2021 Trade Update: Hedging Your Bets

Because international trade has become less “globalized” compared to a few years ago, supply chain managers must devote more scrutiny to regulatory compliance and unexpected penalties.

This is the conclusion drawn from speaking with a number of industry analysts who note that global trade has tripled in the 21st century, from $7 trillion to $21 trillion – along with the complexity of logistical international networks.

“Many industries have become capacity-constrained,” says Kamala Raman, vice president analyst with the Gartner Supply Chain practice. “Some of this is driven by availability of material, some is driven by labor shortages in both manufacturing and transportation, some of it is driven by changing quarantine conditions around the globe, as well as the general inability of countries around the world to operate at a pre-pandemic normal.”

Shortened supply chains

Michael Gravier, professor of marketing and supply chain management at Bryant University notes that the biggest impact will be the shortening of many supply chains. COVID-19 drove home the importance of shorter, more responsive supply chains to respond to dynamic environments – yet the pandemic was simply the final lesson in a series of disruptions, he says.

“Tariff wars, natural disasters, technological disruptions, changing international alliances, new international trading blocs, redefinitions of NAFTA, and substantial demographic shifts all preceded COVID-19.”

According to Gravier, we live in an age of ever-shortening planning horizons, while coming out of an era where competitive advantage accrued to those who leveraged the production efficiencies inherent in the specialization found in a globalized world.

“We are discovering the importance of efficiencies in the relationships that bind our supply chains together. The traditional elongated, global supply chain is its own worst enemy.” He says. “It’s too slow to react to the needs of customers, which means more margins that must be covered by the landed cost at the end.”

Gravier maintains that the problem of multiple margins has until fairly recently been minimized by cheap transportation costs, cheap and stable sources of energy, and a relatively low regime of tariffs. Furthermore, in the past managers faced comparatively low labor costs abroad, a strong dollar, low inflation, and a stable consumer marketplace.

“Some of these factors were destined not to last, and others are not as beneficial as they were in the past – and many of them have increased the costs for everyone in the supply chain,” says Gravier. “Disintermediation and simplification of globally-sprawling supply chains are the fastest ways to bring landed costs under control, with the added benefit of increasing agility and responsiveness, and making supply chains a lot easier to manage.”

Other analysts note that in strategic industries, such as the semiconductor or high-capacity battery sector, organizations can’t make decisions based on cost alone.

They are also restricted by national security concerns or simply an impossibly high demand for innovation. Public-private partnership is often key.

For example, the European Commission has approved a $3.5 billion fund to foster the development of batteries for electrical vehicles in 12 European countries. This public funding is expected to draw a further $11billion from the private sector. Taiwanese entrepreneurs have drawn upon their government’s substantial R&D support to become a chipmaking powerhouse. The CHIPS for America Act will provide $52 billion in federal investments to strengthen domestic semiconductor research, design and manufacturing.

Supply chain managers in strategic industries must distinguish between the decisions they control, the decisions they can influence, and the decisions made for them by industrial or national policies. Meaningful partnerships with relevant players in their ecosystem, as well as governments, are critical for success.
“Countries are all tightly integrated when it comes to the goods we’re used to having around. Consider the dozens of suppliers around the globe in the COVID-19 vaccine supply chains that are saving billions of lives today,” Gartner’s Raman observes.

“For example, for the Pfizer/BioNTech vaccine, there are 280 components from 25 different suppliers involved, spanning 19 countries. CSCOs have to find a way to balance the global supply chains that have worked well – and still do – with regional additions that place people, planet and purpose above short-term profits.”

Emerging markets

Meanwhile, supply chain managers do not foresee a global economic recovery until 2022 or beyond, despite an expectation that Asia, North America and Europe will rebound this year from the downturn triggered by the COVID-19 pandemic.

Of 1,200 industry professionals surveyed for the 2021 Agility Emerging Markets Logistics Index, 51.5% say they don’t expect a full recovery until 2022-2024. They see Latin America and Sub-Saharan Africa as the last regions to bounce back.

The survey is part of the “2021 Agility Emerging Markets Logistics Index,” the company’s 12th annual snapshot of industry sentiment and ranking of the world’s 50 leading emerging markets.

The Index is a broad gauge of countries’ competitiveness based on their international and domestic logistics strengths and business fundamentals – factors that make them attractive to logistics providers, freight forwarders, shipping lines, air cargo carriers and distributors.

For the remainder of the year, China and India will remain atop the overall index, say Agility analysts.

Vietnam leaped to No. 8, up three spots, as Asia-Pacific and Gulf markets dominated the top 10. Nigeria rose five spots to No. 30, the highest climb for a Sub-Saharan Africa country in the 12 years of the Index. Gulf countries outperformed most others in business climate, but eight Latin America markets improved their business fundamentals rankings. Malaysia and Nigeria made the most notable upward moves in domestic logistics; Turkey, Brazil, Morocco, Ukraine, Kenya and Myanmar made progress in international logistics competitiveness.

Pandemic impact

In the survey, logistics executives indicated they see the duration of the pandemic as the biggest factor in determining when global economic activity will return to 2019 levels, viewing U.S.-China trade relations, Brexit, protectionism and other factors as secondary.

“The economic disruption caused by the pandemic is not behind us. Lockdowns and shipping challenges will constrain consumer and business activity through much of 2021,” says Chris Price, CEO of Agility Global Integrated Logistics. “The companies, markets and regions poised to recover most quickly are likely to be those using digital technology to collect data, share information, get supply chain visibility, and transact with customers and stakeholders.”

How are industry executives trying to protect their supply chains? By a two-to-one margin, they are speeding up adoption of technology and online business capabilities (41.3%) vs. choosing to move production through multi-shoring, near-shoring or reshoring strategies (21.9%).

Supply chain executives felt disruption across the entire supply chain in 2020, saying they struggled to cope with port congestion (19.6%), transportation capacity (18.4%), supplies of parts and inputs (16.9%), distribution and delivery (16.1%), maintaining international operations (15.1%), and storage (13.8%).

In their own operations, industry executives say the most acute pain points were planning and forecasting for both supply and demand. Managing orders and cash flow were the areas next most affected by pandemic.

Despite their caution, industry executives are feeling opportunistic about emerging markets. More than half (52.0%) of respondents say they plan to increase business activity in developing markets or say they have more confidence in emerging economies. Only 19.5% say they are less confident in emerging markets.

“The strength of the Agility Emerging Markets Logistics Index has always been to differentiate between those emerging markets which demonstrate resilience in the face of adversity and those which are more fragile,” says John Manners-Bell, Chief Executive of Transport Intelligence, a London-based consultancy. “This year is no exception. Although some – especially China and Vietnam – have been able to rebalance around domestic industrial and consumer demand, the majority are still highly dependent on international markets and investment.”

Manners-Bell concludes that a lack of global demand, combined with the breakdown of air and sea logistics networks, has had severe consequences for these economies and societies.

“As the COVID-19 crisis finally unwinds over the next two years, those most resilient will bounce back the fastest,” he says. “Inevitably, those which have failed to embrace market, trade, governmental and social reforms will be hardest hit by the fallout from the pandemic.”

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