Today’s Supply Chain Disruptions Reaffirm The Importance Of A Multilateral Trading System Based On WTO Rules
Share on Facebook Tweet on Twitter ( MENAFN – Caribbean News Global) By Ralph Ossa Economic security has come to the forefront of policy discussions, as a series of crises – most recently the COVID-19 pandemic and the war in Ukraine – have disrupted global supply chains. Governments around the world are looking for ways to make their countries less vulnerable to such disruptions, especially now that rising geopolitical tensions add new uncertainty. In this regard, reshoring and friend-shoring have become popular policy prescriptions, and talk of global fragmentation abounds. In this article, I offer a different perspective, emphasizing the benefits of a strong multilateral trading system based on the rules of the World Trade Organization (WTO). I argue that such a system is the best guarantor of economic security because it provides households and firms affected by supply shortages with unparalleled flexibility. It is difficult to predict where supply shortages will arise and who has the capacity to step in, so access to a broad range of outside options is key. Evidence is mounting that this“flexicurity” offered by the multilateral trading system is highly effective at mitigating supply shortages. Ethiopia’s adjustment to the tragic war in Ukraine is a striking example of this point. As highlighted in a recent wto report on the trade effects of the war, Ethiopia imported 45 percent of its wheat from Russia and Ukraine before the war and then saw these imports plunge dramatically – by 75 percent in the case of Russia and even 99.9 percent in the case of Ukraine. However, it was able to respond to these disruptions by sharply increasing its wheat imports from the United States and Argentina, even though it had not imported any wheat from Argentina before. Clearly, such swift substitution among alternative suppliers would have been much harder in a fragmented world economy. The state of global supply chains The evidence points to considerable concentration in global supply chains. For instance, only a small minority of US firms have diversified supply chains in the sense of importing the same product from more than one source country (Antràs, Fort, and Tintelnot 2017). Looking at macroeconomic data, WTO economists estimate that 19 percent of global exports are in“bottleneck” products, defined as products that have few suppliers but a large market share (Majune and Stolzenburg, forthcoming). Interestingly, this share has doubled over the past two decades, suggesting that global supply chains have become less diversified over time. While it is tempting to interpret these facts as prima facie evidence of underdiversification, it is more plausible that they reflect simply the presence of large sunk costs in forming global value chains. It is costly for firms to identify a suitable foreign supplier, coordinate production processes, and build a trusting relationship, so they are forced to rationalize their global sourcing strategies. What is more, firms also have considerable self-interest in avoiding supply chain disruptions since they directly affect their bottom line. mckinsey estimates that supply chain disruptions cost firms more than 40 percent of a year’s profit every decade on average. The slow adjustment of global supply chains to the trade tensions between China and the US also speaks to the presence of large sunk costs. True, it is possible to detect first signs of decoupling in certain highly exposed products, as Chad Bown has recently shown . However, it is still striking that bilateral trade between China and the US was at a record high in 2022, despite the large and persistent tariffs that are in place. At the macroeconomic level, it is worth recalling that country-level specialization is a natural outcome of the forces of comparative advantage and a classic source of gains from trade. Indeed, I have argued elsewhere that trade is beneficial precisely because it provides access to critical products for which domestic substitutes are hard to find, based on a calculation that the 10 percent most critical products account for 90 percent of the gains from trade (Ossa 2015). This suggests that diversifying the production of the above-mentioned bottleneck products would likely come at high welfare costs. WTO economists estimate that fragmentation of the global economy into two rival blocs would reduce real incomes by 5.4 percent on average. A revival of multilateralism could instead increase real incomes by 3.2 percent, so the opportunity cost of forgoing international cooperation and instead moving to geopolitical rivalry is 8.6 percent. Importantly, the opportunity costs vary from 6.4 percent for developed economies to 10.2 percent for developing economies […]
