August 18, 2023, by Lex Silbernagel, Special Projects – Utility
COVID-19 showed the delicate balance in the global supply chain. Military and trade security, the Russian war on Ukraine and aggressive, predatory and coercive strategies and tactics by China and Russia against other countries predominate how supply chains are being reshaped. Moving forward, security, trade and infrastructure development will be at the core of how supply chains develop.
Over the past 30 years, the focus on building optimum supply around price (cost and capital), quality and service has been possible due to global stability and security, which helped ensure trade flowed smoothly, predictably and freely. The efficiency and effectiveness in these supply chains has been lost, and alternatives are now being rebuilt.
Going forward in this more chaotic world, supply chains will also require resilience, agility, sustainability and protection from predatory practices. Durable and integrated relationships that build upon these requirements are essential for successful supply. Understanding the geopolitical forces shaping our world is increasingly essential to navigating new supply chains.
Some background on China
During the Cold War — to counter Soviet aggression — relations between China and the United States became normalized with President Nixon’s visit in 1972. This brought China into the global order and gave access to low-cost labor and manufacturing in China. China has progressed to be a manufacturing juggernaut, accounting for nearly 28.5% of global manufacturing in 2020, 20% of which was with the United States.
In 2015, China introduced its Made in China 2025 (MIC2025) strategy, which is an effort to advance China into 10 high-end manufacturing sectors. It is a long-term strategy highly dependent on acquiring foreign intellectual property and components, while, at the same time, restricting access to China’s domestic market.
As a result, policymakers in Europe and the United States are resistive to forced technology transfers and cautious of risk from industrial espionage and cyber theft. The target industries are also subsidized by the Chinese government, which gives unfair advantage to Chinese companies. Foreign policymakers in Europe and the United States are especially cautious about allowing access to high-end technologies that can be used in both civil and military applications (i.e., high-end chips used in artificial intelligence and drone applications).
Emerging infrastructure and transport corridors
Ninety percent of China’s trade is dependent on sea transport not being disrupted (Freedom of Navigation (FON) is primarily ensured by the U.S. Navy).
China’s Belt and Road Initiative (BRI), in development since 2013, is a global infrastructure development strategy for ports, roads and railways to secure and control transportation via land and sea corridors throughout Asia, the Middle East and even into Africa, Europe and South America. It is the most expensive infrastructure project in history. It aims to connect China to the world and mitigate its import and export trade and military insecurities.
Concerns from other countries about BRI are that it increases China’s position and leverage on smaller developing countries and adds competition for Europe and the United States in MIC2025 industries. It also increases security risk to other countries in the region — especially India, the United States and, of course, Taiwan.
A potential rival to China’s BRI is the International North-South Transport Corridor (Persian Corridor). This is a proposed multi-modal transport and transit route taking shape between St. Petersburg in Russia, through Iran, connecting to Mumbai in India. This project has been re-energized by Russia as a transport corridor that would allow Russia to bypass sanctions and the need to ship around Europe and through the Suez Canal to trade with India. It would give Iran more stable access to the Indian Ocean and provide India access to Central Asia.
Also, the Biden administration has put forth the Indo-Pacific Economic Framework (IPEF) as a potential alternative to the BRI.
The IPEF — along with the United States’ Build Back Better World (B3W) Initiative and the European Union’s Global Gateway — are rival frameworks intended to support infrastructure development with countries in southeast Asia, Africa and South America.
Control of water
Water scarcity in Asia is a growing concern for the continent. China governs Tibet as an autonomous region. The Tibetan Plateau is the “Water Tower of Asia,” the source of water for a dozen international rivers that flow across Asia. China is adding dams on these rivers, which increases risk in water supply and geopolitical control over countries dependent on these rivers.
Note: Review this resource to take a closer look at the major rivers sourced in Tibet.
For years, control of Tibet has put India and other countries in the region on unfriendly terms with China. In addition, China’s BRI “String of Pearls” across the Indian Ocean and the China-Pakistan Economic Corridor intensify India’s concerns with China.
Competition for Africa
China is winning the competition for Africa, which has abundant resources and a growing population. China is taking what has been viewed as a soft power approach to countries in Africa and along the BRI by offering loans and development assistance. At the same time, China has the highest debt of any country in the world yet takes on risky investments to position themselves with the leadership in countries that have emerging markets, minerals and mining, and energy resources. When countries default on the Chinese loans, alternative concessions are leveraged into place. This practice is referred to as debt trap diplomacy. There are increasing scenarios of debt traps arising, with examples in Sri Lanka, Pakistan (along the BRI) and countries in Africa.
Russian influence in Africa comes through its Wagner mercenary group, where governments ask Wagner for assistance with military, economic and political intervention to stay in power. These arrangements are increasing violence, corruption and authoritarian governance in numerous African countries. Payment for these services by African countries to Wagner (now Russia) is through exchange of partial ownership in mineral and mining resources.
Russian and Chinese aggression in Asia
China and Russia have border and territory disputes with many countries. For as long as they can, the autocratic leadership will continue to exploit whatever serves their objectives for control. The ambitions of China and Russia are unsustainable and unacceptable to most of the rest of the world.
Russia has pretty much destroyed its relationship with Europe due to its war on Ukraine and threat of further aggression on Europe.
The relationship between Russia and China — even with its numerous disputes in the past — is improving due to interdependence between the two for energy, minerals and food. However, it is questionable as to how long this alliance remains positive with Russia as a second to China.
Russia and China are authoritarian powers that seek to control and direct Eurasia to their benefit. This dependence on Russian resources is supporting the trade for energy resources and the war on Ukraine.
The expansionism, coercion and military positioning by China and Russia are being constrained by western countries, Japan, India, the Philippines and other countries in the region. Countries adjacent to China and Russia are often caught in the middle and try to maintain a position of non-alignment.
The aggression of Russia in Ukraine is also leaving many countries concerned about China’s aggression against Taiwan. As part of our Indo-Pacific Strategy, the United States has expanded or put security (military) alliances in place with:
- Australia, the United Kingdom and the United States (the AUKUS partnership)
- Japan
- South Korea
- The Philippines
- India
- Vietnam
Pushing back with trade and the dollar
Our trade with China will continue where necessary, but for western countries, the stated approach is to de-risk rather than fully decouple, with de-risking focused on maintaining military security.
President Trump imposed tariffs on imports from China in 2018. The COVID-19 pandemic and China’s “zero-COVID” policy further derailed manufacturing in China. President Biden has continued with the tariffs and added export controls on advanced computing and semiconductor manufacturing items. The tariffs were put in place to address trade imbalances, unfair trade practices, intellectual property theft, forced technology transfers and the subsidizing of China’s MIC2025 domestic industries. The export controls were put in place over military security concerns.
Roughly 90% of global trade is transacted using the dollar. The tariffs and sanctions — along with rising inflation and the use of the U.S. dollar payments system to enforce sanctions — is driving countries to look at ways to de-dollarize. This would give sanctioned countries, such as Russia and Iran, alternative currencies in which to conduct trade and potentially avoid sanction controls.
The Brazil, Russia, India, China and South Africa alliance (BRICS) is the organization leading efforts to dethrone the dollar. With the exception of India, countries that make up BRICS are either opposing the rules-based international order or struggling financially. Regardless, there is a growing number of countries looking for ways to disconnect from the dollar.
Developing trade relations
Globally, friendly relations and trade alliances will form around security concerns and containing Chinese and Russian aggression. Rules-based trade agreements will be used, in part, to support security strategies. India and the Association of Southeast Asian Nations (ASEAN) are candidate countries for replacement of manufacturing and trade with China.
In 2022, trade for the United States with the rest of the world was over $5.3 trillion ($2.1 trillion in export and $3.2 trillion in import). The total with Asia is $2 trillion, with China amounting to $690 billion ($154 billion in export and $553 billion in import). Our trade with Europe is just over $900 billion. Asia amounts to nearly 40% of all trade for the United States, and disruption triggered by Russia and China is likely.
There are two emerging trade agreements in eastern and southeastern Asia — the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP).
Formation of the CPTPP was initially promoted by the United States under President Obama; whereas, the RCEP is sponsored by China. The United States and India have not joined either of these trade agreements. Our reluctance to join the CPTPP is due to concern over potential impact on jobs in America. The result is that trade with CPTPP members will be done on more of a case-by-case basis. Also, instead of joining the CPTPP, the Biden administration is promoting investment through IPEF to members of the CPTPP as an alternative to China’s BRI.
Key takeaways for purchasing managers
Security, trade and infrastructure corridors will be at the core of how supply chains develop.
Alternatives to China will be desirable across most categories and especially in higher-end technology industries. With all of its internal struggles, China will be increasingly unstable, which will bring disruptions to supply chains. This is similarly true for raw materials coming out of Russia.
Trade will continue to shift away from China and Russia to other countries and regions, especially in southeast Asia and Mexico. Resilience, agility, sustainability and protection from predatory and coercive practices will be requirements in these new supply chains.
Durable and integrated relationships that build upon these requirements and are more transparent (such as country of origin, management of import controls and overall sourcing and prioritization strategies) will be required for successful relationships and supply.
Read more: Why the Supply Chain Will Not Go Back to 2019
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