The coronavirus era has intensified the strategic decoupling between the United States and China. At this historical juncture, supply chains are now deemed the critical strategic drivers of regional and global security dynamics, business operations and the engine of economic activity.  

German chancellor Angela Merkel and France’s President Emmanuel Macron have expressed their commitment to make strategically important products such as medical and pharmaceutical products in France and Germany. In a similar vein, the European Union Chamber of Commerce has asked its members to wean themselves off being reliant on China’s supply chains. Japan and India appear to be following suit.  

Strategic decoupling from China is likely to lead to governments to increase national security regulations on foreign investments and expand their definition of strategic sectors from being information technology (IT), telecommunications and dual-use technologies with civil and military applications, to include food security, biotech, and pharmaceuticals. In turn, governments will demand that strategic sectors conduct domestic manufacturing.  

The United States, EU, Russian and Chinese governments will have greater oversight and screen foreign direct investment (FDI) in these strategic sectors to prevent foreign investors from accessing sensitive data and technologies in a bid to protect their respective technological bases. As businesses are increasingly vulnerable to buyouts due to the economic downturn, governments are wary of foreign investments of their national companies. In late May, the U.S. Senate passed a bill that would bar foreign companies from U.S. exchanges if they are unable to prove that they are not controlled by a foreign government and refuse greater U.S. oversight of company financials. Similarly, the British government is considering legislation to prevent significant investment and foreign takeovers of UK companies.

Reflecting this trend towards protectionism, supply chains will regionalize or reposition onshore.  

Already prior to the pandemic, higher wages and increased shipping costs had led companies to shift supply chains away from China. Yet, the coronavirus has created severe disruptions in a complex web of international supply chains due to quarantines, factory closings, travel restrictions imposed by China and other countries. This increased the momentum of companies seeking to relocate as part of a growing trend of attempting to build resilience into their supply chains and mitigate against future shocks. A recent Bank of America survey of three thousand firms reported that companies in ten out of twelve global industries, including medical equipment along with semiconductors are in the process of shifting part of their supply chains from current locations.

In a bid to accelerate the trend to regionalize supply chains, Western states are likely to increase taxation on goods that were not made onshore or near shore. U.S. Commerce Secretary, Wilbur Ross exclaimed, “Globalization had gotten out of control. It takes two hundred suppliers in forty-three countries on six continents to make an iPhone.” The United States is exploring increasing tariffs on Chinese goods, tax incentives and potential re-shoring subsidies. The United States is also engaging with states across the international community and companies as part of an “Economic Prosperity Network” to standardize an approach towards regionalizing supply chains, trade, energy and infrastructure 

Companies will increasingly consider how their logistics plans will affect final assembly and how they can maximize their margins, as some components for component sourcing require automation to produce products such as ventilators and masks that may be too costly. In turn, business strategies will consider diversifying component sourcing and manufacturing both onshore and utilizing segments of manufacturing offshore. Similarly, the final assembly may be onshored or offshored.  This may create greater options for companies to relocate supply chains from China to Mexico that has a vast labor force and is utilized for component sourcing. South Asian and Southeast Asian states such as India, which has a vast organic labor force. Even the United Arab Emirates (UAE), which does not have an organic labor force that could provide it. This will lead the United States to establish closer strategic ties with these states. Steven Didier and Chris Myers, managing partners of Redrock, a defense company contend that the United States, UK and EU states are able to onshore and regionalize their long-dormant manufacturing engine due to their sophisticated logistics capabilities. The United States, the UK and EU states will attempt to limit their reliance on China for medical equipment, pharmaceuticals, auto and technological products by onshoring component sourcing and maintaining quality control. In turn, the United States, the UK and EU states, such as Germany, are able to become economically hybrid by maintaining both service and manufacturing economies. This will increase their economic output by, in the short-term, creating an enormous amount of blue-collared job opportunities. Meanwhile, in the medium- to long-term, it will advance a counter-trend of increasing levels of automation for supply chains that will displace blue-collared jobs, for example, assembly workers in the electronics and automotive industries. In the longer-term, it offers opportunities for greater workforce training to attain new skills in planning and analytics, especially in strategic sectors.  

Accompanying onshored and regional manufacturing will be increased needs for raw materials that EU and Gulf Cooperation Council (GCC) States lack and that the United States and China possess. This will result in great-power competition over value chains as the United States will attempt to strip away manufacturing from China and reorient global value chains via the United States.  In turn, regional blocs such as the EU and GCC, states will be increasingly reliant upon the United States for raw materials such as textiles and petroleum products, along with agricultural products and energy leading them to pursue trade agreements with the United States. The United States will conduct a hub-and-spokes system via a series of bilateral trade agreements with allies that will have extended value chains towards the United States. In this regard, the trend of globalized value chains will accompany the counter-trend of regional and onshored supply chains.  

By undermining China’s manufacturing base, the United States is likely to leverage its demands that China meet targets of trade agreements, increase conditions of trade with China and equalize the trade deficit. The United States may even seek to cut away the U.S. debt that China holds. 

The United States’ exports of raw materials will help international allies turn their manufacturing capabilities on. In turn, the United States is likely to make this conditional upon other geopolitical issues. The United States is likely to press NATO allies to increase their percentage of GDP expenditure on military and security capabilities and prevent them from accessing the Chinese market.  

The outsourcing and offshoring that epitomized globalization is eclipsed by states attempting to simplify and shorten supply chains through onshoring, nearshoring or regionalizing them. The United States’ attempt to onshore and regionalize in Mexico, and the EU’s attempt to onshore and nearshore in Northern Africa and Eastern Europe, is the bid to mitigate risk and make supply chains more resilient. This entails diversifying supply sources, increasing safety stocks and positioning the manufacture and storage of inventories to be closer to customers. This is especially necessary if there will be manufacturing and logistics outages and disruptions to supplies. The diversification that accompanies onshoring and regionalization may entail prices to increase. Yet, as globalized supply chains had been elongated, the costs of numerous products had already been driven up.  

Resilience entails companies building redundancies into supply chains by having multiple sources of supply, manufacturing and distribution capacity. Companies in sectors such as in the auto sector will be unable to maintain a globalized approach of lean and just-in-time production in the name of competitive advantage vis a vis cost and speed to market. To this end, companies must maintain stockpiles of goods and equipment, diversify supply sources from distant regions, while having vendors that are closer to their customer base. David Simchi-Levi predicts that fashion retailers are likely to relocate parts of their supply chains to Vietnam, Cambodia and Malaysia, while high-tech companies move to Mexico and Brazil to serve market demand in North America and Eastern Europe for the EU.  

Diversifying to other regions can enable supply chains to become easily accessible where products and services can be delivered to the end-users with greater velocity. Similar to network-centric warfare, supply chains will become more agile and supply and demand will be synchronized to rapidly respond to market changes by customizing products to consumer preferences in various regions.  

The current global pandemic, as well as the attempt to offset risk due to the U.S.-China decoupling, is causing companies to embrace digital technologies that will offer end to end visibility in their supply chains. This will offer an unprecedented level of transparency that will impact business approaches towards risk management and changing markets.

Lora Cecere, founder of Supply Chain Insights, has noted that a second wave of local outbreaks of coronavirus may disrupt dual or triple sourcing. This would result in increasing logistics problems, delays for ocean and air freight as well as at border crossings, and truck transits becoming more variable. Supplier disruption and the cost of transportation will drive up costs. Lora Cecere predicts the likelihood of supply outages due to the shorter supply chains with fewer nodes in supply chains of outsourcing manufacturing. 

Thus, diversifying supply chains is critical as regionalized manufacturing along with inventories may be at risk as upstream suppliers, and downstream facilities are disrupted by quarantines in various regions. Furthermore, downstream supply chain facilities may due to reduced economic activity cancel or delay orders from upstream suppliers such as Chinese manufacturers.  

In turn, companies are increasingly adopting new digital tracking technologies such as artificial intelligence and robotic process automation to make supply chains operating in complex distributed networks more transparent which can lead to identifying points of vulnerability and mitigate risk. This will also prevent containers and warehouses from accumulating products that are not selling.  

Steven Didier and Chris Myers have observed that, currently, companies rely upon updating data entry systems that are cost-effective such as Custom Relationship Management (CRM) to monitor cargo throughout the supply chain but cannot identify vulnerabilities across supply chains in real-time. Their effectiveness is reliant upon the thoroughness of data entry. One example of this is when truck drivers use their cell phones to make call-ins from high-risk areas, such as Afghanistan and Pakistan; that data is entered into CRM systems, which may not offer precise information.

In a bid to go beyond traditional data-entry CRM systems, Leah Tedrow, managing director of Evoke, a strategic communications company based in the UAE, developed the Commercial Analysis Software Tool (CAST) for the U.S. government and the private sector. CAST ingests real-time data and multiple information flows such as CRMs, GPS and GDELT, offering a degree of transparency on how supply chains may be impacted upon by geopolitics, policy changes and the environment. This is fed into wider models and algorithms to understand causation, trends and patterns, which contributes to predictive forecasting. As a result, stakeholders have enough information to make contextualized decisions to mitigate risk and, in turn, the algorithms reveal market opportunities that they can capitalize upon. 

These data-entry systems, however, do not identify in real-time the vulnerabilities across entire supply chains. Due to increased disruptions, regulators or insurance companies are likely to mandate for greater transparency within supply chains to identify risks in real-time. New digital manufacturing technologies identify supply chain vulnerabilities in real-time. Steven Didier and Chris Myers note this to be a costlier option than data entry systems, however, these technologies offer real-time monitoring of supply chains that can save significant amounts in revenues for companies. Furthermore, these technologies inform companies on the degree of efficiencies that supply chains offer by monitoring patterns formed after a number of months that inform future trends that are incorporated into business models. These technologies rely upon GPS trackers or telecommunications transmitters that impart information already from the loading at the point of origin to the unloading that takes place at the destination. GPS trackers or telecommunications transmitters are routed through Control Towers and Digital Twins. These technologies require companies to make a considerable upfront investment or considerable reduction in what is already competitive margins for lease programs. 

EY Global Advanced Manufacturing Sector leader, Jerry Gootee, notes that control towers serve as a central hub by using artificial intelligence (AI) and machine learning to gain advanced insight into its supply chain risk exposure. Digital Twins enables supply chains to adjust rapidly to changing customer preferences and production levels, which has a ripple effect on short-term supply and demand forecast, and distribution flows. Digital Twins serves a similar function by providing a digital replica of external parties while drilling down to see inventories from second tiered suppliers. This enables companies to identify waste or production bottlenecks. Jerry Gootee identifies that other digital technologies and approaches include end-to-end inventory rebalancing and procurement-spend analysis into supply chain processes, which can increase the prospects of flexibility at a lower cost. Furthermore, cross-functional teams will access documents such as due diligence of third-party vendors in a central repository. These developments are aligned with the latest wave of digital transformation where increased transparency is promoted across business practices as employees shift from using spreadsheets and needing to rekey information into a holistic landscape where data synchronization and interoperability is the new gold standard. This enables electronic collaborative versions, digital project management platforms or CRM’s to be accessed across the entire business. 

Real-time digital technologies that make supply chains transparent will be critical in light of disruptions caused by the strategic decoupling between the United States and China. Due to both being producers of raw materials, the United States and China are likely to undergo great-power competition and global tug of war over value and supply chains which will overlap China’s Belt Road Initiative (BRI) in central nodes for trading in international markets such as the UAE. This will lead the United States to increase its presence in the Middle East in order to strengthen value chains and trade routes such as the Jebel Ali Port in the UAE through the Persian Gulf and the Middle East. 

The Jebel Ali port has served as a central shipping and logistics hub and a central node for supply chains across the entire region, which in turn offers access to trade in international markets. This has led the United State to invest in Jebel Ali Port as a component in the United States underpinning the GCC security architecture. This also offsets China’s BRI that seeks to control maritime trade routes of which the Jebel Ali Port would enhance its influence in the Indian Ocean and the Middle East.

In an attempt to bypass the UAE’s Jebel Ali Port, China has also explored investments in the Doha ports and Chinese companies have won contracts to work on port projects. China’s BRI though the Doha ports would serve to rival U.S. influence in the region and in international markets as it would extend China’s sphere of influence throughout the Middle East, Levant and Central Asia. 

Currently, China’s access to the Jebel Ali and Doha ports enables it to protect 60 percent of its oil imports from the Middle East. China is investing in both ports to have greater control of ports, sea transit lanes and in turn, global value and supply chains.  

China, whether directly or indirectly, had in the past sought to establish a presence near the Strait of Hormuz by supplying a broader import/export capability through Chabahar seaport in the southeast of Iran. This served as a way to bolster their existing presence in Ghawdar Sea Port in Pakistan, which for all intents and purposes is owned by China but does not offer the scope necessary to compete with Karachi Port to the east. Beijing sought to use this to move supply chains away from the main port in Pakistan, leveraging China’s One Belt, One Road efforts in the region to secure a trade route to and from Afghanistan, Central Asia, Russia and Europe. This was disrupted by the Trump administration’s reinstitution of Iranian sanctions.

Control of ports could entail China having dual usage for trade purposes as well as serving as military naval bases. The Defense Department has noted that China is likely in the future to preposition logistical support for an expansive Chinese naval presence at Gwadar. The Defense Department in its 2019 Annual Report to the U.S. Congress, titled, Military and Security Developments Involving the People’s Republic of China 2019, noted that China’s BRI maritime trade routes and access to foreign ports could create military advantages for China. Furthermore, China could use these ports to circumvent WTO regulations and avoid government-to-government trade agreements, while accessing secondary markets from a business-to-business level. China could also circumvent sanctions by opening a free zone in international hubs from which it continues to do business.  

Both the United States and China are likely in the long-term to seek to buttress their respective access to ports and maritime routes by increasing their naval presence. This may disrupt value and supply chains and increase the risk for international trade along sea transit lanes. The Defense Department has raised the concern that China could “pre-position the necessary logistics support to sustain naval deployments in waters as distant as the Indian Ocean, Mediterranean Sea, and the Atlantic Ocean to protect its growing interests.”

Technological innovation that promotes increased visibility in real-time across supply chains and changing business practices are fueled by and in turn fuel disruptions in the international order. The British historian, Professor Pippa Catterall contends that conflict in economic terms constitutes competition that can resort to violence when it appears to be the most effective or only option left. In that sense, violence is always a form of political communication, as well as a sign of communication breakdown. This was supposed to be averted as globalization had envisaged that economic interconnectedness could mitigate conflict in the rules-based international order. The decoupling between the United States and China has put an end to that fallacy with the return of regionalism, great-power competition, and assertion of U.S. primacy on its own terms in a series of bilateral agreements and rerouting of global value chains.

Barak M. Seener is the CEO of Strategic Intelligentia and a former Middle East Fellow at the Royal United Services Institute (RUSI) He is on twitter at @BarakSeener.

Image: Reuters