World — Dismantling global supply chains endangers global prosperity

ABS survey data suggests that over 40% of businesses expect supply chain uncertainty to adversely impact business conditions over the next two months (Chart). Indeed, as a result of COVID-19, world merchandise trade is expected to fall between 13% and 32% this year, with the contraction particularly large in sectors characterised by complex value chains. This owes to logistical disruptions and lower outputs of intermediate inputs by manufacturing powerhouses. For instance, in the first ten days of May, exports from South Korea fell by 46% y/y. A series of Purchasing Managers’ Indexes show factory activity reaching record lows in Southeast Asia and India.

Rising protectionism was slowing trade growth even before the pandemic. Data from Global Trade Alert found that the policy shift towards economic nationalism accelerated in 2018 and 2019 and was not confined to high-profile tensions between the US and China; indeed the world’s two largest economies were responsible for “only” 23% of new trade distortions over the last three years. The fallout from COVID-19 has seen an intensified pushback against globalisation, unfettered movement of people and free trade.

But pivoting to inward-looking policies that aim to localise supply chains would likely erode productivity, forfeit economies of scale and hurt domestic consumers, thereby enfeebling the recovery. Better than dismantling cost-effective global supply chains would be extensive mapping to identify the vulnerabilities and multi-sourcing to increase resilience to disruptions.