EconomyMarch 18, 2024

Managing global supply chains in a turbulent world

Riley Walters

Reading time: 8 min

Global supply chains have stabilized following the pandemic, but geopolitics – namely risks from China – are creating new challenges that Western governments and like-minded countries are facing head on.

It has been four years since Covid-19 began, and with it, the painful shutdowns worldwide that unleashed havoc on global supply chains. Since then, while uncertainty in global trade has not disappeared and geopolitical tensions continue to ebb and flow, the cost of trade and supply-chain bottlenecks have eased and deliveries have largely returned to pre-pandemic levels. Yet strategies to manage supply chains going forward – especially in strategic industries – are increasingly influenced by geopolitical factors, namely tensions between the United States and China.

The administration of President Joe Biden continues to take on the difficult task of keeping supply chains “secure, diversified and resilient into the future.” Washington is taking steps to overcome two fundamental difficulties to build stronger commercial networks, both domestically and with partners and allies.

The first is prioritizing specific industrial supply chains of strategic interest: semiconductors, batteries, critical minerals and pharmaceuticals. Prioritizing these select industries can streamline the task of building resiliency, though political pressure to support other, trendier sectors will weigh on decision-making. Emerging areas like space, quantum computing and biotechnology are catching policymakers’ eyes in addition to traditional industries such as agriculture and metals.

The second difficulty is a common issue in the study of economics and supply chains: the knowledge problem. This is the challenge of being able to collect and understand information around specific supply chains, especially given that so much of that data is dispersed across the private sector. There is no way for governments to have perfect information, nor to know with certainty how to respond to the information they possess.

The Biden administration’s strategy also addresses difficulties arising from supply chains’ size and opaqueness. To enable better-informed policy decisions, economic growth and geopolitical strength, Washington is working with allies to ease supply challenges stemming from geopolitical tensions while also coordinating on the Sisyphean task of supply chain data collection and analysis.

Persistent threats to global supply chains

If it is not the occasional natural disaster that slows or destroys production, man-made delays like worker strikes and sudden geopolitical escalations increase uncertainty. Even now, attacks from Houthi terrorists on shipping vessels in the Red Sea cause diversions, delays and cost spikes for cargo deliveries.

While some observers suggest that using domestic supply chains can resolve these issues, most supply chains are already so globally interconnected that trying to re-shore production can be like trying to remove oil from water. In 2022 alone, the U.S. imported more than 18,500 unique commodities worth over $3.2 trillion. Nearly half, or 44 percent, of these imports came from Asia, 22 percent came from Europe and 28 percent came from Canada and Mexico.

These commodities not only came from innumerable global suppliers, but were purchased by companies dispersed across the U.S. This includes domestic firms with manufacturing overseas as well as foreign companies with U.S. production.

Trying to re-shore production can be like trying to remove oil from water.

Even within the U.S., supply chain uncertainty is a fact of life. In 2023, there was a significant increase in strikes; eight times the number seen in 2021. Funding uncertainty and talent shortages have delayed efforts by the Biden administration to create new domestic semiconductor production. And economic nationalism continues to haunt Washington as lawmakers oppose new foreign investment in America’s oldest industries.

Threats to supply chains are ever-present, but making them resilient enough to mitigate these potential disruptions is a worthwhile effort that is already well underway.

CHIPS, IPEF and a new White House council

The Biden administration has been actively engaging with partners and allies through several new initiatives.

First are efforts resulting from the CHIPS and Science Act. This law provides appropriations for the International Technology Security and Innovation (ITSI) fund, which includes a $500 million grant program to secure lower-risk semiconductor supply chains with partners and allies. Already, non-traditional partners including Costa Rica, Indonesia, Panama and Vietnam are in the process of working with the State Department on this initiative. This supplements ongoing efforts with the European Union, India, Japan, South Korea and the United Kingdom.

The State Department plans to use roughly $54 million to develop semiconductor production, including upstream production, fabrication and downstream capacity across the semiconductor supply chain. Of this, $5 million will be allocated to semiconductor supply chain mapping alone. This comes in tandem with Commerce Department plans to launch a new industrial base survey focused on the American semiconductor supply chain to identify how U.S. companies are sourcing current-generation and legacy chips.

Semiconductors present perhaps the greatest supply chain concern for the U.S. and its partners. Following the efforts of the U.S.-EU Trade and Technology Council, both sides have set up semiconductor alert mechanisms to detect potential supply chain disruptions. Similar efforts are ongoing through the Indo-Pacific Economic Framework (IPEF) negotiations.

In November, the U.S. and its IPEF partners signed an IPEF Supply Chain Agreement. Its purpose – akin to what the State and Commerce Departments are doing on semiconductors – is to track vulnerabilities and share information and best practices with those at risk of facing supply chain disruptions.

Read more on supply chains and trade challenges

• The disastrous consequences of the new EU supply chain guidelines
• The challenges of supply chain regulation
• The U.S.-China tug-of-war over chips and capital

The IPEF agreement creates three supply chain forums. First, an IPEF Supply Chain Council will collaborate around key goods, as identified by each member, map supply chains and explore options for diversification. As mentioned before, this could lead to pressure on the U.S. administration to place greater scrutiny on new supply chains outside of the strategic sectors of semiconductors, batteries, minerals and pharmaceuticals. Second, an IPEF Supply Chain Crisis Response Network will establish an emergency communications channel between members to help respond to and mitigate disruptions. And finally, an IPEF Labor Rights Advisory Board will monitor labor rights concerns across the various members.

These efforts will likely be in tandem with other efforts ongoing at the U.S. Commerce Department. Its relatively new Supply Chain Center is meant to collect and analyze data on the competitiveness of America’s supply chains and offer the government more advanced analytics as it prepares policy responses.

There can never be enough information collected on supply chains to completely avoid disruptions. But improved data collection and analysis across the federal government on key supply chains can at least foster better-informed decisions at the administration’s recently launched White House Council on Supply Chain Resilience.

As a cherry on top of the U.S. government supply chain activities, the new council will be led by the national security advisor and national economic advisor, with the participation of more than a dozen federal agencies, including the secretaries of commerce, energy, labor and transportation. The advantage of the White House council, compared to other supply chain efforts, will be its proximity to the Oval Office.

China and national security concerns

Certainly, geopolitics is likely to continue weighing heavily on international trade. New geopolitical conflicts emerge frequently. Beijing continues to show its willingness to use China’s economic gravity as a tool for political coercion. Not to mention, the 2024 U.S. presidential elections may bring significant changes to American trade and economic policies.

We can also expect to hear about new participants in the State Department’s semiconductor ITSI funds program. Since this grant is allocated on an annual basis for the next several years, we can expect more countries to join up, including countries from the Global South.

The Biden administration and U.S. Congress want to build more resilient American supply chains and these efforts can certainly help. But as Covid-19 exposed, collecting information on dispersed supply chains is no easy task. Whether in relation to foreign countries or companies, or even American companies at home, supply chain information can be a sensitive topic, sometimes with national security implications. The Biden administration may not be able to collect all the information it would like on various supply chains, but it should be able to gather enough to make better-informed decisions to mitigate potential disruptions.

For industry-specific scenarios and bespoke geopolitical intelligence, contact us and we will provide you with more information about our advisory services.

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