The novel coronavirus is spreading silently and invisibly through its human carriers, inflicting fear and sickness. Likewise, malaise can spread through the “carriers” of the global economy: the supply chains that link myriad manufacturing and service-sector firms around the world.
These supply chains are the circulatory or nervous systems of the global economy and, like their equivalents in the human body, receive little or no attention until things go wrong. Once they do – which is increasingly often – our extreme vulnerability to these hidden links is exposed.
International production of countless goods and services – from
cars to smart phones, from processed foods and drinks to essential medication, and from
financial to technological services – can slow down or even stop, adding to the fear and damage occasioned by the underlying malaise.
Asia – China especially, but also South Korea and many Southeast Asian countries – became the epicentre of supply chains as it emerged to become the world’s workshop or assembly shop. Countries such as India and Bangladesh were relatively late entrants, but are key parts nevertheless.
The first generation of supply chains, according to Changyong Rhee, director of the Asia and Pacific department at International Monetary Fund, involved some of the world’s biggest manufacturers, such as
Apple, which assembled smart phones in China from inputs across and beyond Asia. Car makers from the United States, Japan, South Korea and Europe did likewise.
The huge and complex web of supply or value chains has since expanded as the world’s makers of garments, electronics and cars have
diversified assembly beyond China into countries such as Vietnam and Bangladesh, while Chinese manufacturers did likewise. The web is a largely unmapped maze.
As Rhee noted to the Foreign Correspondents’ Club of Japan in Tokyo, we are in the second generation of supply chains, where it is no longer a case only of companies from advanced economies taking comparative advantage from lower costs in emerging economies, but a much
more sophisticated process.
It is just as likely to involve global companies tapping skills in information technology, artificial intelligence or other technologies of countries such as India, as links in their supply chains or providers of financial services do likewise. This has increased the value yet also the vulnerability of the chains.
The novel coronavirus has badly upset these logistics, not least in China’s Hubei province, a
centre of vehicle manufacturing. Japanese carmakers such as Nissan have, meanwhile, been forced to temporarily halt production in at least one plant in Japan while electronics giant Foxconn has barely managed to
restart production after the prolonged Spring Festival break.
This is by no means a one-off problem.
Haruhiko Kuroda, when he was president of the Asian Development Bank, was one of the first to sound the alarm about such interruptions nearly a decade ago, and the threat continues to grow.
Soon after the
Fukushima earthquake, tsunami and nuclear reactor meltdown disaster in Japan in 2011, Kuroda told me he was worried about the impact of the disaster on Asian and global supply chains. His fears proved justified as Japan’s production of critical components and materials slowed or stopped.
Then came the severe acute respiratory syndrome (
Sars) epidemic in 2003. As IMF managing director Kristalina Georgieva noted, the Chinese economy “is much more significant for the world” now, adding: “Then it was 8 per cent of the world economy. Now it is 19 per cent and it is much more integrated in Asia and with the rest of the world.”
She also observed that “disruptions [from the coronavirus epidemic] are more likely to cascade down to other countries”, adding that “the world economy in the early 2000s was in a very strong shape, whereas today we are projecting
relatively modest global growth”.
Epidemics such as the novel coronavirus and Sars, or natural disasters such as in Fukushima, will continue to occur but man-made disasters that affect supply chains are also on the rise, and this is where awareness of their importance needs to be driven home forcefully to politicians and policymakers worldwide.
US President Donald Trump’s trade war against China, which is in a holding pattern or truce, may prove to have an even more disruptive effect on supply chains than epidemics or natural disasters, because it seems to have provoked efforts to
delink China-based chains from American ones.
Also,
Britain’s exit from the European Union will cause far more disruption in the Europe-UK processing of manufactured goods than is generally realised. The cost of these uncertainties in terms of production costs and capital investment is potentially high and will be reflected in prices.
In short, the costs of economic globalisation may prove to be higher than imagined as the golden age of free trade comes increasingly under threat and as health risks from mass travel and tourism mount. We need to study, map and measure these risks while the remnants of global cooperation last.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
