At the peak of its first wave, the COVID-19 pandemic had dramatic effects for global supply chains and the world economy. Manufacturers were prevented from opening their gates, fields of crops spoiled, and supermarket shelves were emptied. For some, this was an inconvenience, spurring fistfights over toilet roll and boosting wheat prices as pasta consumption spiked and we all discovered baking. However, hospitals on the front-lines also struggled to get critical personal protective equipment (PPE) and ventilators, while life-saving medicines fell short in supply.
Countries responded differently, with some sending needed supplies to allies abroad, and others distancing from key international fora like the WHO. Vocal challenges have been made to the liberal international project over the last decade, often with globalization at the centre. As we face two generation-defining crises – COVID-19 and climate change – has globalization indeed broken the world?
Supply chains carry risk from one place on the globe to other, distant ones
Supply chains are the connective tissue of the global economy, but they can also carry risk between communities great distances apart. At the outset of the pandemic in Wuhan, China, it was readily apparent that the virus could impact producers and consumers globally, with significant concern for businesses dependent on products manufactured in the region – from auto companies to technology firms.
This phenomenon is not unique to COVID-19: extreme weather events have caused similar disruption. The 2011 Thai floods inundated technology manufacturers, causing $46 billion in damage and losses, with severe economic consequences for multinationals including Apple and Samsung and neighbouring countries like Japan. In both cases supply chains enabled the transmission of risks, impacting businesses and communities elsewhere – crossing borders and sectors in the process.
Shortening or diversifying supply chains – what’s a good way to mitigate risks?
A common proposal to mitigate these risks has been to shorten supply chains – relocating production closer to home and simplifying complex webs. But this may not always be possible – nor socially desirable. Coffee, a highly traded commodity and arguably a key input to economic activity of all sorts, is produced primarily in tropical, climate-vulnerable regions. It is quite unlikely, though, that the UK or EU would be able produce their own coffee supply, even under the most extreme climate change scenarios. Likewise, what of the 25 million smallholder coffee farmers in Brazil, Vietnam, and Colombia? In addition to their continued exposure to direct climate risk, those communities will face the secondary effect of losing lucrative contracts and sales, plunging businesses into bankruptcy and farmers into poverty.
The impetus for international trade has long been the economic benefits for people on both sides of transactions. Supply chains create stable employment opportunities for producers and access to international markets and provide consumers with more choices at affordable prices. Rejecting these basic tenets of international economics and pursuing more nationalistic approaches to trade will be accompanied by economic harm on all sides.
Diversifying supply chains avoids concentrated risks or bottlenecks, which may intensify pressure in times of crisis but is only suitable for contending with acute, isolated risks. COVID-19 did not stay in Wuhan, but rather spurred restrictions on movement and economic activity in nearly every country. Similarly, climate change is expected to have widespread impacts, increasing the frequency and severity of extreme weather everywhere. During the global food price crisis of 2007–2008, it was not one event that generated intense challenges for food security, but the combination of severe droughts in some regions and floods in others, which led to a rice export ban in India, panic buying in the Philippines and export restrictions in Vietnam.
International cooperation is the best way to manage systemic risks
Rather than an indictment of international cooperation, these challenges highlight the importance of working closely together to manage common concerns in a globalising world. A coordinated international response is crucial to grappling with the coronavirus and reopening our economies safely. The same is true for managing systemic risks in supply chains in ways that are effective and equitable.
Firms should be rewarded for investing in resilience, encouraged to improve risk assessments across their suppliers and supported with subsidies for financing climate-resilient solutions in supplier farms or factories, directly supporting vulnerable communities. Governments should explore mechanisms for free-trade agreements to bolster sustainable investments, going beyond carbon border adjustments to pursue green economic cooperation. Key products and industries, from staple-grains to medicines and PPE, should be stockpiled internationally, assuring critical supplies during crises, and collectively bargaining to keep price gouging in-check.
Where markets struggle to respond to systemic risks, instead acting as disseminators of shocks, the tools of diplomacy should be used to decide how to manage and resolve them. The COVID-19 pandemic affords an opportunity to rethink our relationship to the modern economy and build structures that are fit for the global challenges facing our society today. Rather than separating from the international community, now is the time to re-embrace international cooperation and build an economy that works for everyone.