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Fragile supply chains: will industries return?

Isabelle Méjean
Isabelle Méjean
Head of economics department at the Institut Polytechnique de Paris and Best young French economist 2020

Last spring, inter­na­tion­al sup­ply chains were dis­rupt­ed by the grad­ual spread of the Covid pan­dem­ic across the glob­al econ­o­my. Par­tic­u­lar­ly impact­ed were prod­ucts in high demand to com­bat the virus, rekin­dling the debate about mar­ket glob­al­i­sa­tion. Is it time to bring pro­duc­tion clos­er to home, or will the cur­rent sys­tem have to adapt to new eco­nom­ic risks? For Isabelle Méjean, a researcher at the French Cen­tre for eco­nom­ics and sta­tis­tics (CREST), head of the Eco­nom­ics depart­ment at the Insti­tut Poly­tech­nique de Paris, and Best Young French Econ­o­mist 2020, the prob­lem is strate­gic, rather than economic. 

In your research, you com­bine data from large com­pa­nies to bet­ter under­stand inter­na­tion­al trade flows. What is your objective? 

I use sta­tis­ti­cal data about com­pa­nies, their pro­duc­tion meth­ods and glob­al­i­sa­tion strate­gies to study their micro­eco­nom­ic strate­gies. This can help us bet­ter under­stand cer­tain larg­er-scale, macro­eco­nom­ic phe­nom­e­na. For instance, I study the syn­chro­ni­sa­tion of eco­nom­ic cycles across coun­tries, and how cycli­cal fluc­tu­a­tions in a num­ber of for­eign coun­tries impact the French econ­o­my. In stan­dard macro­eco­nom­ic the­o­ry, cor­re­la­tions between cycles are explained by rel­a­tive price adjust­ments – a rise in activ­i­ty ben­e­fits for­eign com­pa­nies through high­er imports. 

My co-authors and I showed how the glob­al­i­sa­tion strate­gies of a few very large com­pa­nies go a long way towards explain­ing cycle syn­chro­ni­sa­tion. Since dif­fer­ent com­pa­nies devel­op in dif­fer­ent ways, their glob­al­i­sa­tion strate­gies are high­ly var­ied. It is there­fore very dif­fi­cult to prop­er­ly under­stand the aggre­gat­ed phe­nom­e­non with­out delv­ing into the fine sta­tis­ti­cal detail. Hence, we need large swathes of information. 

Of course, we’re not work­ing on the scale of “big data” in the sta­tis­ti­cal sense of the term. But, in order to uncov­er the links between indi­vid­ual deci­sions and macro­eco­nom­ic effects one has to map the entire dis­tri­b­u­tion of com­pa­nies, and this involves a great deal of data. 

Right from the start of 2020, when only Wuhan province was in lock­down, we saw evi­dence of shortages.

Which eco­nom­ic phe­nom­e­non linked to the pan­dem­ic struck you the most? 

Ear­ly on, the pan­dem­ic high­light­ed the inter­de­pen­dence of large inter­na­tion­al com­pa­nies. Right from the start of 2020, when only Wuhan province was in lock­down, we saw evi­dence of short­ages, e.g. in the elec­tron­ics sec­tor, since the world leader in fibre optics oper­ates in the area. At the time, it was dif­fi­cult to fore­see the scale of the pan­dem­ic, and these reper­cus­sions across sup­ply chains appeared to be a unique illus­tra­tion of the lack of resilience to local shocks due to glob­alised production. 

Very quick­ly, the spread of the slow­down in Chi­nese pro­duc­tiv­i­ty through val­ue chains became a sec­ondary con­cern. Espe­cial­ly com­pared to the eco­nom­ic shock­wave sparked by lock­down mea­sures that were imple­ment­ed to man­age the cri­sis across most of the glob­al econ­o­my. But inter­de­pen­dence between com­pa­nies, nation­al­ly and inter­na­tion­al­ly, remains an impor­tant fac­tor in the way our economies func­tion prop­a­gat­ing both neg­a­tive shocks, like the eco­nom­ic lock­down, and pos­i­tive ones, like the recov­ery plans to come. 

Today, the ques­tion is one of resilience. How can we insert shock absorbers into these net­works of com­pa­nies to pre­vent harm­ful domi­no effects? How can we boost nation­al economies, when all coun­tries are faced with the chal­lenges of sub­se­quent waves? Take the Euro­pean auto­mo­bile sec­tor, which is both high­ly frag­ment­ed and inte­grat­ed across Europe: cur­rent­ly, French and Ger­man man­u­fac­tur­ers can­not return to full busi­ness with­out both a resur­gence in demand and a return of activ­i­ty across the entire chain, espe­cial­ly by parts sup­pli­ers in West­ern and East­ern Europe. 

Sup­port­ing demand is an impor­tant part of the recov­ery plan, but sup­ply prob­lems can quick­ly become extreme­ly com­plex in a sec­tor that main­ly pro­duces prod­ucts “just in time” – with low stocks and process opti­mi­sa­tion through­out the sup­ply and pro­duc­tion chains. A fac­to­ry that dis­trib­utes bumpers, for instance, must receive the start­ing mate­r­i­al before they can start the next batch of deliv­er­ies. High­er stocks, which would appear to be the sim­ple answer to dif­fi­cul­ties in sup­ply, are there­fore dif­fi­cult to imple­ment in the short term. In the medi­um term, the ques­tion of inte­grat­ing “just in case” man­age­ment will no doubt arise. 

Will sup­ply chains be off­shored or regionalised?

I don’t believe the mod­el will change. I’m not sure we’re ready to give up the ben­e­fits of glob­al­i­sa­tion, such as an increase in pur­chas­ing pow­er and a diverse range of con­sumer goods. It is believed, for exam­ple, that the increase in trade between France and emerg­ing coun­tries from the mid-1990s to the end of the 2000s gen­er­at­ed gains in pur­chas­ing pow­er of around €1,000 per year per house­hold. That’s hard­ly neg­li­gi­ble, even when these gains are bal­anced against the loss­es – job loss­es, in par­tic­u­lar, which are said to have amount­ed to about 100,000 over the same period. 

Peo­ple are also talk­ing about sov­er­eign­ty. Is this real­ly an eco­nom­ic issue? 

Over the past year, we have heard a lot of talk about “strate­gic” sov­er­eign­ty, or how to reduce our depen­dence on for­eign pro­duc­tion in strate­gic sec­tors, where it con­sti­tutes a risk when geopo­lit­i­cal ten­sions arise. The ques­tion is more about strat­e­gy than eco­nom­ics. And we’re not real­ly talk­ing about actu­al de-glob­al­i­sa­tion. Rather, sub­si­dis­ing the low-prof­it nation­al pro­duc­tion of a small num­ber of tar­get­ed prod­ucts. But where does sov­er­eign­ty end? 

The next cri­sis may require oth­er basic neces­si­ties. I’m afraid we’re real­ly talk­ing about pro­tec­tion­ism, and a deep­er cri­tique of glob­al­i­sa­tion, which is seen as a fac­tor in France’s low growth rate, con­tribut­ing to mass unem­ploy­ment. In my view, this is of far greater con­cern than French depen­dence on a hand­ful of for­eign prod­ucts. But it is, above all, a Euro­pean prob­lem. France’s lack of eco­nom­ic com­pet­i­tive­ness is large­ly man­i­fest in our trade bal­ance deficit with our Euro­pean part­ners. France’s weak mar­ket share in the EU will not be solved by off­shoring low-added-val­ue busi­ness­es. On the con­trary, we need to regain com­pet­i­tive­ness in high tech­nol­o­gy activ­i­ties, the indus­tries of the future. 

Do you think com­pa­nies will change their busi­ness model? 

For them, the cur­rent cri­sis is main­ly a short-term liq­uid­i­ty cri­sis, par­tial­ly off­set by gov­ern­men­tal sup­port. How­ev­er, the eco­nom­ic cri­sis will con­tin­ue, the finan­cial health of com­pa­nies will be severe­ly impact­ed, and invest­ments will slow down. In the short term, I don’t think we can expect com­pa­nies to change their busi­ness mod­el. For them, over­haul­ing sup­ply strate­gies requires large invest­ments which like­ly won’t be on the agen­da any time soon. In the longer term, the suc­ces­sion of crises linked to nat­ur­al dis­as­ters, the pan­dem­ic and polit­i­cal insta­bil­i­ty will prob­a­bly lead them to rethink their glob­al­i­sa­tion strategy. 

Are we see­ing oth­er changes in inter­na­tion­al trade? 

It’s too ear­ly to tell. Trade sta­tis­tics often emerge after the fact. Unlike the 2008 finan­cial cri­sis, where we saw a far greater reduc­tion in trade than in glob­al GDP, we haven’t yet seen a trade col­lapse linked to the pan­dem­ic. In 2020, trade approx­i­mate­ly mir­rored fluc­tu­a­tions in GDP, with a strong reduc­tion in the sec­ond quar­ter, then recov­ery from July onwards. In 2021, GDP will remain at between 2 to 8 points below pre-cri­sis lev­els and it is pos­si­ble that trade will reduce fur­ther, giv­en the per­sis­tent lack of activ­i­ty. Of course, not all coun­tries are impact­ed in the same way. France, with high­ly spe­cialised indus­tries that have been adverse­ly affect­ed by the cri­sis (name­ly, aero­space) will very like­ly expe­ri­ence an increased trade deficit. 

Interview by Clément Boulle

Contributors

Isabelle Méjean

Isabelle Méjean

Head of economics department at the Institut Polytechnique de Paris and Best young French economist 2020

Isabelle Méjean is a professor at the Centre for Research in Economics and Statistics (CREST: a joint research unit of CNRS, ENSAE Paris, École Polytechnique - Institut Polytechnique de Paris, GENES). Head of the economics department at the Institut polytechnique de Paris, she is the winner of the prize for the best young economist of France 2020 (Le Cercle des économistes - Le Monde).