Such a strategy would enable pivots as circumstances change the need for such flexibility has been demonstrated repeatedly over the last two years. But in order to promote flexibility, this will necessitate development of both production capacity and strategic capabilities in those diverse locations. I also envision a scenario where a firm concentrates major parts of production in two or perhaps three sites centered within major trade blocs and then exports some intermediate materials and finished goods to markets in other blocs. One can imagine regions that manage to stay politically nonaligned, such as Southeast Asia, serving as a production base for multiple blocs.
Trade blocs advantages disadvantages full#
Large parts of the auto industry have generally focused on producing narrow ranges of models at individual sites and then exporting some proportion of their output to other markets so that they can offer a full range of products everywhere. That’s not to say that all production will necessarily be localized. Similarly, one can envision a European bloc that draws on Eastern Europe and North Africa for low-cost labor. Such blocs can largely be drawn to encompass a breadth of capabilities and resources - for example a North American bloc that includes the U.S., Canada, Mexico, and parts of Central America that can together offer large markets, skilled as well as low-cost labor, and relatively lower transport distances and costs. This likely will mean more balancing of production capacity and consumption within geographic trade blocs. Managers who have relied on labor arbitrage or distant global sourcing strategies increasingly will have to develop regional alternatives. Under the banner of “resilience,” we are seeing the rapid growth of industrial policy initiatives. But the United States is not alone: The European Union and Japan have also jumped in with efforts to rebuild their shares of global chip production, and China’s “dual circulation” policy, launched in 2020, is aimed at lessening its dependency on imported strategic materials, including computer chips. In the United States this issue has become conflated with the loss of American leadership in advanced semiconductors and has led to major legislation to promote domestic investment.
The broad impact of the semiconductor chip shortage during the pandemic exemplifies the pressure to shift supply chains. Most recently, the war in Ukraine has renewed attention to the supply of raw materials such as metals, noble gases, and agricultural commodities. Trade restrictions, even if they are temporary, weaken trust and give countries the excuse to implement industrial policies in the name of resilience and self-sufficiency.
Officials of one small country told me that it had a neighbor restrict its supply of fresh produce, causing it to question its supply security for just about everything. Restrictions on the export of essential medical goods and vaccines early in the pandemic sent a strong message to governments who were caught short. The continuing U.S.–China trade war, which began during the Trump administration, got the debate going, but the pandemic accelerated it by exposing the depth of cross-border dependencies. But now supply-chain “resilience” is getting tangled with economic and technological “sovereignty,” a euphemism for more localized production. Over the last three decades, firms have taken advantage of reliable, low-cost transportation and a benign trading environment to leverage low-cost labor in Asia to deliver a plethora of products to distant markets. Here are four dimensions that they should consider. As managers navigate this dynamic, they need to think beyond product costs and supplier choices.
Trade blocs advantages disadvantages plus#
Historically the focus of supply-chain managers has been sourcing: managing the flow of materials and resources as they move through value-adding stages until they become finished products and services all the way to the point of delivery to customers.īut the multitude of shocks caused by the Covid-19 pandemic, a new urgency in reducing greenhouse gases, and geopolitics, plus the war in the Ukraine, have put the fragility of global supply chains top of mind.
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