Do we really need more Free Trade Agreements and do they help or hinder?
To those in the know, the risks involved from overexposed supply chains were apparent before COVID-19 struck. Just last year, the US-China trade war highlighted the dangers involved in sourcing goods from one location. This resulted in increased focus and interest in companies looking elsewhere to source, supply or manufacture and this trend even has a name – The ABC or ‘Anywhere But China’ movement.
Single sourcing or over reliance on just one sector or supply base makes you vulnerable to not just these two examples but anything else such as natural disasters, labour issues, cyber-attacks and much more.
Running a diversified supply chain is however not necessarily the panacea to overcome such disruptions. Diversification can be costly and having multiple suppliers can lead to increased complexity and reduced visibility, if the correct systems are not in place. Further, having more than just a select few suppliers does not always guarantee that disruption will not occur. During this pandemic for example we have seen facilities and ports closing all around the world so regardless of where you source from, raw materials and products were simply not flowing.
COVID-19 has helped reinforce just how important a strong and resilient supply chain is and every expert is now running a webinar on how best to achieve this.
Some believe that globalisation will be reversed or slow further and that re-shoring or near-shoring will increase to mitigate against future major risks. Whilst an element of this could be helpful in a few industries this is not a strategy that can be carried out too widely. Bringing manufacturing back locally in developed economies is a supply chain quagmire many companies will not be able to overcome. Many developed economies have lost manufacturing expertise. It would be expensive to rebuild these capabilities and would almost certainly require subsidy, potentially in the form of state-aid or tariffs. Consumers would also ask why there is a need to spend more to buy locally manufactured products when they can buy them cheaper abroad. As well as harming productivity and ruining bottom lines in the private sector, the debate would be particularly acute in areas such as domestic infrastructure, where budgets are continuously under pressure.
What we do except to see over the next few years instead is a renewed interest and focus for global supply chains to be redesigned and this is an area where the relevance and importance of free trade agreements come to the fore.
One mega FTA, that has been in the news lately is the Regional Comprehensive Economic Partnership (RECP). Trade ministers of the 10-member states of ASEAN and its free-trade partners Australia, China, Japan, Korea, and New Zealand recently reaffirmed just a fortnight ago to the signing of the agreement in November this year. If this goal is achieved, RCEP would create the world’s largest global free trade agreement.
Some pundits however do question the relevance and role such agreements play to not just small and medium enterprises (SME’s) but also larger multi-national companies (MNC’s). In a recent poll of Supply Chain professionals, less than 3% said that they were leveraging the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) This agreement, involving 11 countries around the Pacific (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) was re-vamped after President Trump removed the United States from the agreement, formerly known as the TPP, as soon as he came to office. It became effective at the end of 2018 but it is still not an FTA that is well known – let alone utilised by many.
This FTA could however take on a different purpose post-coronavirus. This will not just exist to help increase trade flows in total, but will help in the sphere of supply chain diversification as well. The Japanese government for example, recently created a $2bn fund for businesses to examine their supply chains with the intention of lessening their reliance on China. China currently accounts for nearly a quarter of all Japanese imports and in areas such as automotive parts, it is even more crucial, accounting for nearly 40% of imports. The CPTPP may be a path to helping Japanese and other manufacturers find alternative sourcing locations.
Further possibilities for supply chain diversification could arise if the other countries that have expressed an interested in joining the CPTPP enter the agreement. South Korea, Thailand, Indonesia, the Philippines and the UK have all been linked with membership.
Developments in trade agreements in the Pacific are evidence of the importance that global and regional supply chains are likely to continue to have post-COVID-19. However, these trade agreements will be more important in increasing diversification than they ever used to be but much still needs to be done by regulators. The first order of business should be to ensure more companies are aware of the benefits of such agreements. Secondly, the implementation and use of such agreements need to be more uniform across all signing states and steps to utilisation of such FTA’s more straightforward and easy to leverage. Unless these are done, the question many ask will still go unanswered and many of these deals that are signed after much effort and negotiation will simply fall by the wayside.
ABOUT THE AUTHOR
Dr. Raymon Krishnan
The Logistics and Supply Chain Management Society
Dr. Raymon Krishnan currently serves as President of The Logistics & Supply Chain Management Society and is Editor-at-large of LogiSYM, the collaborative platform of the Society and CargoNOW. A globally recognized expert in supply chain management with close to thirty years of experience as an end user, educationist and service provider, Raymon’s experience covers the full logistics spectrum, from raw material procurement to physical distribution and eventually customer service and care, with a strong grounding in Quality and Six Sigma.