Trade growth outpaced global gross domestic product (GDP) growth for three decades before the COVID-19 pandemic disrupted supply chains around the world. As the effects of the pandemic subsided, the Ukrainian conflict and its consequences were replaced by a slowdown in the growth of this business. The global business environment was generally weakened as a result of these severe disruptions.
Trade tensions were rising even before the pandemic, and a new economic nationalism began to challenge the decades of globalization that followed the end of the Cold War and China’s opening to the world. As a result, trade will grow by just 2.3 percent through 2031, compared to a projected 2.5 percent GDP growth, according to the Boston Consulting Group’s Global Trade Model.
Economies are still adjusting to the economic and geopolitical upheavals of the past three years, but the challenges affecting global trade are here to stay. How can companies dependent on global supply chains manage today’s uncertainties and prepare for future risks?
Understand how business flows are changing.
China’s trade with the US continues to decline, while trade with the EU is growing more slowly than the global average. This trend opens up opportunities for India, Mexico, and again, ASEAN countries, increasing trade not only with the US and the EU but also with China.
Diversify to reduce risks.
Trade disputes threaten global supply chains, so government policies encourage diversification directly and indirectly. New laws in the US promote domestic manufacturing and encourage companies to diversify their supply chains. Increasing trade tensions between the EU and China are causing European countries to turn to suppliers in other parts of the world.
These supply chain disruptions affect some industries more than others. Energy-dependent industries are working to improve sustainability and find alternative energy sources, while semiconductor-dependent industries are learning the importance of diversifying their supply chains due to increasing trade restrictions.
How should companies respond?
Today’s uncertain business environment requires a new balance between efficiency and lower costs, on the one hand, and the increased need to identify and respond to global risks, on the other. Many companies are already making changes to prioritize the sustainability and diversification of their supply chains, but every global company should take the following steps to respond to today’s changes:
Understand the most significant risks in your value chains. What inputs affect your operations the most? Where do these contributions come from, and how do they reach you? Who are the main suppliers, and what are your alternatives?
Prioritize actions that strengthen supply chain sustainability.
Prepare for “unlikely” shocks earlier: build a buffer stock of risky items and prequalify alternative suppliers.
Develop contingency plans for key assets at risk. This strategy may include funding R&D for rare mineral alternatives or developing supplier relationships across multiple continents.
What should companies plan for in the long term?
The consequences of war, pandemics, and protectionism will affect trade flows worldwide in the near future. Value chain sustainability should be an ongoing practice, not a one-time achievement. Companies can succeed by pursuing these long-term goals:
Incorporate geopolitical scenario planning into capital allocation processes and supply chain management. Run a series of geopolitical disruption scenarios for contingency plans. Actively follow instructions as scenarios unfold.
Identify the impact of environmental, social, and governance (ESG) objectives on global supply chains and integrate them into your planning.
Assess the organization’s ability to have people in leadership positions who can identify and manage global risks as early as possible.
Use modern analytical tools such as supply chain control towers and digital twins to identify the earliest possible indicators of new shocks or disruptions, visualize scenarios and contingencies, and respond and adapt quickly.
World trade will grow in the next decade, albeit more slowly. Important changes in trade corridors are behind this overall slower growth. These changes bring new winners and losers. Actions companies can take now can ensure they stay on the winning side.
Leave a Reply