Commerce has fundamentally changed over the past thirty years. Intermediate goods—or parts of products traded through global supply chains—now account for 70 percent of all trade. The Civil Society, Markets, and Democracy program hosted a workshop in May to explore the evolution of global supply chains, the risks they face, and how U.S. policies help or hinder the country’s competitiveness. The workshop included current and former government officials, supply chain experts, corporate representatives, and finance specialists.
Over the coming months, we will share posts from many of these experts here on the Development Channel, asking them to weigh in on emerging trends, strategies for mitigating supply chain risks, and transparency and sustainability, among other topics. To introduce the series, here are some of the main takeaways from the global supply chains workshop. Read the full rapporteur report here: The Future of Global Supply Chains.
Current State of Supply Chains
In just a single generation, supply chains have grown to dominate global trade, as products are increasingly made across countries rather than within them. Workshop participants noted that many of the most striking changes come from China’s rise as a major manufacturing hub within these chains, now producing approximately one-quarter of global output. But many factors that enabled China’s growth—such as its labor cost advantage—have eroded, making regions such as Southeast Asia and eastern Europe more appealing by comparison, and threatening China’s place at the center of global supply chains.
Worldwide, governments and companies alike are working to make supply chains more transparent. In what participants called a “sea change” in attitudes toward production, China has seen a growing number of voluntary corporate guidelines for supply chain transparency. And in the United States, legal changes—such as a recent amendment of Section 307 of the U.S. Tariff Act of 1930—can help address labor concerns. This spring U.S. customs officials seized a Chinese shipment of soda ash under the new guidelines to keep out products made by forced labor, and participants expect to see many more Section 307 cases, forcing changes in current practices.
Supply Chain Risks and Compliance Trends
Participants stressed several risks to global supply chains that threaten their resilience and viability, including natural disasters, cyberattacks, climate change (as rising sea levels alter shipping routes), and public health crises such as Zika. In the United States, decrepit infrastructure—ports, railroads, bridges, and airports—hinders competitiveness and the ability to integrate into these globalized means of production. As one participant noted, their company sees much of the United States as “a second-world country.”
Protecting workers’ rights remains a major challenge, as chains lengthen and companies use a growing number of small subcontractors to provide components or services, in many cases losing their visibility into working conditions along the supply chain. But workshop participants observed a change in the way that companies and governments are overseeing compliance with labor and environmental standards. They discussed a shift from a traditional compliance model, where companies’ incentives often don’t align with their providers down the chain, to more of a partnership model, where buyers and suppliers embrace a relational (rather than transactional) contract, giving lower-tier suppliers the incentive and security to invest and improve.
U.S. Policies to Boost Competitiveness
Some participants stressed a fundamental change: trade is no longer the engine of economic growth. This is due to both cyclical changes, such as weaker demand and the commodities bust, and structural changes, including a resurgence of protectionist policies.
Many participants focused on new trade agreements such as the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) as tools to help reverse this trend, and to improve supply chain practices around the world. For instance, the mere desire to qualify for the TPP is helping spur reforms in Asia, despite Chinese officials’ and corporations’ initial skepticism. Still, the TPP and TTIP may not be enough—participants noted the TPP’s limits, including its inattention to the quickly-expanding services sector. And in the face of rising protectionist attitudes, the deals may never materialize.
Others pointed to the outdated and fragmented regulatory approach to trade given supply chains’ current realities. With oversight spread across nearly fifty agencies, proliferating standards and regulations can constrain how companies source, manufacture, and move goods around the world. National security concerns can also complicate policy formulation. Participants noted a fundamental tension between creating nimble supply chains that quickly satisfy customer demand, and building more resilient production linkages that can weather unforeseen disruptions.