SUPPLY chain disruptions require countries to “rethink” production lines to prevent further impact on the world’s food and energy supplies, according to an economist from the Asian Development Bank (ADB).
In an Asian Development Blog, Jong Woo Kang, Principal Economist at ADB’s Economic Research and Regional Cooperation Department, said trade conflicts, the pandemic, and geopolitical tensions impact on global supply chains.
In order to cushion the impact of these factors on supply chains, countries can either employ diversification, onshoring, or nearshoring in order to prevent the disruptions from causing commodity prices to increase, Kang said.
“They (global supply chains) have been struggling amidst uneven economic recovery and trade conflict between global heavyweights, and are suffering geopolitical risks that are critically weighing on food and energy supplies,” Kang said. “The time is right to rejigger global supply chains.”
Diversification, Kang explained, meant countries would source and sell their products away from places that were prone to disruptions due to economic, health, climate change and geopolitical issues.
Onshoring would bring home supply chains while nearshoring will bring supply chains closer to home such as those done through regional trade blocs or where certain trade agreements are in force.
The European Union, the Regional Comprehensive Economic Partnership (RCEP) and the United States–Mexico–Canada Agreement (USMCA) all support nearshoring.
“The Indo-Pacific Economic Framework (IPEF) is another example, although it can fall under the category of ‘friendshoring’ as touted by some people, where the scope of ‘friend’ goes beyond the geographical boundary,” Kang further explained.
Risk management
But the government’s decision on which path to pursue would not be simple. Choosing to diversify should not only be based on cost efficiency but also risk management.
Kang said diversification should involve offshoring production to multiple sites to prevent encountering or being saddled by supply chain disruptions.
The ADB economist said, meanwhile, choosing reshoring or onshoring would require countries to be selective since it could be costly and, to a certain extent, inefficient.
However, reshoring could also lead to supply chain security and create “a new oil” for the economy. In order to maximize this, Kang said, the key is for countries to innovate and raise the technological sophistication of their industries.
In terms of nearshoring, there is a need to further explore opportunities in free-trade agreement opportunities with geographical neighbors and other allies, such as those encouraged under the IPEF.
Apart from these considerations, Kang said, providing incentives could jumpstart the motivation of businesses to reshore or diversify but will not be enough to sustain these efforts.
He added that these government interventions such as incentives and subsidies should also be compliant with World Trade Organization (WTO) rules to prevent “retaliatory reactions from trading partners.”
“Legitimate economic rationale and political motives for rejiggering supply chains may not always ensure its success unless pursued with strategic thinking and practical implementation plans, which also need to be well aligned with business incentives,” Kang said.
“Rhetoric is one thing, but implementation is another. Only those which can wisely strategize its implementation will be able to reap the benefits,” he added.
Insulating PHL
Earlier, BusinessMirror reported that local economists said insulating the Philippines from supply chain disruptions that could accelerate inflation requires making the necessary investments to increase farm sector productivity and improve the country’s logistics network.
The country’s inflation woes have been caused mainly by supply chain disruptions which are bound to worsen as the Christmas season fast approaches, according to Alvin P. Ang, who chairs the Ateneo de Manila University’s Department of Economics.
Ang said these long-term responses would mean addressing agriculture productivity concerns and making strides toward achieving energy security.
Part of these long-term measures, University of the Philippines School of Economics Director for Research Renato E. Reside Jr. said, includes addressing the country’s infrastructure constraints. (Full story here: https://businessmirror.com.ph/2022/08/04/what-would-it-take-to-shield-phl-from-supply-chain-woes/).