In recent years the world has been rocked by unforeseen and unimaginable global catastrophes. The coronavirus pandemic caused disruptions to global economies as countries closed their borders. Markets became volatile and saw historic crashes, while commodity prices shot up owing to shortages in supply.
The global economy became accustomed to a new normal where Covid-19 vaccines represented health passports that dictated movement and activities across borders. Then, the sudden resumption of activity in travel, trade, business, and consumerism brought forward newer challenges. Increase in demand for consumer goods created extreme shortages in supply. New constraints and volatilities emerged in the global supply chain industry as demands to meet shortages outweighed capacity, giving rise to severe port congestion, quadrupling of freight charges, and heightened costs for warehousing and logistics.
There was hope that the supply chain crises would subside by 2022. But with the current Russia-Ukraine war and the re-imposition of restrictions over the resurgence of Covid-19 cases in China, the challenges to global supply chain networks seem to only have been exacerbated further.
Supply chain is part of the very fabric of globalisation, a phenomenon that has shaped the global economy over the past several decades. According to the International Monetary Fund, transoceanic routes carry over 80% of the world’s traded goods. In the months following March 2020, the freight charges from ocean liners have increased by more than 300%. And as the crunch in the industry deepens, the tenets that have defined globalisation slowly seem to be tethering away.
Globalisation controversies
Anti-globalisation movements date as far back as 1999 when protests took place outside the Word Trade Organization conference in Seattle. Populist sentiments against open borders increased into the new millennium as businesses struggled to stay afloat in the aftermath of the 2008 financial crisis. Some people believed globalisation was on the brink of extinction even back then – then came Brexit and Trump. In 2016, the United States launched a trade war against China, leading to one of the highest effective tariff rates the country had seen since the 1930s. In recent years, China also increased restrictions on the flow of cross-border goods, focusing instead on meeting a growing domestic demand.
Despite all this, supply chains continued to thrive, and global trade remained firmly reliant on the framework that has interconnected the global economy since the fall of the Berlin Wall in 1989. It was impossible for it to have been any other way. Globalisation may have made economies interdependent but this interdependency is characterised by geopolitical stability, exchange and transfer of technology, and for economies to make trade decisions based on where they have a comparative advantage. Global marketplaces emerged, defined by highly sophisticated global value chains. In short, efficiency was the key. No one wants to give up on the comforts of globalisation, the trillions of dollars of opportunities that it has afforded over the years, and the addiction it has created amongst consumers to buy at exorbitantly low prices. Nor do globalization advocates want to ignore the benefits of the systems benefits on the 1 billion people who’ve risen out of poverty because of the new jobs that were created by foreign direct investment and rapid industrialisation. But efficiency also has its costs. Risks of sudden capital flights have the power to destabilize financial markets, and blue-collar workers in rich countries lose out when production is offshored.
More recently, however, disruptions to the global economy brought about by the pandemic have prompted a serious reflection and reimagining of the current world order as new bottlenecks in supply chain have emerged. Businessmen, policymakers, institutions and consumers all saw firsthand how globalisation failed during a global health crisis. Globalisation, in essence, was the reason why Covid-19, which started in a small Chinese province of Wuhan, spiraled into a never-before seen before global pandemic. The Russia-Ukraine war has served to justify these claims once again since sanctions on Russia have disrupted markets even further. Food and commodity prices have surged, and energy markets are becoming more and more volatile. Europe, having been dependent on Russia for its energy needs for years, is desperately trying to build up its gas reserves.
Globalisation’s changing tide
There is fear in giving up on existing frameworks completely but businesses also need protection. The narrative is changing from efficiency to security, and from a need to offshore to reap the benefits of cheap labour and production costs to a need to reshore and reap the benefits of safety in the event of another global crisis. Globalisation seems to be slipping in popularity while regionalisation is promoted to build new trading blocs that will yield minimal global impact in the event of a crisis.
It must be noted that evidence of countries reshoring production is very little. According to The Economist, domestic manufacturing in America remains not only firmly reliant, but has also shown a significant increase on imports of raw materials. Manufacturing shares as percentage of GDP in the rich OECD countries remains at a historic low of just 13%. But the fact that companies in the West are bearing additional costs to build up on reserve inventories in case of another supply chain crisis shows that the fear is palpable. Countries are diversifying their sourcing bases, to be able to meet demand in the event of a crisis when aggregate supply falls.
Therefore, reimagining globalisation is all about accruing the benefits of globalisation with partners, businesses, and people who you can rely on; with whom you share a strategic geographical and political advantage.
Cause for fears
Freight forwarders currently hold all the power and freight rates are expected to remain at record highs in the months to follow -- this is after the EU Mobility Package, which went into effect on February 2022, which has reduced the average number of working times for drivers and jacked up costs. Elsewhere in the West, an aging population means that drivers are in short supply, thus creating a gap in the market. To find younger applicants, the industry needs to further improve working conditions, reduce hours and adjust pay scales. Moreover, oil prices continue to remain high and given the highly fuel dependent nature of the supply chain industry, the burden is being translated into high transportation costs.
Diesel buyers in Europe are having to spend 41 percent more on fuel today compared to December 2021. In addition to this, Europe is also on its way to revise its draft of the Emissions Trading System, the world’s largest carbon market to regulate emissions. The additional tariffs are expected to be in place starting 2023 on aviation industries, oil refineries, electricity generation, steel production and other highly polluting sectors.
Lastly, the bottlenecks in the supply of goods remain. The closing of the Suez Canal in August 2021 has increased traffic and several port closures in China due to Covid-19 are adding to the pressure. Intense backlogs and congestion persist at ports in both the East and the West Coast.
The fact remains that stakeholders had underscored their dependency on maritime container trade. The IMF reports that rising shipping costs play a key role in driving global inflation. When freight rates double, inflation increases by 0.7 percentage points. While fuel or commodity prices have a higher and a more direct impact on inflation, volatility in shipping costs is quantitatively similar.
Rising shipping costs are in effect translated into higher import costs. Evidence from 143 countries further suggests that since imported goods and raw materials form the basis of production in most sectors, the impact is reflected in producer prices every 2 months. These costs are gradually passed on to the consumer. Countries that have a consistent trade deficit thus feel the impact of surging inflationary pressures far more than others.
Robustness gives way to resilience
Risks to supply chain have always been an inherent part of the industry, according to McKinsey’s Dan Swan, and disruptions will continue to happen with more frequency and potentially larger magnitudes; The current supply chain crisis has reduced global GDP by 1 per cent.
Global supply chains therefore must be reengineered to afford sustainability and strength – the question is, how? Should railway systems and trucking be more regulated? How can the power of the oligarchies that control the shipping industry be curtailed? How can retailers and middlemen who have abused pitfalls to raise prices be held accountable? These are among the questions that need to be addressed to make the supply chain industry more resilient
But regulation also goes against the fundamental premise of the neoliberalist dream of globalisation. If the need for security morphs into a desire for regionalisation, protectionism and industrial subsidies will become the undercurrent allowing countries to meet domestic demand. In the short-term, broken supply chains and additional tariffs will further raise prices. In the long-term, however, replicating supply chains into regional networks will create inefficiencies that will increase operating and financial costs to over 2 per cent of the global GDP, according to The Economist.
Consequences for Pakistan
Pakistan has recently grappled with a severe financial and political crisis and up until a few weeks ago, the country was on the brink of bankruptcy. Inflation hit a two-year high at 13.8 percent, one of highest in Asia, and the central bank has had to hike its interest rates by 675 basis points in response.
Food prices have surged by 17.3 per cent while transportation costs have increased by 31 per cent. Electricity tariffs and gas prices have increased by almost 50 per cent while fuel prices are up by over 30 per cent to meet the conditions of the IMF. Moreover, the trade deficit has widened to an all-time high by 57.85 per cent year on year during the first 11 months of 2021-2022. The import bill has increased in the country by 44 per cent to over $ 72.18 billion, up from $50.02 billion in the same period last year.
Within the current framework in which Pakistan needs to significantly boost its exports, the looming changes in the global economy should be of major importance to the country. Pakistan should evaluate and define its own trade policy in response.
The export sectors need a buffer to cushion themselves against surging costs of production to remain competitive. Meanwhile, the textile industry offers a one-of-a-kind opportunity to capture newer markets and buyers. China is struggling once again to contain another outbreak of Covid-19, and India is facing rising cotton prices, which have made the country’s textile exports highly uncompetitive. Subsidies and relief measures should therefore be extended to not only make the industry more competitive but also to assuage the workers and employees who are already facing the impact of inflation causing lowered buying power and standards of living. An employee who has his basic needs taken care of is one whose productivity is also higher.
Equally important is a need to identify new opportunities for trade within the region and establish links. Markets like China and India are witnessing the rise of emerging-market consumption within the rising middle class. According to a McKinsey report, it is projected that developing countries will account for almost two-thirds of global consumption of manufactured goods by 2025 and more than half of overall global consumption by 2030. It is projected that China will account for 12 cents of global consumption for every $1 and is soon expected to overtake the United States for having the greatest number of millionaires in the world.
China’s share of exports also decreased to 9 percent of what it produced in 2017, compared 17 percent in 2007. This has been largely obscured because the country’s output, exports, and imports have all shown an increase in absolute terms.
But what it indicates is that China is reorienting its value chains to meet its own burgeoning domestic demand. Elsewhere, India exported 35 percent of its total apparel output in 2002. This share decreased to 17 percent by 2017 as domestic consumers increased consumption.
These shifts present Pakistan with new potential opportunities that are fully in line with changing global paradigms. But it also presents a need for the country to build and establish the frayed relationships with some of its neighbours, especially India where nationalist sentiments and political mistrust have sabotaged relations for decades.
For Pakistan to be able to use the potential economic climate to its advantage, it will need to make use of careful strategic planning – taking incremental steps through cultural diplomacy to build new bilateral trade relationships.
Ramisha Saleem is a freelance writer who is a Special Advisor for SMEs, Entrepreneurship and Start-Ups, ESG Foundation, UK and CEO, MK Textiles LLC. She can be contacted on ramisha.saleem@outlook.com. All information and facts provided are the sole responsibility of the writer.