2022 - REPORT - STRATEGIC TRADE CHALLENGES: SECURING ESSENTIAL INDUSTRIES AND SUPPLY CHAINS

Faik OZTRAK (Türkiye)

16 December 2022

The emergence of new trading powers and particularly China has fomented new tensions in the international trading system. At the same time, Russia, a declining and high disruptive country, poses grave and more immediate challenges. These tensions are largely driven by disagreements over which norms, practices and rules ought to shape the trading system. Indeed, mounting challenges to the liberal order have begun to alter old paradigms about economic development, the free flow of goods and capital and notions of how best to administer the international trading and financial order and to prosper in it. New struggles have emerged regarding who writes international trade and investment rules and who ultimately benefits from them. Although rising powers like China clearly profited from the liberal trading system once they had decided to participate in it, their demands to rewrite these rules and operate under different norms have mounted over time as their relative weight and power in that system increased. For its part, Russia seems more determined to smash the current order without providing coherent or workable alternatives.

Concerns about these kinds of trends both domestically and internationally lie behind mounting calls in some democratic societies for injecting broader governance and even security considerations into the global trade architecture, in trade policy and in national industrial policies. This is animated by a growing recognition that states need to do more on the economic front to safeguard embattled democratic societies increasingly compelled to fight off authoritarianism both internationally and domestically and to ensure access to inputs needed by their own industries and consumers. These concerns were already on the rise prior to the COVID-19 pandemic. But that pandemic and now, Russia’s horrific war on Ukraine, have exposed new vulnerabilities to the trading order and to the complex web of global supply chains that is among its most salient features. 

The pandemic has exposed a range of vulnerabilities linked, in part, to over-dependence on strategic rivals for a range of essential finished goods − including pharmaceuticals and personal protective equipment, critical manufacturing inputs and raw materials. Recent disruptions to supply chains and shipping and transport networks have fostered collective economic uncertainties that only complicate efforts to address supply shortages. Such disturbances can be economically devastating and can impact economic growth through many channels, including rising prices, delayed production, backed up ports, breakdowns in transportation systems, investor uncertainty and wildly swinging demand conditions. 

This, in turn, raises questions about current offshoring strategies and has precipitated a re evaluation of systemic risk and how best to mitigate it. New regulations and restrictions are now needed to address these vulnerabilities. Decades of offshoring production and overreliance on strategic rivals for essential production inputs and goods have stripped North America and Europe of a degree of economic agency and weakened their capacity to respond to a global crisis like a pandemic and now Russia’s war on Ukraine. 

Corrective measures are thus essential, and this is changing perspectives on supply chain management, global trading relations, industrial policy, international financial flows and how best to manage trade of essential commodities and goods with rivals.

Europe now needs to find alternatives to Russian oil and gas and cope with the commodities price explosion that followed from Russia’s attacks on Ukraine. Responding to China demands a more nuanced set of policies that at once reinforce the rules of international trade and the central role markets play in structuring it. This implies a strategy that balances elements of free market liberalism and varying degrees of state intervention. This is not an easy balance to strike and the risk to the open market cannot be discounted. 

Instability is likely to continue to rattle global supply chains as long as the COVID-19 pandemic endures and Russia continues its war on Ukraine. Any return to normalcy will take time as backlogs of orders are sorted out and suppliers respond to changing demand conditions as consumers rebalance purchases of goods and services.  

Western governments need to recognise their own limits. They will never be positioned to master all the information that market actors consider when making fundamental supply decisions. But states can shape the process in broad terms though concerted trade, industrial, environmental, tax, transportation and even strategic policies conducted in close consultation with friends, allies and the private sector. Along these lines, strategic reserve policies might provide a hedge to critical supply shortages in the future. Global protocols on how best to keep ports up and running during pandemics and other global emergencies are needed.

Societies that distribute the gains from trade more equitably are more likely to achieve greater public buy-in on the need to maintain and defend relatively open trading systems. Finally, Allied governments should recognise that while it may make sense to exclude strategic rivals from bidding on national critical national infrastructure and other strategic projects, engaging allies and partners generally makes strategic and economic sense. In simple terms, “Buy NATO” is better than Buy National.
 


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