Associate Professor, University of Cyprus
SUPPLY CHAINS IN A POST-PANDEMIC WORLD MIGHT REVOLVE LESS AROUND CHINA
As covid-19 sweeps across the globe, policy makers are questioning the wisdom of global supply chains that are reliant on China. Calls for greater diversification, self-reliance, and more regional trade—which is less sensitive to disruptions in long-distance transport—may lead to a fundamental re-thinking about how the global economy should be organized. In a study with Nita Rudra, we show that the building blocks may already be emerging for a more resilient and diversified international trade order — with a rapidly increasing number of poorer countries navigating this system. This has happened largely without the direction of global superpowers like the United States and China.
Like Europe and the United States, many poor countries have also struggled with the economic and political effects of a “China shock” since the 1990s. As China’s export dominance in manufactured goods satisfied much of the demand from wealthier nations, developing countries saw a sharp decline in trade with the global north. Our study explores what this shock has meant for poor countries with large populations of unemployed or underemployed workers — what economists call “surplus” labor. Countries like Pakistan, Peru, Zambia, Uganda and Nigeria are rich in labor, but many young people, and particularly women, work in the precarious informal economy. What’s missing in these countries are enough industries plugged into global supply chains — which could provide far superior formal employment opportunities and better working conditions for large populations of underemployed workers.
How have these “surplus labor” nations responded to the challenges posed by China’s export juggernaut? We find they have been engaging in a surprising strategy: They’ve been forming their own trade agreements. Classic economic theory doesn’t expect developing countries with similar economic profiles to strike many trade agreements among themselves. Put simply, they are rich in labor and poor in capital. But these “South-South” trade agreements have some overlooked benefits that may be relevant for rich-country firms. Most importantly, they enable firms in poor countries to “learn by export” — they start small by exporting to neighbors and gradually build the ability to export to larger and more distant markets.
Not surprisingly, supply chains among poor countries have grown rapidly in recent years. This includes trade in a range of goods from apparel, leather, toys, office equipment and food products. As small countries ramp up trade with one another, they increase scale and product quality, which serve as stepping stones toward integration with even larger markets outside their region.
We document a sharp increase in South-South trade agreements among non-BRIC developing countries during the past 20 years. In fact these agreements are mainly being forged by countries facing steep competition from China. Trade networks in East Africa (EAC), Southeast Asia (ASEAN), and the Americas (Pacific Alliance and Mercosur) have been actively seeking to strengthen regional export capacity.
Consider the evolving trade network in East Africa. Companies like Mukwano Group, a Ugandan conglomerate that produces low-skilled manufactured goods, took the lead in arguing that an East African free trade agreement (FTA) would help them compete with countries like China. The Ugandan Manufacturers Association supported the creation of an FTA in 2000, as a bid to avoid a return to the era of exporting unprocessed raw materials and importing finished products. Similarly, in Kenya, local manufacturers are incentivized to support preferential trade agreements as a way to help regional businesses stave off competition from Indian and Chinese exporters.
What does this mean for the post-pandemic global economy, as companies take a long, hard look at overall strategies and supply chains? This could be good news for firms looking to diversify their supply chain partners as a way to boost economic resilience. As a recent Economist article sums up, the pandemic has exposed the simple truth that “… what people thought was a global supply chain was a Chinese supply chain. … Companies do not just need suppliers outside China. They need to build out their choice of suppliers, even if doing so raises costs and reduces efficiency.”
For governments in industrialized countries, supporting nascent trade networks in the developing world is a win-win strategy because it may counter China’s influence while simultaneously helping to develop markets in poorer countries. This is certainly not news in Europe, which has long encouraged regional trade agreements in Africa — but analysts point out that these agreements desperately need some renewed energy.
As the aftershocks and disruptions of the 2020 pandemic play out, the future of global trade might depend as much on “the rest” of the world as on the EU, U.S., China. Time will tell if this new crop of international networks — forged by small countries, not big powers — will prove their worth by providing firms with opportunities to engage in a more diversified, vibrant and participatory global economy. The result may be a global economy that is quite different from how we started out in January 2020.
 Adapted from Daniela Donno and Nita Rudra, Washington Post, 26 May 2020.
 Daniela Donno and Nita Rudra. 2019. David and Goliath? Small Developing Countries, Large Emerging Markets, and South-South Trade Agreements. International Studies Quarterly 63(3).
 “The changes covid-19 is forcing on to businesses.” 11 April 2020. Economist.