Changing nature of supply chains

ISLAMABAD: Global economic landscape was not looking good even before Covid-19 but it is a whole new story after that.

In the months prior to the Covid-19, the global trade tensions, particularly between the US and China, and a populist tendency in many other global economies tested nerves of global markets.

The rising trade protectionism and other economic barriers started straining the flow of goods and services that was on an upward trajectory since the start of 21st century, with the short exception of 2008-09 crisis.

Growth in international trade was already showing signs of stress, starting late 2018. And then came the Covid-19 that exacerbated these trends, though the real impact is yet to be accounted for.

Looking ahead, the Covid-19 has made few trends quite clear, and adjustments or shifts in global supply chains (GSCs) are one of the major ones. This is the result of exposed fragility of GSCs whereby multinationals encountered supply shocks followed by demand shocks, leading towards policy thinking of “self-reliance”, “multi-level sourcing” and “closer-to-home” supply chains.

GSCs had been optimised for “just-in-time” model that reduced operating costs for businesses, but it was based on the assumption of ever-functioning transport, regulatory and business networks, which have been seriously exposed by the Covid-19 crisis.

As the pandemic started in China, which has a reputation as the “factory of the world”, the interruption in that factory changed perceptions at all levels of the GSCs.

The current situation would result in a few adjustments or shifts in GSCs. Some of these trends could be as follows.

First, diversification of supply chains to reduce reliance/exposure to the Chinese manufacturing base. Second, regional logistics hubs will re-emerge in order to mitigate single-source dependencies, and to establish a flexible and adaptable supply chain.

Third, the human dimension is back, and it will play a prime role in rebalancing supply chains during this crisis, and well beyond. Fourth, the transition to a new model for supply chains will be underpinned by a rapid and wholesale digitisation of the paperwork that accompanies global trade.

Fifth, new manufacturing practices such as 3-D printing may be used on larger scales. Sixth, multipurpose manufacturing units, for example cosmetics companies making hand sanitisers, may increase in number and use.

The case of Pakistan

What is in it for Pakistan? A lot, only if the country’s economic and trade policy and management is geared towards these changes in order to harness benefits of the aforementioned “adjustments” and “shifts”.

The following guiding points may be helpful for Pakistan to plan ahead and get a share in the shifting GSCs.

First, Pakistan needs to establish a trade intelligence mechanism to get the real-time global markets pulse and identify opportunities arising out of shifting GSCs. Second, there needs to be a realistic and dynamic assessment of supply capacity, in various manufacturing and services sectors of Pakistan, including the lead times (to supply) in order to harness the opportunities through proactive marketing.

Third, the trade promotion strategy and modalities must be changed drastically in order to make this system agile, proactive and connected with suppliers (exporters of Pakistan) and buyers (in target markets). The existing trade promotion system lacks these elements.

Fourth, Pakistan may have more opportunities in non-traditional exports, ie other than textile, leather and rice. Services, particularly information and communication technology (ICT), financial, logistics and professional, carry a huge potential that has always been overshadowed by traditional exporter lobbies.

Fifth, Pakistan may present itself as an alternative manufacturing base in some sectors. This may be done through the China-Pakistan Economic Corridor (CPEC) to invite Chinese companies to establish a manufacturing base in Pakistan and feed into GSCs.

Light engineering and light electronics sectors carry a good potential for starting this effort. An improved logistics infrastructure, however, would be the key in this case.

Sixth, as Pakistan has the labour cost advantage, though some skill development is required, it may present itself in the labour-intensive manufacturing sectors and particularly in niche areas.

Pakistan is an interesting case for international trade analysts, which is an economy of around $300 billion (subject to current calculation debates) with exports hovering around $20-24 billion since years.

It becomes even more interesting if one reads the trade policies and strategic trade policy frameworks adopted by successive governments. These policies outline ambitions that have never been met.

Were these mere illusions or ill-prepared documents or something more to it? Probably the all of that in addition to the archaic trade policy management, whereby trade is seen only as exports and exports is seen only as textile and textile is seen only as subsidies.

The share of textile is no more than 10% in the economy of Pakistan; rest of the 90% may carry a bigger potential.

Another point that trade policy management needs to factor in is to introduce an accountability or monitoring and evaluation mechanism.

Firstly, at the level of policy, or strategic framework, development it should be ensured that these documents make sense and are reality-based rather than a typical bureaucratic exercise.

Secondly, the army of commercial counsellors must be able to demonstrate the increase in exports and investment in their areas of jurisdiction. Above all, the trade policy needs to be taken seriously at the legislature and media organs of the state. It is said that there is always an opportunity in crisis. In the current crisis, those who will not capture this opportunity appropriately may have to face a lasting crisis in their international trade ambitions.

The trade policy of Pakistan needs to be seen through this lens as traditional markets and export channels worked only in the pre-Covid-19 era. Global supply chains and markets are going to change fundamentally, be agents rather than victims of this change.

The writer is an international economist

 

 

Published in The Express Tribune, June 15^th, 2020.

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