Recent years have been witness to the world being rocked by unforeseen and unimaginable global catastrophes. The novel corona virus pandemic emerged, causing, among other things, disruptions in trade and cross border movements. Markets became volatile and saw historic crashes, while commodity prices shot up owing to shortages in supply.
As Covid-19 pandemic subsided, the sudden resumption of activity in traveling, trade, business and consumerism brought forward newer challenges. Increase in demand for consumer goods created extreme shortages in supply.
New constraints and volatilities emerged in the global supply chain industry as demands to meet shortages outweighed capacity, giving rise to severe port congestions, quadrupling of freight charges, and new highs in warehousing and logistics.
There was hope that the supply chain crises would subside by 2022. But with the current Russia-Ukraine war and the re-imposition of restrictions over the resurgence of Covid-19 cases in China, the challenges to global supply chain networks seem to have been exacerbated even further.
The truth is that supply chain is the very fabric that has woven the contours of globalization over the years. As per the IMF, transoceanic routes carry over 80% of the world’s traded goods. In the months following March 2020, the freight charges from ocean liners have increased by more than 300%. And as the crunch in the industry deepens, the tenets that have defined globalization slowly seem to be tethering away.
Globalization is no stranger to controversy.
Anti-globalization movements go back to as early as 1999 when the WTO (World Trade Organisation) conference in Seattle saw one of the largest of such organized protests. Populist sentiments against open borders increased in the 2010s as the world saw businesses struggling to stay afloat while reeling from the aftershocks of the 2008 financial crisis.
To some, globalization even then seemed to be on the brink of extinction. Then came Brexit and Trumpism. In 2016, the United States launched a trade war against China, leading to one of the highest effective tariff rates seen since in the country since the 1930s. China, too, in recent years, has increased restrictions on the flow of cross border goods, focusing instead on meeting a growing domestic demand.
However, despite this all, supply chain continued to thrive. And global trade remained firmly reliant on the framework that has interconnected the global economy since the fall of the Berlin Wall in 1989. It was impossible for it to have been any other way.
Globalization may have made economies interdependent but this interdependency is characterized by geopolitical stability, exchange and transfer of technology, and for economies to make trade decisions based on where they have a comparative advantage.
Global marketplaces emerged, defined by highly sophisticated global value chains. In short, efficiency was the key. No one wants to give up on the comforts of globalization, the trillions of dollars of opportunities that it has afforded over the years, the addiction it has created amongst consumers to buy at exorbitantly low prices, and the one billion people it has lifted out of poverty as foreign direct investment created rapid industrialization and new jobs. But efficiency also has its costs. Risks of sudden capital flights have the power to destabilize financial markets, and blue-collar workers in rich countries lose out when production is offshored.
More recently, however, disruptions to the global economy brought about by the pandemic have prompted a serious reflection and reimagining of the current world order as new bottlenecks seem to emerge. Businessmen, policymakers, institutions and consumers all saw first-hand how globalization failed everyone.
That globalization, in essence, was the reason why Covid-19, which started in a small Chinese province of Wuhan, spiralled into a never seen before global pandemic, is a fact.
And the Russia-Ukraine war has served to justify these claims once again. Sanctions on Russia disrupted markets even further. Food and commodity prices have surged, and energy markets are seeing consistent volatility. Europe, having been dependent on Russia for its energy needs is desperately trying to build up its gas reserves.
The conversation regarding globalization has taken a different a turn now
There is fear in giving up on existing frameworks completely but businesses also need protection. The narrative is changing from efficiency to security. From a need for off-shoring to reap the benefits of cheap labour and production costs to a need for reshoring and reaping the benefits of safety in the event of another global crisis.
Globalization seems to be slipping away and regionalization is increasingly becoming more sensationalized. Building new trading blocs that will yield minimal global impact in the event of a crisis. Reimagining globalization is therefore all about accruing the benefits of globalization with partners, businesses and people who you can rely on; with whom you share a strategic geographical and political advantage.
It must be noted that evidence of countries reshoring production is very little. According to The Economist, domestic manufacturing in America remains not only firmly reliant, but has also shown a significant increase on imports of raw materials.
Manufacturing share as percentage of GDP in the rich OECD countries remains at a historic low of just 13%. But the fact that companies in the West are bearing additional costs to build up on reserve inventories in case of another supply chain crisis shows that the fear is palpable.
Countries are diversifying their sourcing bases, the idea being not to increase robustness for the capacities still remain the same, but to be able to meet demand in the event of a crisis when aggregate supply falls.
These fears are not without cause
Freight forwarders currently hold all the power, and freight rates are expected to remain at record highs in the months to follow. This is after the EU Mobility Package, which went into effect on February 2022, which has reduced the average number of working times for drivers and jacked up costs.
Elsewhere in the West, an aging population means that drivers are in short supply, thus creating a gap in the market. To find younger applicants, the industry needs to further improve working conditions, reduce hours and adjust pay scales.
Moreover, oil prices continue to remain high and given the highly fuel dependent nature of the supply chain industry, the burden is being translated into high transportation costs. Diesel buyers in Europe are having to spend 41% more on fuel today compared to December 2021.
Adding to this, Europe is also on its way to revise its draft of the Emissions Trading System, the world’s largest carbon market to regulate emissions. The additional tariffs are expected to be in place starting 2023 on aviation industries, oil refineries, electricity generation, steel production and other highly polluting sectors. Lastly, the bottlenecks in the supply of goods continue to remain.
The fact remains that stakeholders had underscored their dependency on maritime container trade. IMF reports that rising shipping costs play a key role in driving global inflation. When freight rates double, inflation increases by 0.7 percentage points.
While fuel or commodity prices have a higher and a more direct impact on inflation, volatility in shipping costs is quantitatively similar. Rising shipping costs are in effect translated into higher import costs.
Evidence from 143 countries further suggests that since imported goods and raw materials form the basis of production in most sectors, the impact is reflected in producer prices every 2 months. This is then gradually passed onto the consumer. Countries which have a consistent trade deficit feel the impact of surging inflationary pressures far more than others.
Robustness must therefore clearly way give way to resilience.
Risks to supply chain have always been an inherent part of the industry as per McKinsey’s Dan Swan, and will continue to happen with more frequency and potentially larger magnitudes. The current supply chain crisis has reduced global GDP by 1%. Global supply chains therefore have to be reengineered in way that affords sustainability and strength.
The dilemma then is a question of how? Should railway systems and trucking be more regulated? The oligarchies that control the shipping industry, how can their power be curtailed? The retailers and the middlemen who have abused pitfalls to raise prices far above input costs, how to make them accountable? These are policy areas that need to be addressed to bring resilience.
But regulation also goes against the fundamental premise of the neo-liberalist façade of the globalization. So if the need for security is morphed into a degree of regionalization instead, then protectionism and industrial subsidies will become the undercurrent to be able to meet domestic demand.
In the short term, broken supply chains and additional tariffs will further raise prices. In the long-tem, replicating supply chains into regional networks will create inefficiencies that will increase operating and financial costs to over 2% of the global GDP as per The Economist.
So what does this mean for Pakistan?
The country has already been grappling with severe financial and political crisis of its own. Until a few weeks back, the country was on the brink of bankruptcy.
Under the current crisis where Pakistan needs to significantly boost its exports, the looming changes in the global economy for trade should be at the frontlines for Pakistan to evaluate and define its own trade policy in response. Export sectors need a buffer to cushion themselves against surging costs of production to remain competitive.
The textile industry, for instance, presents a one of a kind opportunity to capture newer markets and buyers. China is struggling once again to contain another outbreak of Covid-19, and India is facing rising cotton prices, which have made the country’s exports highly uncompetitive.
Subsidies and relief measures should therefore be extended not only to make the industry more competitive but to assuage the workers and employees who are already facing the impact of inflation through lowered buying power and standards of living. An employee who has his basic needs taken care of is one whose productivity is also higher.
Equally important is a need to identify new opportunities for trade within the region and establish links. Markets like China and India are witnessing the rise of emerging-market consumption with a rising middle class.
According to a McKinsey report, it is projected that developing countries will account for almost two-thirds of global consumption of manufactured goods by 2025 and more than half of overall global consumption by 2030. It is projected that China will account for 12 cents of global consumption for every $1 and is soon expected to overtake the United States for having the most number of millionaires in the world.
China’s share of exports also decreased to 9% of what it produced in 2017, compared 17% in 2007. This is largely obscured for the country’s output, exports and imports have all shown an increase in absolute terms. But what it indicates is that China is reorienting its value chains to meet its own burgeoning domestic demand. Elsewhere in India, the country exported 35% of its total apparel output in 2002. This share decreased to 17% by 2017 as domestic consumers increased consumption.
These shifts present Pakistan with new potential opportunities that are fully in line with changing global paradigms. But it also presents a need for the country to build and establish the frayed relationships with some of its neighbours, and specifically with India where nationalist sentiments and political mistrust have sabotaged relations throughout history.
For Pakistan to be able to use the potential economic climate to its advantage, it will need to make use of careful strategic planning and taking incremental steps through cultural diplomacy to build new bilateral trade relationships.
(The writer is Head of Growth and Operations, Terry Tex International, CEO, MK Textiles LLC., Special Advisor (SMEs, Entrepreneurship & Start-Ups), ESG Foundation, UK) [email protected]
Copyright Business Recorder, 2022