Fragile supply chains: will industries return?
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.