Global supply chains are in the midst of a fundamental paradigm shift. From the late 1970s to the 2000s, many countries embraced economic interdependence through trade liberalisation and promoted a free market economy with minimal government intervention. From the global financial crisis in 2008 to the Covid-19 pandemic (2020-2023), governments have been shifting towards a more managed approach to trade. This trend has become more pronounced, as the world’s power balance changes, due to the rise of China, emerging technologies impact security and economy, and the sustainable global agenda becomes important for the world’s future in the 21^st century.

Highly industrialised economies, which previously focussed on liberalising trade through the WTO and through free trade agreements (FTAs), are shifting to more neo mercantilist approaches. They are pursuing resilient supply chain policies and measures to support climate change, national security concerns and other non-trade objectives (e.g. human rights). On top of that, ‘America first’ protectionism under the incoming US Trump administration will cast new challenges to its trade partners – including its resilient supply chain allies. What are the implications for trade policy of this paradigm shift from efficient supply chains to resilient chains and the return of US unilateralism?

Major economic powers as promoters of resilient supply chain policies

In March 2024, the United States Special Trade Representative, Katharine Tai announced plans to hold public hearings on the trade tools that the USA should develop to guarantee supply chain resilience. These trade tools would provide alternative sourcing options and assist in recovering supply chains following disruptions, such as new pandemics or geopolitical upheaval. Instead of encouraging other countries to open their markets to US trade, the US may look inwards and focus on trade as a way to protect labour rights and the environment, and focus on how to strengthen its manufacturing base and workers. Under President-elect Trump’s “Make America Great Again” slogan, US trade policy is likely to be inclined to unilateralism, using tariffs to protect US jobs.

In May 2024, then Director-General of EU Trade Policy, Sabine Weyand, argued that the long-held belief that an effective trade policy should reduce barriers to trade and promote supply chain efficiency was redundant. Instead, a modern trade policy must enable companies to move away from reliance on single markets (like Russian energy supplies) and towards diversified suppliers and markets to guarantee resilience. This focus is unlikely to change following the EU elections. Ursula von der Leyen, as the newly re-elected President of the Commission, identified de-risking global value chains as a key policy objective in the face of security concerns and the weaponization of policies like energy and climate. Key to this strategy are reciprocal Clean Trade and Investment Partnerships with like-minded trading partners to guarantee supplies of critical minerals and raw materials and maximise supply chain resilience.

In the case of Japan, then-Prime Minister Kishida has departed from neoliberalism by introducing the principle of “New Capitalism” which justifies the government’s intervention to economic activities for socioeconomic sustainability and national security in 2021. For example, the “Economic Security Promotion Act” (enacted in May 2022) set establishing “resilient supply chains” as one of four key pillars. While the government continuously promotes the WTO and FTAs, it promotes diversification of investment in China by reshoring and nearshoring using subsidies.¹ Its industrial policy in the name of economic security prioritises the semiconductor and digital industries to enhance Japan’s competitiveness in emerging technologies. From 2021 to 2023, the government allocated the budged of about $271 trillion for the semiconductor industry.

At the international level, these major economic powers are attempting to cooperate on resilient supply chain network through the G7 (e.g. Statement on Economic Resilience and Economic Security in Hiroshima, 2023) and bilateral and plurilateral frameworks with ‘strategic allies’. However, collaboration among ‘strategic allies’, such as Indo-Pacific Economic Framework for Prosperity (IPEF) Supply Chain Agreement,  does not seem to be stable once the US Trump administration comes back and adheres to unilateralism to regain ‘American’ manufacturing sector.

Implications for developing countries

Implications of this paradigm shift are not obvious because countries respond to the resilience narrative in different ways. These may reflect national interests including domestic politics, exposure to geopolitical risks, level of development, economic structure, import dependency and natural disaster risks.

For example, whereas resource rich developing countries (e.g. Brazil, Chile and Indonesia) have a great advantage in raw material exports, over-reliance on upstream industries expose systemic economic vulnerability (e.g. commodity price fluctuations). It also pressures towards green economy and sustainable environment, thereby requires economic diversification. Countries like the Democratic of Congo and Zambia are rich in critical minerals and have been targets for both the US, the EU and China as strategic partners to de-risk supply chains. The challenge for DRC and Zambia is to remain politically neutral while the EU, the US and China and other countries seek to influence the domestic agenda in their favour.

Looking at the investment aspect, ASEAN countries are benefiting from investment diversification from China triggered by highly developed countries’ resilient supply chain strategies. For instance, Indonesia and Vietnam are leading greenfield manufacturing FDI (Indonesia: $33 billion and Vietnam: $16 billion in 2023).  ASEAN takes investment diversification from China as a great opportunity for its regional development. It aims to become a centre of global value chains in the era of resilient supply chains. It is also exploring new partnerships with Indian Ocean Rim Association, the Pacific Islands Forum and the Gulf Cooperation Council.

Implications for the WTO

For the WTO, there is an increasing dissonance between the efficiency and specialization narrative underpinning the WTO rules and the new resilient supply chain narrative. This has led to profound disagreements between members about how to address long-standing issues during talks to change WTO rules. For example, the UK and the USA want to create specific fiscal packages (subsidies) to support climate change adaptation, rather than expecting the market to respond to the changing demands on corporations from dramatic changes in the weather and biodiversity loss.

Under the WTO’s efficiency and specialisation narrative, such subsidies would be viewed with suspicion and considered ‘protectionist’. Now members talk openly about ‘repurposing’ subsidies as part of the wider resilience narrative. Brazil, in contrast wants to retain the focus on reducing trade distorting subsidies. Whilst the negotiating agenda at the WTO has always been in a state of flux, the difficulty is that now members cannot agree on how to amend the negotiating mandate on certain WTO Agreements. Without adapting the WTO rules to address the contemporary challenges of the twenty-first century, there is a danger that the WTO’s regulatory role as a key facilitator of global trade will be undermined, with consequential adverse impacts on global supply chains.

In short, this paradigm shift from ‘efficient’ to ‘resilient’ supply chains, which is being driven by highly industrialised economies, is increasingly influencing contemporary trade policy. Furthermore, the incoming US Trump administration is likely to affect its narrative. Policy implications are playing out in different dimensions. To deepen our understanding of the effects of resilient supply chain policies, we need multi-disciplinary studies that consider the international, economic, business, legal and political dimensions of this issue.

 

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