Four Keys to Resilient Supply Chains
Marion Jansen
Apr, 2024
#Trade and FDI
#Services
If you work in the field of trade policy, you have likely spent much of the last year responding to the following questions: Where are the masks? Why is there not enough personal protective equipment? Why is vaccine distribution so slow? In short, have we become too reliant on global supply chains? In this context, trust in trade risks becoming a casualty of COVID. This is unfortunate, as trade probably plays an important role in making economies more resilient.
In this context and in constant consultation with our stakeholders, we have been mainstreaming COVID-related analysis in the OECD Trade and Agriculture Directorate’s programme of work. Our objective has been to deepen the common evidence base, identify a toolkit of policy options, and improve communication about the importance of open markets during the pandemic.
To deepen the common evidence base we relied on a combination of economic modelling, in-depth examination of specific supply chains and qualitative information based on consultations with the private sector.
In reaction to increased calls for “reshoring”, one of the first things we did was employ the OECD’s economic modelling capacity to compare whether an interconnected economy fares less well in a situation of external shocks than a more localised regime featuring less geographic diversification and fewer production stages as a result of reshoring. In the localised regime also, incentives to source inputs from abroad are reduced through a global rise in import tariffs combined with national subsidies for domestic production. In addition, firms are more constrained in switching between different sources of inputs, making international supply chains more “rigid”.
We find that localised regimes are characterized by less trade but also by lower output, compounding the economic slowdown already caused by external shocks like the COVID-19 pandemic (OECD, 2021a). Not only that, but the localised regime proves to be more vulnerable to shocks, as the lack of adjustment channels leads to increased instability and proves detrimental in terms of trade, prices and household income.
In this context and in constant consultation with our stakeholders, we have been mainstreaming COVID-related analysis in the OECD Trade and Agriculture Directorate’s programme of work. Our objective has been to deepen the common evidence base, identify a toolkit of policy options, and improve communication about the importance of open markets during the pandemic.
To deepen the common evidence base we relied on a combination of economic modelling, in-depth examination of specific supply chains and qualitative information based on consultations with the private sector.
In reaction to increased calls for “reshoring”, one of the first things we did was employ the OECD’s economic modelling capacity to compare whether an interconnected economy fares less well in a situation of external shocks than a more localised regime featuring less geographic diversification and fewer production stages as a result of reshoring. In the localised regime also, incentives to source inputs from abroad are reduced through a global rise in import tariffs combined with national subsidies for domestic production. In addition, firms are more constrained in switching between different sources of inputs, making international supply chains more “rigid”.
We find that localised regimes are characterized by less trade but also by lower output, compounding the economic slowdown already caused by external shocks like the COVID-19 pandemic (OECD, 2021a). Not only that, but the localised regime proves to be more vulnerable to shocks, as the lack of adjustment channels leads to increased instability and proves detrimental in terms of trade, prices and household income.
Economic models like the OECD’s METRO model per definition rely on a simplified representation of the global economy and therefore cannot provide all the answers to the questions policy makers have in a crisis like the Covid-19 pandemic. We therefore complemented our modelling work with deep dives into specific supply chains, especially for essential products like face masks, PPE and vaccines (OECD 2020a, 2020b).
We wanted to better understand what was behind the bottlenecks and immediate shortages that were such a source of political and public concern. Our conclusions are quite clear: shortages were not caused by the collapse of supply chains, but by an unprecedented surge in the scale of demand (OECD, 2020c). Furthermore, when we look at the geographically diversified production of a range of COVID-19 products, it is evident that no country or region can unilaterally meet its own needs. In fact, global supply chains have been part of the solution to global shortages. So policy-makers should be careful not to mis-diagnose the supply chain disruptions as a widespread over-reliance on foreign supply.
We also felt it was crucial to test our analytical conclusions against the real world experience and expertise of individual firms and business associations. To collect this qualitative information, we were fortunate to be able to work with Business at OECD to conduct consultations with supply chain managers in sectors such as pharmaceuticals and medical goods, ICT goods and services, transport and logistics, and agri-food.
We heard that, overall, supply chain risk management strategies held up reasonably well. Most firms are considering fine-tuning, rather than overhauling, their approaches to international supply. This includes identifying alternate means of transport, and staying in front of customs requirements and procedures through pre-qualification and registration, where possible.
There is a strong sense that global supply is required to respond to demand spikes, while diversified production networks boost security of supply. Digitalisation was highlighted as an enabler of resilience, as were trade facilitation measures such as acceptance of electronic documents (at and behind the border), regulatory flexibility (even if on a temporary basis), and the alleviation of restrictions on trade in services. Finally, some factors of concern were repeatedly mentioned, including the chaos caused by unpredictable recourse to export restrictions and the costs and unpredictability generated by heterogeneous health measures and requirements.
Economic modelling, the in-depth examination of specific supply chains, and the qualitative experience of supply chain managers underline the importance of open markets in times of crisis and the crucial role value chains have played in adjusting to an unprecedented demand shock in a specific set of health- related goods. Much of this work is synthesized in our contribution to the OECD-G7 report on Fostering economic resilience, which sets out a toolkit of policy options available to governments to promote resilient supply chains (OECD, 2021b).
Our work also highlights the key role of coordination and coherence among governments and consultation and cooperation between the public and private sector. If we have learned anything during the COVID-19 crisis, it is that international supply chains will continue to be subjected to unexpected disruptions. The public will continue to demand that governments take steps to ensure security of supply, and trade policy-makers will need policy solutions that address these expectations without resorting to beggar-thy-neighbour measures (Figure 2).
We wanted to better understand what was behind the bottlenecks and immediate shortages that were such a source of political and public concern. Our conclusions are quite clear: shortages were not caused by the collapse of supply chains, but by an unprecedented surge in the scale of demand (OECD, 2020c). Furthermore, when we look at the geographically diversified production of a range of COVID-19 products, it is evident that no country or region can unilaterally meet its own needs. In fact, global supply chains have been part of the solution to global shortages. So policy-makers should be careful not to mis-diagnose the supply chain disruptions as a widespread over-reliance on foreign supply.
We also felt it was crucial to test our analytical conclusions against the real world experience and expertise of individual firms and business associations. To collect this qualitative information, we were fortunate to be able to work with Business at OECD to conduct consultations with supply chain managers in sectors such as pharmaceuticals and medical goods, ICT goods and services, transport and logistics, and agri-food.
We heard that, overall, supply chain risk management strategies held up reasonably well. Most firms are considering fine-tuning, rather than overhauling, their approaches to international supply. This includes identifying alternate means of transport, and staying in front of customs requirements and procedures through pre-qualification and registration, where possible.
There is a strong sense that global supply is required to respond to demand spikes, while diversified production networks boost security of supply. Digitalisation was highlighted as an enabler of resilience, as were trade facilitation measures such as acceptance of electronic documents (at and behind the border), regulatory flexibility (even if on a temporary basis), and the alleviation of restrictions on trade in services. Finally, some factors of concern were repeatedly mentioned, including the chaos caused by unpredictable recourse to export restrictions and the costs and unpredictability generated by heterogeneous health measures and requirements.
Economic modelling, the in-depth examination of specific supply chains, and the qualitative experience of supply chain managers underline the importance of open markets in times of crisis and the crucial role value chains have played in adjusting to an unprecedented demand shock in a specific set of health- related goods. Much of this work is synthesized in our contribution to the OECD-G7 report on Fostering economic resilience, which sets out a toolkit of policy options available to governments to promote resilient supply chains (OECD, 2021b).
Our work also highlights the key role of coordination and coherence among governments and consultation and cooperation between the public and private sector. If we have learned anything during the COVID-19 crisis, it is that international supply chains will continue to be subjected to unexpected disruptions. The public will continue to demand that governments take steps to ensure security of supply, and trade policy-makers will need policy solutions that address these expectations without resorting to beggar-thy-neighbour measures (Figure 2).
Going forward, we are centralising this growing evidence base in an online tool that identifies four keys to resilient supply chains. Our objective is to promote accessibility, communication, transparency, and policy impact.
The first key is to anticipate risks. Understanding the nature of shocks and accurate diagnosis of the problems is essential to identifying the most appropriate policy responses. This is true not simply in the present context of COVID, but also to provide important insights for the handling of future supply chain disruptions.
The second key is domestic tools to minimize exposure to risk. At the national level, reducing risk and promoting growth need not be a zero sum dilemma. Investing in infrastructure, enabling digital trade, sound procurement management and regulatory flexibility can promote the resilience of supply chains while also contributing to productivity and competitiveness.
The third key is public-private tools to build trust. Public-private cooperation can boost confidence that global supply chains will be able to provide needed goods and services at the right time and in the right quantities. These approaches include firm-level risk management strategies, public-private action plans, the stress testing of supply chains, and strategic governance at the national level.
The fourth key is international tools to keep markets open. While governments can take a number of actions at the national level, ensuring resilient global supply chains requires collective efforts at the international level. This can involve the full range of international economic co-operation tools, from multilateral, plurilateral and bilateral agreements, to softer forms of policy coordination and peer review.
Each of these four keys is comprised of issues, policy actions and relevant tools and publications to promote policies resilient supply chains without undermining robust, sustainable and inclusive economic recovery. It is our intention that this evidence base will be kept up to date with new contributions from the OECD, experts and national administrations. Moreover, it is our hope that a common base of evidence will promote coordination, coherence, consultations and cooperation as governments and business strive to address unprecedented disruptions to international trade.
The OECD’s founding principles and values hold that open and rules-based international trade is an essential condition for economic growth from which all can benefit. We invite you to explore these four keys to resilient supply chains, and to contribute to further deepening the evidence base that can ensure a robust, sustainable and inclusive recovery.
The first key is to anticipate risks. Understanding the nature of shocks and accurate diagnosis of the problems is essential to identifying the most appropriate policy responses. This is true not simply in the present context of COVID, but also to provide important insights for the handling of future supply chain disruptions.
The second key is domestic tools to minimize exposure to risk. At the national level, reducing risk and promoting growth need not be a zero sum dilemma. Investing in infrastructure, enabling digital trade, sound procurement management and regulatory flexibility can promote the resilience of supply chains while also contributing to productivity and competitiveness.
The third key is public-private tools to build trust. Public-private cooperation can boost confidence that global supply chains will be able to provide needed goods and services at the right time and in the right quantities. These approaches include firm-level risk management strategies, public-private action plans, the stress testing of supply chains, and strategic governance at the national level.
The fourth key is international tools to keep markets open. While governments can take a number of actions at the national level, ensuring resilient global supply chains requires collective efforts at the international level. This can involve the full range of international economic co-operation tools, from multilateral, plurilateral and bilateral agreements, to softer forms of policy coordination and peer review.
Each of these four keys is comprised of issues, policy actions and relevant tools and publications to promote policies resilient supply chains without undermining robust, sustainable and inclusive economic recovery. It is our intention that this evidence base will be kept up to date with new contributions from the OECD, experts and national administrations. Moreover, it is our hope that a common base of evidence will promote coordination, coherence, consultations and cooperation as governments and business strive to address unprecedented disruptions to international trade.
The OECD’s founding principles and values hold that open and rules-based international trade is an essential condition for economic growth from which all can benefit. We invite you to explore these four keys to resilient supply chains, and to contribute to further deepening the evidence base that can ensure a robust, sustainable and inclusive recovery.
References:
OECD (2021a). Global value chains: Efficiency and risks in the context of COVID-19. OECD Policy Responses to Coronavirus (COVID-19), OECD Publishing, Paris. https://doi.org/10.1787/67c75fdc-en
OECD (2021b). Fostering economic resilience in a world of open and integrated markets. OECD report prepared for the 2021 UK presidency of the G7. https://www.oecd.org/newsroom/OECD-G7-Report-Fostering-Economic-Resilience-in-a-World-of-Open-and-Integrated-Markets.pdf
OECD (2020a). The face mask global value chain in the COVID-19 outbreak: Evidence and policy lessons. OECD Policy Responses to Coronavirus (COVID-19), OECD Publishing, Paris. https://doi.org/10.1787/a4df866d-en
OECD (2020b). Using trade to fight COVID-19: Manufacturing and distributing vaccines. OECD Policy Responses to Coronavirus (COVID-19), OECD Publishing, Paris. https://doi.org/10.1787/dc0d37fc-en
OECD (2021a). Global value chains: Efficiency and risks in the context of COVID-19. OECD Policy Responses to Coronavirus (COVID-19), OECD Publishing, Paris. https://doi.org/10.1787/67c75fdc-en
OECD (2021b). Fostering economic resilience in a world of open and integrated markets. OECD report prepared for the 2021 UK presidency of the G7. https://www.oecd.org/newsroom/OECD-G7-Report-Fostering-Economic-Resilience-in-a-World-of-Open-and-Integrated-Markets.pdf
OECD (2020a). The face mask global value chain in the COVID-19 outbreak: Evidence and policy lessons. OECD Policy Responses to Coronavirus (COVID-19), OECD Publishing, Paris. https://doi.org/10.1787/a4df866d-en
OECD (2020b). Using trade to fight COVID-19: Manufacturing and distributing vaccines. OECD Policy Responses to Coronavirus (COVID-19), OECD Publishing, Paris. https://doi.org/10.1787/dc0d37fc-en
