Truck trailers at Holyhead port in Wales
Even if Covid has concentrated minds on the need to improve supply chain resilience, for complex goods it will take at least three years to carry out serious reform © Anthony Devlin/Bloomberg

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This is the last Trade Secrets before next week’s big ministerial meeting at the World Trade Organization in Geneva. So before we plunge deep into the carnival of civil servants, the festival of fonctionnaires, the parley of penpushers, today we’ll give you another blast of actual real stuff. Specifically, we’ll look more closely at how management decisions are shaping the overall patterns of supply chains that we looked at earlier in the week.

Interesting news yesterday on the policy front, by the way. The new German coalition government said that the economics ministry, which handles trade, would go to the Greens. Before you all start bemoaning EU trade policy slipping into the hands of a gang of eco-protectionists, especially since climate will now be put in the same ministry, the Greens in German domestic politics are actually quite pragmatic. They are also instinctively more hawkish on China and Russia than Angela Merkel’s Christian Democrats. We’re a bit sceptical there will be a bold move away from the crude “Merkantilism” that brought us the EU-China Comprehensive Agreement on Investment, but if there is, we’re all for it.

Charted waters looks at the steady decline in labour force participation across advanced economies.

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Onshoring is a slogan, not a strategy

Let’s recap what we know. Supply chains, as far as we can tell, haven’t changed very much in terms of shortening, onshoring, nearshoring, “friendshoring” (shifting to countries run by political allies) as a result of Covid-19. Last year’s big drop in trade from the contraction in demand (excluding the mad scramble for face masks and other medical kit), the great resurgence this year which has caused supply-chain snarl-ups worldwide, governments starting to talk a strong interventionist game: none of these seems to have had much effect.

We’ve been chatting with a bunch of supply chain gurus, including some from banks who talk to companies, do a lot of trade finance and have a very good overview of who is procuring and exporting from where. The general sense is that secular changes that were already in place before the crisis will continue, but Covid is, at the most, a catalyst of existing trends, not a new departure.

Last year’s sense of panic among companies over acute supply chain vulnerability seems to have dissipated pretty quickly, and they’re looking past the current turbulence. Parvaiz Dalal, global head of supply chain finance at Citigroup, told us: “Onshoring was a big theme of discussion last year, but, as of today, it has not become a reality as it was predicted to be.”

An HSBC survey of more than 7,300 business decision makers in 14 markets showed some pretty chunky effects from the current snarl-ups: 70 per cent of respondents reckoned supply chain disruptions would reduce their company’s income over the next year, by an average of 22 per cent. But fewer than a quarter said that disruptions were a serious constraint on business growth.

In fact, as Vinay Mendonca, interim global co-head of trade and receivables finance at HSBC, pointed out, volatility within and between countries argues for doing more internationalisation, not less, to spread the risk both in sourcing and destination markets. “The economic recovery is not just bumpy, but it’s also uneven and inconsistent,” he said. Covid cases can suddenly surge in one country or another, leading to government restrictions that shift demand or close factories and interrupt supply.

Assuming the turbulence dissipates, what’s left are the same issues that were there before the pandemic — indeed, since the global financial crisis in 2008. Labour cost arbitrage (workers in poor countries making stuff for consumers in rich ones), the dominant model from the 1990s, has increasingly become exhausted. China is more interested in building its domestic market these days than importing intermediate goods and exporting finished products. Emile Naus, from BearingPoint, a consultancy that advises on supply chains, said that for high value-added products at least “we need to look at reversing some of what’s been done over the past 30 years”.

Products have become more sophisticated and value chains more complex, and with them comes a higher probability of unexpected single points of failure lurking deep in a network of suppliers. Threats of disruption from bad weather or natural or human-made catastrophes such as the Fukushima earthquake and nuclear disaster in Japan in 2011 long predate Covid.

But blindly following a sloganistic strategy such as “onshoring” or even “diversification” isn’t enough. Naus tells of one car manufacturer that tried to spread risk by sourcing gearboxes from multiple suppliers, only to find that all of them depended on the same (small and inexpensive but vital) component manufactured in Fukushima.

Correctly assessing cost and risk in the supply chain and making changes is slow and detailed work. Most of the gurus reckon that even if Covid has concentrated minds on the need to improve resilience, for complex goods it will take at least three years, maybe five or 10, to do serious reform. And although companies are fairly confident about business and trade coming back, those sitting on cash right now are much more in the stock buyback game than expanding their balance sheets and setting off into new ventures. Citi’s Dalal said: “Most companies we talk to are following an investment-light approach rather than investing heavily in new production.”

Now, all of the above is anecdotal or at best survey information — it’s hard to quantify this stuff with very up-to-date hard numbers. But it’s a pretty consistent story and it does square with more comprehensive data on what was happening pre-Covid and last year.

We’re going to keep coming back to the supply chain subject from various angles, because it’s a lot more nuanced than the OH NO (or “HOORAY” au choix), IT’S THE END OF GLOBALISATION AS WE KNOW IT that you might read in some quarters. And if you think there’s an aspect we’ve missed, get in touch. We’re all ears.

Charted waters

Yesterday we noted that advanced economies were battling to attract immigrants in order to plug the gap left by labour shortages. Many of these shortages of late have been down to millions of resignations made in advanced economies during the pandemic.

However, there’s a broader trend going on here. As the chart below shows, labour force participation rates have been on the wane in several advanced economies since the early years of the millennium. Claire Jones

Line chart of participation in the labour market, aged 15+ (%) showing Covid-19 has had a smaller impact on labour force participation than long-term trends in some countries

Good news for shipping companies and exporters: Beijing has said it will allow foreign vessels to transport goods between domestic ports.

Not-so-good news: a new Chinese data protection law has blocked foreign companies’ and governments’ access to information about the location of its ships, reducing the transparency of supply chains and the ability to monitor cargo trade.

Chad Bown has updated his US-China “phase one” tracker, showing that with two months to go, China is on track to purchase only 62 per cent of the goods it committed to buy from the US.

A terrific new resource of information about plurilateral agreements at the WTO went live yesterday.

Japanese beverage company Kirin may find itself booted from Myanmar (Nikkei, $) after a military-owned conglomerate petitioned a court to end their jointly owned brewery.

Vietnam’s prime minister sought to ease concerns about supply chains ($) while in Japan this week, but Nikkei reports that factories serving brands from Intel to Toyota and Reebok have stuttered as employees hesitate to return to work, worrying investors that Thailand and Indonesia may soon speed ahead. Alan Beattie and Francesca Regalado

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