BY GOH JUN WEI

Today’s globalised and interconnected world has brought about many perks (ease of access to your favourite imported goods!). At the same time, connecting many economies together also has problems of its own. One of the more prevalent ones as of late revolves around the complexity of our global supply chain. 

Understandably, firms will extend their production processes to include foreign suppliers in effort to reduce costs. The rise of cheap factors of production in countries such as China and Vietnam have led to many companies offshoring inputs. However, such an intricate supply chain is risky as small disruption caused by one of the chains can lead to a domino effect where a global shortages and cost-push inflation occurs. This is exactly what is happening to the world now as we speak!

1. How did it all happen?

Due to multiple pandemic restrictions around the world, worker mobility (especially employees of logistics firms) has been greatly reduced. On top of that, COVID-19 outbreaks have forced ports to close and shipping firms to face slashes capacities. This greatly disrupted the entire trade system as there is a worldwide bottleneck where goods are stuck at ports, unable to be shipped out to their destinations. Despite initial dips in consumer demand, towards the end of 2021, consumer demand has also started to pick which further strains an already struggling global trade infrastructure. 

2. Why is this an issue?

A supply bottleneck decreases short-term aggregate supply and leads to an increase in general price level. Consumers are likely to face cost-push inflation and even shortages for certain goods. Figures are showing that bottlenecks are halting much production in both the US and Eurozone which undermines economic recovery worldwide. In fact, shortages of semiconductors has cost Apple almost USD6bn in potential sales! 

3. How are firms and governments reacting to the problem?

Most firms are actively formulating new corporate strategies in response to the supply bottlenecks. Companies that traditionally kept little spare inventories and chose flexible contracts with suppliers are now opting to storing more inventory on hand while also entering to longer-term contracts. Firms are also looking to invest in more efficient technologies and engaging with local suppliers. In essence, the “cost-minimising” strategy has been considerably laxed to allow firms themselves to have more insulation against future supply chain bottlenecks. 

Governments around the world are cognisant of the issue at hand as well. The White House has recently encouraged firms to source for inputs locally. Specifically, the US government are looking towards larger capital investments into improving local supply chain infrastructure while also pushing for more policies to improve worker productivity as well as innovation.

4. Moving forward?

Much of the current supply chain bottlenecks stems from pandemic restrictions due to pandemic restrictions. However, it could also highlight an underlying weakness in the corporate strategies many firms are adopting. Larger investments might be required to create regional hubs of local suppliers to reduce overreliance on importing inputs which is an economic risk. Shipping companies still remain pessimistic of the situation in the near future. The situation we are facing should by no means discourage us from engaging in free trade. International trade has been and will continue to be a huge driver of the global economy. Nonetheless, it is parochial for us to be aware of the complexities and problems the current trade infrastructure has, followed by tweaks in corporate strategies to better insulate firms from future events that will create disruptions in the global supply chain.