Sustaining Capitalism

Today, the Committee for Economic Development, the public policy center of The Conference Board (CED), issued a new Solutions Brief, A Road Map to Achieving Free but Secure Trade with Resilient Supply Chains.

The report—the latest in CED's Sustaining Capitalism series—details the causes of the supply chain disruptions that have further weakened the global consensus for global trade and economic globalization; looks at the options of reshoring, nearshoring, and friend-shoring, and the implications for trade policy more broadly; and examines the special case of semiconductors. As the report emphasizes, achieving resilient supply chains and free but secure trade will require deeper collaboration between private and public sector leaders, given their interconnected roles in the production and flow of goods and services in the domestic and global economy.

"The US efforts to build resilient supply chains through the options of reshoring, nearshoring, and friend-shoring must be complemented by a trade policy that provides for growth through free but secure trade," said Dr. Lori Esposito Murray, President of CED. "Achieving this outcome, which is essential to both US national and economic security interests, requires close collaboration between leaders in the public and private sectors to identify supply chain priorities and resolve them with the most efficient and effective trade policies."

Key contributors to the supply chain crisis and changes in trading patterns:

Each of these factors would have been significant on its own. But, together, they elevate supply chain adequacy and resiliency to a national crisis. Key factors identified in the new Solutions Brief include:

Changes to the US-China trade and strategic relationship.

• China's policies have made it harder for foreign companies to penetrate the country's domestic market, as it increasingly focuses on manufacturing for its own domestic market. China increasingly controls the complete value chain for various products.

• China and the US remain strategic economic competitors around the globe: China's Belt and Road Initiative, for example, seeks to shift global trade patterns in China's favor. The two countries also compete in resource areas such as rare earth minerals and in geographic areas such as the Pacific.

• The uncertainty and tensions surrounding the China/Taiwan relationship, particularly in the wake of Russia's invasion of Ukraine, have only furthered the erosion of trust in China as the world's premier manufacturing hub.

• Globally, even during the height of the pandemic, China was a resilient exporter; its exports fell in Q1 2020 but stabilized by Q2 and rebounded by Q3 of that year—a very different scenario than in many other economies.

The COVID-19 pandemic.

• Globally, the pandemic accelerated the trend toward greater regionalization as borders and economies closed and supply chains were disrupted.

• More recently, lockdowns in China to combat the Omicron variant have had strong global ripple effects for many goods, from toys to autos to smartphones.

• Examples include:

  • A shutdown in a Shenzhen port decreased import volumes in southern California ports by 14 percent.

  • A lockdown that affected a Shanghai factory led to a shortage in New York of Omnipaque, an iodinated contrast medium for medical imaging.

Russia's invasion of Ukraine.

• The war forced a rapid disruption and reevaluation of supply chains—most critically, in energy.

• Russia and Ukraine are major producers of other important international commodities such as grains, aluminum, steel, palladium, neon, and platinum. These supply chains have been disrupted by sanctions, war, and maritime blockade in the Black Sea.

• Such events and the fallout from them are forcing companies to increasingly take geopolitical risks into account, pushing them toward supply chain diversification—in essence, toward a more regionalized system.

• A June 2022 global poll of CEOs by The Conference Board found that 83 percent fear the reemergence of competing economic blocs, with 43 percent highly concerned about this development.

The transition to stakeholder capitalism.

• Consumers are increasingly demanding to know more about companies' social commitments, including the extent of their commitments to responsible and ethical sourcing.

• Additionally, important steps toward developing a greener economy raise significant supply chain issues. For instance, China controls 85 percent of rare-earth refining, making supply chain diversification and resilience difficult in the short term and shifting more emphasis on developing new sourcing from "friends" in the medium term.

Key recommendations:

While the issue of supply chains directly affects the strategy and business models of private sector companies, the challenge can only be solved by collaboration between private and public sector leaders. As detailed in the Solutions Brief, CED's recommendations for achieving free but secure trade with resilient supply chains include:

Establish formal consultation/collaboration groups for leaders in the public/private sectors to fully understand global supply chains and determine priorities for supply chain challenges.

• Collaborate more closely with business to identify sources of potential weaknesses in supply chains. Steps include:

  • Establish criteria of potential risk, including threats to national security, possible predatory pricing, threats to public health, possible economic disruption, and considerations of market strengths and weaknesses of US industries.

  • Develop practical solutions, including onshoring, nearshoring, and friend-shoring.

  • Prioritize supply chain challenges for semiconductors and critical minerals, given their significant role in the ability of the US to compete and thrive in the global economy.

  • Establish formal consultative groups of port authorities and their customers to establish clear priorities for efficient and effective operations.

Improve the feasibility of solutions for each unique, prioritized supply chain risk developed by public and private sector leaders.

• Make reshoring more feasible:

  • Eliminate or streamline unnecessary regulation preventing factories from locating in the US.

  • Consider tax credits for location of factories here in a way that minimizes market distortions; consider domestic subsidized production for special cases (e.g., semiconductors).

  • Target investments to improve roads and ports; include a supply chain focus in the Bipartisan Infrastructure Law spending; solve the truck driver shortage; train more Americans for careers in logistics.

• Expand nearshoring opportunities:

  • Convene a special "Three Amigos" (US, Mexico, Canada) postpandemic summit on supply chains, seeking ways to strengthen links and reduce barriers to trade.

  • Establish a tri-national private sector advisory council under USMCA to advise the three governments on nearshoring opportunities and North American economic integration.

  • Help the Dominican Republic-Central America Free Trade Agreement countries grow their economies by building their infrastructure for resiliency and integrate more fully into US supply chains.

  • Reengage with South America to expand US trade relationships.

• Strengthen friend-shoring opportunities:

  • Build country partnerships with supportive countries. Many countries in Africa, Asia, Europe, Latin America, and the Middle East would qualify.

  • Find ways to help new countries become "friends" in supply chains; strengthen economic assistance to build links to US supply chains (e.g., helping reach US standards on labor rights), including targeted assistance from USAID, Economic Support Funds, and development finance.

  • Deepen the mission of the US Foreign Commercial Service to include knowledge of supply chains of US producers. Doing so will help US companies better understand foreign supply chains.

Deepen trade policy engagement: promote supply chain resilience through new trade agreements.

• The US should develop a plan for a reformed World Trade Organization—in particular, its dispute resolution mechanisms—and continue to promote the benefits of an open global trading system.

• The US should consider opening negotiations for additional bilateral and regional trade agreements. It should consider USMCA as a possible model to attract domestic support, given it passed the Congress with bipartisan support and had backing from labor.

• The US should launch discussions to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the follow-on agreement to the Trans-Pacific Partnership (TPP).

• The US needs to prioritize protection of intellectual property.

Invest in R&D.

• Increase government funding of basic research, which has lagged despite the important role this funding has in ensuring US competitiveness.

• Such funding should include further investments in critical technologies such as advanced materials manufacturing, biotech, power-storage solutions, semiconductors, AI, quantum computing, and advanced cyber networking.

• Increase private sector R&D funding to meet the competitive demands of effectively and efficiently reshoring and nearshoring advanced manufacturing capacity.

Determine alternatives to lockdowns as a response to the next public health crisis.

• Economic lockdowns helped trigger the current supply chain disruptions. Important lessons can be drawn that can help avoid a draconian response to the next major public health challenge. Lessons include:

  • Determine business plans for future disruptions: Businesses should update their business plans/playbooks now with lessons learned for future disruptions. They should also coordinate with state and local officials to ensure that essential business infrastructure that requires public sector support to continue operating in a future public health crisis is addressed.

    • For additional insights and recommendations, see the CED Solutions Brief, Preparing for the Next Public Health Crisis: Lessons from the Pandemic.

  • Determine essential businesses: Private sector leaders should coordinate with public sector leaders on the federal, regional, and state levels. They should use the lessons of the COVID-19 pandemic to determine and prioritize essential businesses that would need to operate in a public health emergency and the requirements that the workforce would need to operate in person and remotely.

The new Solutions Brief, A Road Map to Achieving Free but Secure Trade with Resilient Supply Chains, can be accessed here.

About CED
The Committee for Economic Development (CED) is the public policy center of The Conference Board. The nonprofit, nonpartisan, business-led organization delivers well-researched analysis and reasoned solutions in the nation's interest. CED Trustees are chief executive officers and key executives of leading US companies who bring their unique experience to address today's pressing policy issues. Collectively they represent 30+ industries, over a trillion dollars in revenue, and over 4 million employees. www.ced.org 

About The Conference Board
The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead. Founded in 1916, we are a non-partisan, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States.
www.conference-board.org