As a one-time operator of global supply chains, and now an academic who often consults with international firms, I’ve come to a simple conclusion: Students of supply chain management should study international relations as part of their curriculum. They need to acquire an academic ability to deduce the effects of statecraft and international balance of power on their work-life.
That dictum doesn’t only apply to students; industry professionals, particularly those involved with strategic aspects like planning and design, must hone their ability to see through media biases and read geopolitical trends and patterns.
During the last two years, supply chain managers in the United States and elsewhere have continually encountered the direct, outsized influence of international political relations on their lives and work. The catastrophic delay of more than three weeks in the reporting of COVID-19, the deadly lag in the response from authorities in major countries like the United States, Brazil and the UK to the contagion, which partly and critically caused the shortages of lifesaving equipment and hygiene products, chip shortage in one sector and a glut in another, and the global food price inflation and energy crises have all had one factor in common— geopolitical power dynamics. We need to develop the ability to anticipate and predict them in the way that we have devised ways to forecast demand—not only react and change course ex post facto.
To be fair, those of us in the business of supply chain are not political ignoramuses. More than in any other corporate function, except maybe finance, managers in our field develop a keen sense of awareness of the political environment because we often operate globally. It helps us optimize goods movement and resource pricing. The focus, however, is largely attuned to local and national political environments. It now needs to broaden to encompass international affairs. Not just by way of knowing about them, but through formal training in how to apply that knowledge. There are three chief reasons.
One, the rate of globalization has far outpaced our understanding of the increasingly diverse economic and political ecosystems that our supply networks run through. I am not aware of any survey that could provide a sense of the level of knowledge that our supply chain managers possess about international affairs, but we do have some idea about the larger populace. A recent Pew Research Center survey that assessed adult Americans’ level of international knowledge produced some interesting results. Tasked with choosing answers from a list to questions such as: “Name the leader shown in the photo” (Kim Jong Un) and “Who is the PM of the UK?” respondents on average got around 60% of the answers right, close to 70% displayed low and medium levels of knowledge, and what admittedly hurt the most, the majority couldn’t identify the flag of India, the world’s largest democracy. This does not reflect a poor understanding of world affairs for a lay populace, but if this survey involved people handling global supply chains, I’d be highly concerned.
Two, if supply chain management were a person, it would be a Millennial. Although Booz Allen’s Keith Oliver had introduced the term in 1982, it was not until the midaughts that industry bodies formally recognized the discipline. The Council of Supply Chain Management Professionals (CSCMP), the industry’s leading association, didn’t assign a place for it in its lexicon until 2003, and then, two years later, changed its name from the Council of Logistics Management, as it was known then, to CSCMP, to reflect the change. Elijah Ray, the 2003-2004 president revealed the reason: “People in our profession now have an expanded and more critical role within our companies than we did 10, or even five, years ago.”
Indeed, it has only been in the last decade or so that supply chain managers have begun to assume leadership roles—Apple’s current CEO is a good example. Leadership roles require a greater understanding of the global business environment. The relentless march of globalization is going to make this a necessary requirement, even a differentiator.
Third, and perhaps the most important reason, is that the contemporary world order is in disarray. A corrosive mix of events, including the internal and interstate political conflicts in the West, its rising tensions with the non-Western world, a growing contempt for democracies with them being perceived as conflict-ridden and indecisive, the Ukraine war and the burning China-Taiwan issue has shaken the current world order to its core, perhaps irreversibly. This is, and will incrementally have, a farreaching effect on global supply chain networks.
But what is this new world order that we speak of? How did it come to be, why is it said to be adrift and what are its implications on global supply chains?
Order and chaos: The circle of trade
Historically, security and stability were the foundation that supported the political framework that enabled international trade. Both have to coexist; security is to be granted by military powers, stability stems from cooperation or comprise reached between traders, middlemen, and other participants. The first recorded instance of such an arrangement was the emergence of a network of geographically shifting routes that linked Europe to the Far East. Collectively called the Silk Road, these routes came together around 130 B.C.E.
Stretching across 4,000 miles of some of the world’s most daunting terrain between North-Central China and ancient Anatolia, it could be argued that the Silk Road represented the first global supply chain, bringing silk, porcelain and precious stones to Europe and horses, glassware, Neostarian Christianity and Buddhism to China. It may also have represented the first new world order in trade and supply chain terms, functioning for more than a millennium under an epiphenomenal cover of protection provided by numerous empires in return for heavy customs duties. Across time, these included the Holy Roman Empire, the Byzantine Empire, China’s imperial dynasties including the Han and Tang Dynasties, the Mongol Empire and the Kushan Empire. The route met its abrupt end in 1453 CE in another era of war, strife and political instability following the fall of the Byzantine Empire to the Turks.
The end of the Silk Road set the stage for the next world order. Although European explorers like Portugal’s Ferdinand Magellan sought out alternative routes to the East, international trade remained small for some 200 years, comprising less than 5% of the global GDP. Indeed, economic historians peg the first modern world order for trade to a peace treaty reached between European powers in the German region of Westphalia in 1648. Known as the Peace of Westphalia, the treaty marked the end of another era of war and instability, the 30- and 80-Years Wars, and created the political framework for modern international order. This was a Eurocentric world order, premised on the coexistence of sovereign states, a mutual respect for the rights of states to decide their own fates and religious tolerance.
The most significant impact of this event on global trade was its curtailment of inter-state aggression. The resulting balance of power in Europe allowed colonial powers like France and Great Britain to expand their dominions. Britain, aided by the rapid progress in energy generation, locomotive and navigational technologies made during the Scientific Revolution and the Industrial Revolution, achieved on its own, as well as influenced the economic integration of the world economy in the decades before the start of the first world war.
The sins of the British Empire are well documented, its imposition of common political, legal and financial institutions over about a fourth of the world population, created a framework that allowed, for the first time in history, cross-border capital flows and the functioning of free markets.
As we’ve seen, nothing lasts forever: The fall of the British Empire after the two World Wars marked an end of a world order that enabled the free movement of goods, labor and capital around the world. This was the first wave of globalization, which raised the share of exports in global GDP to about 15%.
The demise of the Great Britain-led world made way for a new world order built on liberal values, anti-colonial fervor and the desire of nations for reconstruction and self-reliance, with the United States in the center, one that had endured for nearly 80 years.
A new world order
It’s difficult to imagine today, but until the turn of the 20th century, the United States wielded no influence of any major import in international affairs. It maintained a small standing army and a smaller Navy than Chile. What changed to bring America to the frontline of an emerging new world order was the devastating impact of two world wars, devastating famines and a contagion that killed millions in Europe coincidental to America’s rapid industrialization powered by railroads, steel and electrical power, along with its decisive role in the two world wars. America was plowing ahead while Europe was tasked for years only with clearing away the rubble.
Having lived through the humiliations of the Great Depression and experiencing the useless carnage on foreign soil unleashed by war, the country had good reasons for desiring to have in place a rule-based, liberal international order. Beginning with Woodrow Wilson, America’s leaders for the first time viewed security and financial stability in global terms. In the ensuring years, American leaders with the help of their European counterparts, built multilateral institutions like the League of Nations—later revived in the form of the United Nations— the World Bank, the International Monetary Fund IMF, NATO, the World Trade Organization and the European Union aiming to move the world away from warring tendencies toward peace, prosperity and stability.
Henry Kissinger, who has played a significant role in influencing American foreign policy, articulated the democratic countries’ vision of the international order in his recent book World Order as thus: “an inexorably expanding cooperative order of states observing common rules and norms, embracing liberal economic systems, forswearing territorial conquest, respecting national sovereignty, and adopting participatory and democratic systems of governance.”
This was the first time that a consensus-based world order was created and galvanized in the history of humanity. It benefitted and prospered not only its principal architects, the United States and its democratic allies, but also the two erstwhile great empires, now under communist rule. It worked, demonstrably so, for more than seven decades, ensuring an era of relative calm and macroeconomic stability known as the Great Moderation. This era birthed the third and the fourth wave of globalization driven by advancements in telecommunications and transportation technology, and the neoliberal zeal of major and the developing economies to participate in the new world order.
Incredibly, it provided people in most parts of the world with access to goods and services that would be considered a novelty even for a Londoner in the 20th century. As John Maynard Keynes, the economist and the first vice president of World Bank, noted in his 1920 book The Economic Consequences of Peace: “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole Earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep.”
This was made possible during an era of unprecedented growth, which raised international trade to a record level of 60%. A globalized market reduces costs, provides access to better resources, commodities and creates optimized supply chain networks all of which result in incremental cost-efficiencies.
The great unraveling
Again, nothing lasts forever. The first signs of cracks in The Great Moderation appeared nearly six years ago, with the imposition of new tariffs on China. But the underlying trigger had been building up for over a decade.
The gravity defying export growth of China since the early 1990s post-reforms era, particularly after its entry into the WTO in 2001, not only displaced the United States as the top manufacturer in terms of output but it also began to reconfigure the global supply chain. China’s newly acquired global leadership did not particularly challenge the wealthy democracies in the West, the flag-bearers of the world order, as long as it satiated their markets’ hunger for faster, cheaper and better products. It helped reduce, for example, the price index for consumer goods in the United States by 7.6% between 2001 and 2006. What prompted a pushback, however, was what the economists call the “China trade shock.” Its meteoric rise had begun affecting the employment rates and wage equality in the non-farm sectors high-income countries.
To add to their consternation, China’s revivification of the Silk Road Belt and Road Initiative, a network of railroad, ports and infrastructure projects stretching from China to Europe to Africa, looked more like a projection of its geopolitical ambitions than an effort to raise the still relatively low living standards of its people.
As a result of the tariff wars, the multinational manufacturing base, including American brands like Cummins, iRobot and Crocs Shoes, moved supply chains out of China. The country’s factory output plunged to a record low in 2019, when it witnessed the slowest GDP growth of the post-reform period. Then, the pandemic turned the tide. A world in dire need of medicines and essentials, and the monetary expansion unleashed by Western economies in response to COVID-19, caused China to boost its exports by double digits during most of 2020 and 2021. The growth momentum is showing signs of a slowdown largely due to its stringent zero-COVID policy, but China’s runaway growth despite its playing fast and loose with guiding principles of the current world order like transparency and human rights underscore the deep structural flaws of the system.
A world in disorder
Events that cause widespread suffering are known to shift people’s support toward reactionary political ideologies. The 1918 influenza pandemic may have increased support for extreme right-wing politics in Germany. The COVID-19 pandemic seems to have rekindled the revanchist tendencies among the major powers. It cannot be a coincidence that Russia’s territorial claim over Ukraine or China’s over Taiwan have come to a boil in the aftermath of a catastrophic event that exposed the scant attention that authoritarian regimes pay to their healthcare and public welfare mechanisms.
Barely two weeks before Russia’s declaration of war on Ukraine, Chinese President Xi Jinping and Russian President Vladimir Putin issued a joint declaration for a new era that was at odds with the current world order on key matters of human rights, Taiwan’s sovereignty and as curiously, a world where the United States had no leading role to play. Foreign Affairs magazine called the declaration “a shot across the bow of a sinking American ship.”
These events signify a world order that, to put it mildly, stands at a crossroads. In the wake of these developments, the world’s major economies have started to align, realign and revive arrangements that protect their interests in a changing world, and which will have an impact on global supply chain management.
We have the Quad, a non-formal alliance between the United States, Australia, India and Japan, that has become more aligned in response to China’s recent assertions. Then there is I2U2, a new quadrilateral grouping comprising India, Israel, the United Arab Emirates and the United States. In May of 2022, President Biden launched the Indo-Pacific Economic Framework (IPEF) which includes Australia, Brunei, Fiji, India, Indonesia, Japan, South Korea, Singapore, Thailand, Vietnam and other countries from the region, with an aim to boost economic cooperation.
Clearly, these new alignments, conspicuous in their exclusion of Russia and China, have been formed or revived in response to the rising geopolitical polarization. For its part, China put its weight behind the Regional Comprehensive Economic Partnership (RCEP), a 10-member Association of Southeast Asian Nations (ASEAN), that excludes the United States.
Russia’s Ukraine invasion has met unequivocal condemnation in the West. Globally, it has fewer allies now than it had at the start of the war, except the outlaw states of Iran, Syria, Serbia and North Korea. Traditional allies like China, India and Brazil have shifted positions with mounting evidence of war crimes and decisive setbacks like Russia’s retreat from Kherson. Yet, Russia’s economic engagements have strengthened with countries in Asia and the Middle East.
Among the most concerning developments that signal the current world order’s deepening crisis are the strategic visions unveiled this year by the two major nations that outline each power’s idea of the shape of global order.
The United States’ National Security Strategy, released in last October, imposed stringent restrictions on the transfer of semiconductor technology to China, aiming to contain the latter’s ability to develop any significant technology advantage in areas like artificial intelligence and robotics. This was the biggest measure yet by the United States against China’s tech industry. The Financial Times editor Edward Luce took note of the real import of the measure, writing “Imagine that a superpower declared war on a great power, and nobody noticed.”
President Xi Jinping put forward the Chinese vision of global security called the Global Security Initiation (GSI) at the Boao Forum in April of 2022. One of the mainstays of GSI is the principle of “indivisible security,” which states that the security of any state is inseparable from others in its region. The concept was a product of the Cold War détente in the 1970s where it was used to ease east-west relations. But the idea gained notoriety this year when Putin used the idea to justify its campaign in Ukraine.
The most important thing to note in the context of the international order is that, for the first time, China and Russia presented their visions of the world, which places a high value on security, but leaves out of the equation a respect for human rights and the non-use of force.
The international order is presented with three distinct courses from here. One led by America, its allies and other democratic, liberal forces. The second, led by China, its allies and strategic partners that see and treat economic interests and political rights as two mutually exclusive entities. And the third, a world constantly at war with itself, caught between competing forces—much like the Cold War era.
Implications for supply chains
While it is too early to tell which of those three courses will prevail in the emerging new world order, they will affect global supply chains, and the professionals who manage them.
In fact, we are already paying a heavy price for political instability and volatility. The cost in human life is heavy: In addition to the millions who died during the pandemic, more than 200,000 people, including soldiers and civilians, are estimated to have been killed or wounded so far in the Ukraine war, with no end in sight. Beyond the human toll, the war has driven up the price of food and energy for a world already reeling under inflation, with both Russia and Ukraine among the world’s biggest exporters of oil, fertilizer and food. China’s bid to strongarm a wily pathogen continues to slow down the manufacturing of automobiles and consumer electronics.
That the international order in disarray should come as no surprise. What should surprise us, though, is the inability of the world’s biggest economic powers to contain not only the economic shocks, but also the rising populist, authoritarian and protectionist tendencies across the world. IMF and Moody’s predict an even gloomier outlook than previously estimated.
One result is that single-string global supply chains, built over five decades to make products faster, cheaper and better, are history. In the new world order, countries will align more on the basis of political interests. That, in turn, means that both public and private trade flows will be driven by geopolitical interests.
Two, is that governments and corporations need to move from single, bottom-line thinking, one sharply focused on profit, to triple bottom line thinking. British author John Elkington came up with the term triple bottom line (TBL) in the mid-90s to urge leaders to rethink capitalism. The TBL strategy entails considering three distinct bottom lines focused on profit, people and planet. It involves tracking and managing the value added to—or taken away from—corporations, people’s lives and the environment.
Using the same paradigm for our supply chains, a TBL approach means adopting agility, resiliency and sustainability as key deliverables alongside the market-driven practices of cost and speed. Talk to any senior-level supply chain executive at one of the world’s leading companies, and you are already like to hear that TBL strategies are being implemented in their organizations, even if that language is not explicitly used.
Three, supply chain planners will need to realize that geopolitical developments provide a sound barometer of risks affecting the global supply chain. Typically, people managing supply chains are so focused on managing the physical flow of goods, assuring compliances and dealing with one supply chain disruption after another, that they don’t take into account the larger human factors like political motivation of the stakeholders. Supply chain executives will need to monitor the political landscape for alarming trends and events like a rise in populism or authoritarianism, corrupt practices, exploitation of natural resources, human rights abuses or an autocrat’s extra-constitutional bid to extend his term.
Hopefully, with newer business-intelligence technologies, supply-chain planning systems will have the ability to analyze reliable data coming in from all sources including social, economic, political, and environmental. This will only prove to be effective when economic powers want to engage more deeply with trade partners. One way to do this would be to ensure that Free Trade Agreements clearly spell out guidelines for an adherence to fair trade practices, while working with partners who share these values. This will help create robust multiple-strand supply chain networks that would be more agile and responsive to future shocks.
Four, we must recognize that despite the political rhetoric, globalization will not stop. Economies will still compete, and to do so they will need incremental efficiencies and savings that are only possible through globalization. Organizations, however, will seek to make the supply chains conflict-free and this could be done by building in decoupling points. Used widely for inventory management, decoupling points act as both inventory-holding points and safety buffers in a distribution network. The concept can also be applied at the level of global supply chain management, where decoupling points can be used to connect different regionalized, customer-centric supply chain networks. In the event of a crisis, a decoupling can quickly redirect production and sourcing to other hubs, making sure that operations in other parts of the supply chain continue undisrupted.
Finally, Western nations, their allies and strategic partners need to ensure that they don’t permanently alienate the powers on the other side of the fence, who feel constrained by the current world order. The West cannot ignore the growing aspirations of two-thirds of the world’s population that has become a thriving part of the global economic landscape. They will have to see that trade relationships are not driven by raw emotions, but by respect and trust for people and environment.
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