Resilient Supply Chains and Overdependence on China

Resilience in supply chains has become a buzzword today in the global political economy, especially since the COVID-19 pandemic. COVID exposed modern-day supply chains to unprecedented disruptions and vulnerabilities. In this era of global interconnectedness, disruptions in one region can ripple worldwide, impacting production and consumers everywhere. Supply chains become vulnerable to disruptions when centred physically or economically in and around one country. A resilient supply chain manages to respond and recover quickly to unexpected disruptions caused by pandemics, wars, and any other major event in any part of the world. The priorities of companies and countries have shifted from ‘efficiency’ to ‘resilience’ in the past few years due to disruptions worldwide.

In a phase where wars, conflicts, and public health emergencies are difficult to foresee, it becomes important for a country to keep its supply chains safe, diverse, and not too vulnerable. According to GlobalData from Comtrade, almost all countries are vulnerable. The USA, which has a trade deficit with many other countries, is one of the most vulnerable, and China, which has the highest trade surplus of US $890 Billion, is one of the least vulnerable countries. This shows us how China keeps countries dependent on itself, not majorly on any one country. If any country keeps its supply chains resilient and agile, it is China.

While recovering from a pandemic, the world is facing additional consequences of two major geopolitical conflicts between big players like Russia and Ukraine (supported by the West) and the situation between Israel and Palestine, with Iran now officially joining the conflict. The geopolitical tensions mirror the economic conditions around the world. Be it the war in Ukraine, which led to obstruction in the movement of goods, increased costs, and inventory shortages, with oil prices rising higher with the sanctions put on Russia by the West, or the situation in Gaza, which has arisen an alarming situation in the Red Sea. The Houthi rebels of Yemen, who are allies of Hamas and Iran, have started attacking cargo ships in the Red Sea that were bound for Europe or Israel through the Suez Canal. This situation is alarming as the Suez Canal handles 12% of global trade and 30% of global container traffic. The supply chains can be adversely affected by this as any alternative would cost way more as this is the shortest route between Southeast Asia and Europe. Both situations add to supply chain disruptions, but the major vulnerabilities are due to the world’s over-dependence on one country, China.

Most supply chains or stages in supply chains are centralized in China today due to its strong business ecosystem, skilled and cheap labour, and world-class infrastructure. Chinese have taken over the supply chains in the last two decades, starting from cheap manufacturing and dominating almost all the stages of supply chains. While the China-centric supply chains may be efficient, the world has understood the hard way in COVID that they might not be resilient. China’s zero COVID policy was one of the contributing factors to the world hurtling towards recession in recent years. The world was left vulnerable during COVID-19 when China locked its doors, hurtling various supply chains like critical minerals, intermediate goods, etc.

Another factor why the world’s overdependence on China is a threat is how China weaponizes the supply chains. China’s economic coercion poses a serious threat to international trade. China’s debt trap policy is also seen as a threat to the sovereignty of various developing nations. This is one of the concerns of middle powers like Australia, Taiwan, Japan, India etc.

China’s share in the Global Supply Chains of Intermediate Products has increased over time, and China has been the world’s largest exporter of intermediate goods for 12 consecutive years. This asymmetric dependence means that any attempts to de-risk the intermediate goods supply chain might harm other manufacturing countries like the US more than China. On the other hand, China’s manufacturing does not experience any asymmetric dependence as most of the intermediate goods are made in the country. China is a big exporter of industrial goods and critical minerals, and it leads in critical mineral processing, such as copper, nickel, lithium, cobalt, and around 80% of rare earth metals. Data for BloombergNEF shows that China leads majorly in the refined supply of these critical and rare earth minerals. In a shift to green and clean energy, China processes 80% of lithium, used in ion batteries, and 80% of polysilicon, used for manufacturing solar panels. This shows how the energy transition of the future is also asymmetrically dominated by China, which has a monopoly on critical minerals used to make semiconductors, wind turbines, electric vehicles, and solar panels.

The world has reacted to this situation by adopting some de-risking strategies like China+1, which companies and countries use to diversify supply chains away from China, reducing reliance on one source. Reshoring, friend shoring, and nearshoring are some examples of de-risking strategies. These strategies come up with their own challenges as the cost of derisking is too high, infrastructure and connectivity in other countries may not be as good as in China, and navigating regulatory and legal considerations also becomes challenging. Political responses to this include the QUAD, which is the ‘Quadrilateral Security Dialogue’ including India, the United States, Australia and Japan, the Supply Chain Resilience Initiative(SCRI) formed by India, Japan and Australia and similarly, G7’s commitment to strengthen supply chains. While several steps have been taken and resilient supply chains have become a part of dialogues worldwide, it remains a challenge for the world to diversify the overdependent supply chains.