Fractured Chains

Our lives are increasingly reliant on functioning and resilient global supply chains. Over the last few years, we have witnessed a number of major shocks to the global flow of goods, services and capital.

In this series, we unpack this volatile supply chain landscape in greater detail, helping organisations to better understand the risks and challenges they face today, whilst supporting them to identify and prepare for any potential shocks in the future.
Last updated: 15 / 06 / 2022

In a highly interconnected and interdependent world, our lives are increasingly reliant on functioning and resilient global supply chains. Over the last few years, we have witnessed a number of major shocks to the global flow of goods, services and capital. First, the Covid-19 pandemic triggered a global shutdown of manufacturing and logistics that - coupled with an e-commerce boom and resultant surging demand for consumer goods, medical supplies and computer chips - led to severe manufacturing shortages and backlogs, and shipping delays at major supply chain hubs.

Then, with some green shoots of recovery beginning to emerge, Russia's recent invasion of Ukraine and China's continuing 'zero-Covid' policy have delivered yet more convulsions to an already fractured global supply chain network, likely inducing further delays, goods shortages, and food insecurity across regions of the developing world.

Against this backdrop of repetitive supply chain shocks and increasing global insecurity, a new reality of frequent supply chain disruption may be emerging, meaning that organisations must now adopt novel strategies in order to cope with these reverberations and keep their operations moving and secure. In our latest series - Fractured Chains - we unpack this volatile supply chain landscape in greater detail, helping organisations to better understand the attendant risks and challenges they face today, whilst supporting them to identify and prepare for any further potential shocks in the future.

In this first post, we assess how we arrived at this point today, first tracing the roots of the current global supply chain landscape – from the emergence of U.S. hegemony post-Cold War, to the splintering and realignment of regional powers and economies post-financial crisis -  before turning our attention to recent geopolitical crises and their impact on an increasingly complex and fragile global supply chain. Over the coming weeks, we will then focus on a number of pertinent themes – from supply chain resilience and due diligence to cyber security and regulation – addressing what the key areas of risk are for businesses and international organisations and what they can do to prepare/respond to these issues moving forward.

The ‘Unipolar moment’

The collapse of the USSR at the beginning of the 1990s heralded what American journalist Charles Krauthammer termed as the ‘Unipolar moment’. Such a theory argued that there had been a fundamental shift in the deeply-polarised global system, and that “[T]he center of world power is the unchallenged superpower, the United States, attended by its Western allies.” At the time, it was thought that U.S. hegemony would only last for a ‘moment’ in history, and that the forces of self-determination and ideology would push the world back to the pre-WW2 status quo of multiple regional alliances. However, over the next 20 years, this failed to manifest.

Instead, the U.S. broadly dominated global affairs, maintaining influence and de-facto control over international organisations such as NATO, the International Monetary Fund (IMF) and the World Trade Organisation (WTO). This in turn allowed the US to control the flow of capital to a large extent, and provided the opportunity for large U.S. companies to leverage cheaper labour markets in developing countries.

Nascent Competition

The U.S.’ influence has also been facilitated by the continuing strength and technological superiority of its military and the pervasiveness of its intelligence agencies. CIA support to U.S.-supported groups and regimes across the world became commonplace throughout the second half of the 20th Century, ushering in a new era of sub-conflict competition between the US and regional powers such as Russia, China and Iran. Subsequently, the U.S.’ political, economic and military power has become an ever more pressing constraint for a number of its strategic adversaries as they seek their own regional hegemony.

The successive conflicts that defined the post-9/11 era for the U.S. provided significant opportunities for the its adversaries to begin to assert dominance beyond their regional spheres of influence. As the U.S. became mired in, and increasingly focussed on, its decades-long struggles in both Afghanistan and Iraq, Russia and China were more able to expand their influence in the same areas and beyond, particularly in the global south.

Against this backdrop, the early 2000s saw multiple regional trading blocs around the world begin to coalesce, in part so that regional powers or groups of countries could themselves access wider markets for goods and attempt to diversify away from reliance on US capital. The EU, for example, saw the accession of 12 Member States between 2004 and 2007, and the trading bloc has moved towards greater integration on political, socioeconomic and security issues. The formation of the BRICS (an acronym denoting the five major emerging economies of Brazil, Russia, China, India and South Africa) in 2006 also represented a nascent challenge to U.S. dominance, bringing together as it did a number of regional powers traditionally seen as adversarial or neutral. Elsewhere, APEC (21 member economies in the Asia-Pacific region) and MERCOSUR (11 member and associated member economies in South America) are trading blocs which continue to grow in prominence and influence within their respective regions. As such, these blocs may have become the natural fault lines for global supply chains themselves, as regional groups seek to protect their economies from further shocks, and also pool political resources to compete with more powerful countries. The recently announced Regional Comprehensive Economic Partnership (RCEP – 15 Asia-Pacific countries) may be a case in point, which points to the growing regional hegemony of China and the creation of more efficient supply chains in the region.

The 2008 financial crisis - considered a ‘black swan’ event, meaning that it was “an unpredictable event that was beyond what is normally expected of a situation and had severe consequences” - was a stark reminder of how closely interconnected the global economy was to the U.S.’.OPEC  countries were hit particularly hard, with oil prices falling by more than 100USD per barrel between July and December 2008, destablising their economies and subsequently contributing the Arab Spring of late 2010. Further, the shock of 2008 almost certainly encouraged diversification away from the U.S. and fostered the growing independence of the trading blocs discussed above. The social and political upheaval caused by the crisis has also provided the conditions for more extreme political ideologies across the globe, including the West. The rise of populism in the U.S., UK and Europe can be directly linked to the perceived disenfranchisement of disadvantaged communities following the economic downturn, which in turn fostered a more isolationist and inward-looking attitude across a number of Western democracies. The election of Donald Trump as U.S. president and Brexit are often cited as catalysts in this regard, and how such attitudes become permeated at a national level in politics.

For businesses, the recovery from the financial crisis did, however, present a renewed opportunity for growth, with competing labour and commodity markets offering increasingly lower prices to attract foreign business - particularly in China. This led to the physical lengthening of supply chains, with materials and components commonly sourced from one or more continents and manufactured in another. China in particular has taken advantage of this, with the multi-decade investment plan of the ‘Belt and Road’ initiative to enable trade into central and southern Asia, and the huge expansion of its manufacturing capacity (28.7% of global output as of 2019).

Over time, technological development has also increased the demand for rarer raw materials, such as lithium and cobalt, which are used in lithium-ion batteries and a number of increasingly important components for renewable energy sources. While this has resulted in some shortages, these have largely been confined to the Technology sector as opposed to global markets as a whole, although this is beginning to change and become a wider issue.

In short, local economic and political issues, accelerated by the financial crisis and a succession of regional conflicts affecting the perception of the U.S. across the world, have weakened its influence and power, and frayed many of the ties binding countries together, while at the same time global supply chains have grown more complex, interconnected and fragile. From 2016 to the present day, the situation has only devolved further, as we entered a period of global upheaval not seen since the Second World War.

Successive crises

Since 2020, multiple crises in quick succession have stress-tested the status quo and further accelerated the decline of U.S. hegemony:

- U.S.-China rivalry

A rapid retaliatory rise in trade tariffs between the US and China since 2016 set the stage for a increase in both economic and military tensions. China has come under multiple rounds of sanctions as a result of authoritarian crackdowns in Hong Kong as well as increasing armed manoeuvres in the South China Sea and Taiwanese airspace. An increasing military presence in the area has also caused physical disruption to shipping lanes, limited business confidence in Taiwan, and raised broader strategic questions about the region’s future. Heavy-handed regulation on the behalf of the CCP (Chinese Community Party), particularly in the burgeoning Tech sector, has also agitated U.S. investors and drastically reduced their appetite for Chinese companies (for example, U.S. FDI in China dropped to $8.7 billion in 2020, a fall of roughly a third from the previous year and the lowest level since 2004). China also witnessed $17.5 billion worth of portfolio outflows in April 2022 alone, an all-time high according to most recent data from the Institute of International Finance (IIF).

- Coronavirus

In early 2020, the COVID-19 pandemic forced near-global lockdowns of entire populations in order to contain the spread of the virus. This had a steep humanitarian toll, and initiated supply chain shocks in multiple areas, most notably the drop in demand for oil, the increased requirement for healthcare products and the stoppage of air, land and sea freight. While the majority of countries have re-opened their borders and released restrictions, recent regional-level lockdowns (namely in China and the city of Shanghai) have severely disrupted manufacturing and shipping from a number of vital ports. This has had global knock-on effects, such as disruption to worldwide shipping and trade due to containers being stuck in Chinese waters.

- The invasion of Ukraine

The recent Russian invasion of Ukraine is perhaps the most brazen example of how the geopolitical order is now shifting at an accelerating pace. Potentially buoyed with a false assumption that NATO was unprepared and ill-equipped after the withdrawal from Afghanistan, Putin’s invasion has been interpreted as a direct challenge against the alliance and U.S. power more broadly. Outside of the direct catastrophic loss of life and chaos in Ukraine itself, the war’s impacts have been reverberating globally, as we discussed in detail in our last series ‘Beyond Ukraine’.

From a supply chain perspective, the affect of the conflict has been felt already in two key areas. First, the drastic increase in the cost of oil and gas has accelerated the upward trend of inflation and rising costs for consumers across world. After the massive public spending initiatives to fight COVID-19, the rise in oil and gas prices has meant that inflation is currently at levels not seen since the 1970’s in many countries.

Second, connected to inflation but with a somewhat different cause, staple food prices are also rising as a result of the inability to harvest crops from Ukraine and the restriction of goods movement in the Black Sea, as well as sanctions on Russian exports; together Ukraine and Russia export 55 million metric tons of wheat and 30 million metric tons of corn, representing 7.3% of total global wheat and 2.6% global corn production respectively. Since early February, as the Russian military build-up intensified and became more scrutinised, winter wheat futures have increased approximately 45%, spring wheat 16%, corn 12% and soybeans 5%. Traders expect this shock to last only a year, however it is not yet clear what the short-term impact of this may be, or how this may change if droughts in wheat-producing countries continue to intensify due to global warming (which is having an adverse effect on grain production globally).

This impact to food prices is likely to be felt particularly hard in regions such as North Africa and the Middle East, with a significant proportion of their resident populations already either in, or at risk of, food poverty. Factors such as food scarcity have also been shown to have dramatic consequences for the socio-economic and political foundations of countries affected. For example, rising bread prices were a significant contributing factor to the Arab Spring that swept through North Africa and the Middle East in 2010-2011, and countries such as Tunisia are already facing significant difficulties in managing budgets amid rising prices.

- Sanctions

Since the latter half of the 2010s, sanctions have become the weapon of choice for the U.S. and the wider West, and are often seen as a bloodless alternative to military action in order to influence and punish countries seen to be contravening the ‘rules-based’ international order. Overall, however, sanctions are one of the most damaging elements of the West’s toolkit for multinational businesses and affected governments and populations. Sanctions can also have an outsized impact on local economies and disadvantaged areas of society, and thus such effects become easy propaganda wins for regimes targeted by the sanctions looking to deflect blame and anger.

Sanctions not only force countries and global companies into re-engineering their complex supply chains, but the long-term effect promotes alternative spheres of influence and capital flows in order to protect countries from future sanctions issues. If the long-term strategy of a regional power is to exert more influence in an area in such a way that runs contrary to U.S. and Western interests, it makes sense to establish trading agreements and policies that protect its economy from the impact that sanctions may have, providing you with the freedom to act.

Collectively, these events have demonstrated both the complexity and vulnerability of modern supply chains. The shifting nature of the current global landscape means that businesses and other international organisations will likely have to re-evaluate and reconfigure these supply chains and quickly build the institutional ability to identify and respond to further geopolitical risks.

Over the coming weeks we will be exploring these issues in greater detail – from areas of supply chain resilience and due diligence, to the risks associated with cyber security and regulation - offering advice on the key steps organisations can take to mitigate the key risks from supply chain disruption both now and in the future.

Fractured Chains so far

Successive crises and supply chain resilience

By Adam Carrier
June 8, 2022

Supply chain resilience refers to an organisation’s ability to quickly and efficiently alter its suppliers in the event of a disruptive scenario. This can be done in many ways, including via contingency planning, diversification, and selection of robust and proximal suppliers. Most organisations can also bolster the effectiveness of these measures by incorporating contingency planning and threat monitoring into their decision making.
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We will be looking at:
  • Supply chain resilience
  • Due diligence and assurance
  • Cyber impacts
  • Political risk
  • Diversification
and more, over the coming weeks and months.