There is no doubt that the COVID-19 pandemic and widespread shutdown across the world has exposed concerns about the current fragile construction of global supply chains. The general consensus is that this is a wake-up call for businesses to adjust quickly if they want to cope during times of heightened health risks when lockdowns and other health-related restrictions created bottlenecks that slowed or stopped multiple supply chain operations. ASEAN exporters have an acute interest in such solutions, as they are central to many intricate global supply chains, often as either upstream suppliers of inputs to Chinese manufacturers, or as downstream producers using inputs from China, for goods that are then shipped around the world.
In response, some commentators in the West now argue that companies and countries should focus on "reshoring"local supply chains and supporting national "champion"manufacturers. But retreating to protectionism and subsidies to promote local production is simply not a wise or realistic long-term approach in an increasingly interconnected world.
Instead, the smart path forward in the wake of the global COVID-19 pandemic is to develop more resilient and flexible supply chain structures, supported by diverse production sources, accelerated technology and logistical advances and global trade agreements. ASEAN countries stand to be among the primary beneficiaries of these efforts, and should actively promote them, as voices of reason in response to reactive protectionism.
Now is the time to strengthen fragile global supply chains
We need to construct resilient, less fragile global supply chains and investment flows that can benefit from each country's unique comparative advantages, resources and capabilities. Yes, it is important to support sustainable local production and supply of critical medicines, medical supplies and food in all nations. At the same time, however, we must be realistic and recognise that purely local efforts cannot produce most future technologies crucial to sustainably improving the lives of a growing world population.
No country can efficiently create entirely on its own all of the high-technology semiconductors, sophisticated production equipment, robotics, artificial intelligence and other advances needed for medical, industrial and consumer goods and services. Constructing tariff and/or non-tariff barriers to imports and spending public money on large subsidies that favor domestic companies drive up prices, distort supply and demand dynamics, and stifle innovation.
Diversify supply and production sources
The COVID-19 pandemic shows that many corporate supply chains are vulnerable to bottlenecks at their sole source suppliers. Thus, a necessary step to strengthen and protect one's supply chain is to develop multiple alternative, independent sources: a “Plan B" and, for critical inputs and sectors, also a "Plan C". Recent studies have shown that ASEAN producers should be prominent in the creation of these alternative sources, and should benefit immensely.
Companies also need to adopt a more conservative, defensive approach to managing inventory and stockpiling key supplies, rather than a rigid adherence to 'just in time"inventory concepts. ASEAN governments can play an important role in promoting these changes by cooperating to enhance "frictionless" global distribution and logistics and by removing protectionist measures, both on their own and via the WTO and regional trade agreements such as AFTA, CPTPP and RCEP.
Advanced and creative technology solutions must come to the fore to reduce in-person work and travel
Companies cannot avoid investing more in technology solutions and working closely with their IT software and hardware suppliers to develop more automated supply chains that rely less on cross border movements of people. Technology can diminish the need for in-person meetings, on-site work and related travel to manage supply chains. Advanced technology can also offer innovations in transit and logistics to reduce the risk of choke points. We may have thought that this process was already underway in many areas, but current events expose how far behind many companies are in this respect and underscore the urgent need to accelerate these efforts.
Governments around the world, including ASEAN nations, must step up their efforts and make it an urgent priority to significantly increase support for technological solutions that protect global supply chains, including organizing international consortia in partnership with business and academia. They can work together to negotiate a WTO agreement that would facilitate supply chain automation and management, along the lines of the recent (currently stalled) efforts to enact a free trade agreement for goods deemed important to achieve environmental and climate protection goals.
Cooperate on trade agreements to address the causes of international pandemics
These days, trade in endangered species or overcrowded and unhealthy working conditions in one part of the world can cause pandemics that affect the rest of the planet. This means we should look beyond a local approach, and calls for international cooperation.
Trade agreements can help address this risk by imposing tougher international environmental rules and enforcement mechanisms to ban trade in endangered wildlife, encourage sustainable food production practices, and support humane working and living conditions. Recent trade agreements have taken steps to develop international best practices in these areas, like the environmental and labor chapters of the eleven-nation Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
The pandemic is a lesson for all stakeholders in international trade who should recognize that any major impact on supply chains from global disruptions in the future can only be avoided or minimized through international cooperation and healthy supply chains. National protectionism will not be the answer to the challenges we are seeing.
Seeking progress should be viewed as a critical health and economic imperative to be tackled via international agreement, leavened by self-interested generosity and commitment by wealthy developed countries. ASEAN countries, who depend on and benefit from the global supply chain, should be strong advocates of this message.
This article was first published in The Business Times' Asean Business portal (8 June 2020).
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