COVID hit trade supply chain networks hard. Well-understood demand patterns evaporated. Ports jammed up with legacy flows while simultaneously coping with new and unexpected spikes. International trade ground to a crawl. According to the think tank Initiative for a Competitive Inner City (ICIC), COVID hit some industries harder than others. The most disrupted segments include retail, manufacturing, accommodations, and food services—including hotels, restaurants, and similar businesses. The ripples from these segments washed across all areas of the economy.
Three years have passed since the darkest days of the pandemic. Many have returned to the office, perhaps still working from home a few days each week. Restaurants have reopened. Some believe we are back to normal.
We may have arrived at the new normal, but in this new normal, disruption to supply chains seems to be a permanent fixture.
Five volatile years
Even before COVID hit, global supply chains and international trade had been roiled by volatility and upheaval. In 2018, former President Donald Trump started trade wars around the world, not only with China but also with U.S. allies, like Canada and Mexico. Each battle has used a different U.S. legal rationale, such as calling some imports a national security threat. Trump followed up by imposing tariffs or quotas on imports. Subsequent retaliation by trading partners and the prospect of further escalation hampered trade and investment. This put various global trade segments under pressure.
Then, in 2020, toward the end of Trump’s tenure, COVID erupted. According to the University of Southern California’s Leonard D. Schaeffer Center for Health Policy and Economics, “From 2020 to 2023, the cumulative net economic output of the United States will amount to about $103 trillion. Without the pandemic, the total of gross domestic product over those four years would have been $117 trillion—nearly 14% higher in inflation-adjusted 2020 dollars, according to our analysis.”
The hits—albeit unrelated hits—kept coming. During the latter days of the COVID epidemic, long-standing tensions in Ukraine went from simmer to boil. In the spring of 2021, Russia began what President Vladimir Putin described as a “training exercise,” building up troops on the border with Ukraine. By the end of that year, analysts using satellite imagery estimated over 100,000 Russian troops were poised at the border. In December, using the massed forces as an implicit threat, Putin demanded NATO’s withdrawal from Eastern Europe, along with a promise to never allow Ukraine to join NATO.
Just as the final big COVID wave tailed off in early 2022, Ukraine went into full crisis. By the end of February, the U.S. had sent additional combat troops to Eastern Europe, NATO put forces on standby, and Western formations moved forward in Poland and Romania. At the end of February, Putin authorized his “special military operations” against Ukraine, and the attack began, with bullets and missiles still flying almost two years later.
Far from easing, conflict around the globe only seems to be heating up. In October, war erupted between Israel and Hamas, causing an unexpected and seismic dislocation in the Middle East. What effect these most recent events will have on the global supply chain remains to be seen.
At the same time that these geopolitical conflicts have been flaring up, tensions with United States’ largest trade relationship have also risen. The Trump administration’s tariffs on Chinese imports remained active and were subsequently buttressed by the Biden administration. The U.S. Department of Commerce expanded sanctions on Chinese companies, like the widely publicized restrictions on telecommunications company Huawei as well as drone maker DJI and genomics company BGI Genomics. Export controls hit chip makers Nvidia, Yangtze Memory Technologies, and ChangXin Memory Technologies. There are now over one hundred individuals and organizations under restrictions or sanctions.
Congress is an active partner in efforts to “decouple” from China. The CHIPS and Science Act aims to restrict technology transfer to China and stimulate firms to invest in the United States. The Uyghur Forced Labor Prevention Act, which supersedes a series of individual import bans, is also discouraging U.S. businesses from sourcing products from China.
Unfortunately, the blight extends beyond China. In response to the war in Ukraine, the U.S. Department of Commerce has enacted stringent trade restrictions and sanctions on Russia. And Turkey’s international straddle across NATO and Russia has landed it on some restrictions list as well. It’s complicated, to say the least.
Volatility is the result
As the flow of goods from Russia and China into America declines, imports are growing from nearly every United States ally. Mexico and Canada have each individually surpassed China as the U.S.’ leading sources of imported goods. The European Union’s trade with Russia dropped dramatically after the Ukrainian invasion, and the EU is now also trying to reduce risk by shrinking reliance on China.
Assessing the state of global supply chains in 2023, the consulting company KPMG’s Global Operations Centre of Excellence published a report identifying The Supply Chain Trends Shaking Up 2023. Geopolitical disruption and volatility lie at the root of many of the trends detailed in the report, including nations being skeptical of cross-border trade cooperation, turmoil around access to key materials, and manufacturing footprints changing shape. The report asserts that, “Disruptions to supply chain operations are set to stay in 2023, whether they be existing or new geopolitical conflicts, inflationary pressures and the recessionary environment, climate change weather events, or other issues yet to emerge.”
In the face of all this volatility, conventional wisdom is evolving rapidly. Thirty years ago, Ross Perot talked about “the giant sucking sound” of manufacturing moving out of the United States. Now, the trend is moving the other way, with contemporary nearshoring and reshoring efforts reversing the flow. Supply chain networks are simplifying, and organizations are again learning the difference between “low cost” and “best cost.” For years, most companies focused on building low-cost supply chains with the primary goal being to present a low price to customers. Now, more companies are realizing they need to adopt a best-cost strategy that adds factors beyond cost to the equation, like risk, lead time, and responsiveness.
Global tensions and the resultant uncertainties are the risks to be managed in this new normal where disruptions are a permanent fixture. To survive we must all adopt the mantra, “Adapt. Improvise. Overcome.” We live in interesting times.