The Growing Fragmentation of Global Trade: Guest Post by Tim Barnes
Globalization and supply chains have been tied at the hip over the course of history. Supply chains naturally take advantage of efficiency and cost advantages and over the centuries, as transportation methods, technology and global knowledge improved, there has been a drive to take advantage of each and every step. Trade between countries and continents has been occurring for thousands of years, using the silk road as an example. Silk was produced in China, and then traded across India, Persia, Arabia and Rome where it was considered a luxury good, dating as far back as the 1st century BC.
Fast forward to 2016, where we live in a highly connected and globalized world where the Panama Canal can now cater for vessels that can carry up to 13,000 TEU (previous maximum size was 5,000 TEU). Raw materials are sourced from one country, products are manufactured in another country, and the final goods are transported to customers all over the world. There are complex webs of free trade agreements, trade barriers, international movement of labor and economic blocs like the European community.
As long as there has been globalization, there has been an element of anti-globalization. A primary concern is job losses in specific geographic areas as companies align their supply chains and business models to the most globally economical strategy. As borders open up, labor moves between countries, and as hot spots of conflict occur, there are, at times, mass movement of refuges. These concerns have grown dramatically recently, creating what some call the fragmentation of globalization.
We have heard of the most recent examples of fragmentation, however let me recap while avoiding the political and emotional arguments. The decision by the majority of voters in the UK to leave the EU (Brexit) was primarily based on concerns around globalization including immigration and free labor movement. The recent election in Australia could result in a hung parliament and the return of Pauline Hanson to the senate. Ms. Hanson is the leader of the right wing “One Nation” party – a strong supporter of anti-multiculturalism, anti-immigration and anti-Islam policies. And then we have the public debate in the US, led by the presumptive Republican presidential nominee Donald Trump who has articulated strong views on anti-globalization – including very tight border controls – restricting Muslims from entering the US and calling for the renegotiation of NAFTA (North American Free Trade Agreement) and the rejection of the Trans-Pacific Partnership (TPP).
These are only some examples of a stronger public voice against globalization. Brexit is a perfect example of fragmented globalization. There are still many unknowns on how the UK will partner with the EU going forward, or even if the UK will remain unified with Scotland and Northern Ireland perhaps seeking their own referendum to separate from the UK. These concerns are critical for supply chain leaders as they struggle to understand how the global trade game will change, and how to restructure their supply chains based on the vast number of changing pieces. Fundamental trade elements are currently unknown, i.e., will there be free trade between the UK and the EU, will UK citizens still be able to work in the EU, and vice versa? Will the trade agreements between the EU and other nations still include the UK?
As we look outside the EU and Brexit, we start asking other questions, what happens if the TPP is not signed (refer to my previous blog for a review on this question)? What happens if NAFTA is renegotiated? And if NAFTA can be renegotiated, does that open the door for every other free-trade agreement (FTA) to be reviewed?
As I conducted the research for my upcoming book on the Trans-Pacific Partnership, called “A Naked View of the Trans-Pacific Partnership – An unbiased informational review in plain English”, I was surprised at how smaller and developing countries are very positive about globalization. In a survey conducted by Pew Research Centre, a nonpartisan fact tank, across 44 countries globally, 81% said trade is good and 54% agreed that trade creates jobs. However, when a similar survey was conducted on American citizens, only 47% said that trade was good (43% saying it’s bad) and 17% said global trade created jobs (46% said it leads to job losses).
So how do global supply chain executives plan for the future? As globalization becomes more fragmented, key developed countries like the UK, US and Australia are questioning the benefits of globalization. How do we plan our supply chains out 5-10 years, and how do all these changing chess pieces impact our ability to maximize efficiency and cost management?
As with any decision that needs to be made without all the critical information, it’s better to be directionally correct than exactly wrong. It is critical that leaders identify which parts of their supply chain can be flexible, so that contingency plans are in place. An example would be raw material suppliers where a vendor plan would be created that will allow easy switching between suppliers from different geographies. For those areas that are less flexible, such as manufacturing plants, alternatives can be reviewed, such as setting up redundancy across different geographies, moving to contract manufacturing or any other risk mitigating change.
Most importantly, in today’s increasingly fragmented global environment, it’s absolutely critical that supply chain leaders understand what is changing globally, and how it will affect their global movement of products and services. As Brexit showed us, anything is possible, and the only protection against uncertainty is knowledge and flexibility.
Timothy Barnes is the President of Asia Pacific Consulting, based in Chapel Hill, NC and author of an upcoming book on the TPP – “A Naked View of the Trans-Pacific Partnership – An unbiased informational review in plain English.
Email: tbarnes@apac-nc.com
Facebook: https://www.facebook.com/asiapacificnc/