Impact of Global Trade Policies on the Supply Chain
Global trade policies significantly impact the supply chain, affecting the movement of goods and services across borders. For example, free trade agreements like NAFTA and TPP have led to an increase in trade between participating countries, resulting in a more efficient and streamlined supply chain. However, these policies can also negatively affect certain businesses and industries. For example, some domestic industries may struggle to compete with cheaper imports, leading to job losses and reduced wages.
The Risks of Relying on a Small Number of Suppliers
As the pandemic has shown, relying on a small number of suppliers is not only counterproductive but risky to operational efficiency as well. The first challenge we witnessed is that it can make the global supply chain vulnerable to disruptions. Some of these include natural disasters, pandemics like the COVID-19, political instability, or economic downturns. Additionally, a concentration of suppliers in one location can result in a lack of competition, which leads to higher prices and reduced innovation. It can also pose a risk to national security.
The Importance of Supply Diversity
To mitigate these risks, it is important to promote greater supply diversity. This can be achieved by encouraging the development of domestic or local industries, as well as by diversifying the countries from which goods and services are sourced. Additionally, governments can take steps to reduce the dependence on a small number of suppliers by supporting small and medium-sized enterprises and promoting the development of new technologies.
Boosting trade resilience through supply diversification
The disruptions occasioned by the pandemic have shown that relying on a single source of supply is risky. However, diversifying significantly reduces the losses in response to the disruptions. According to IMF, higher diversification reduces volatility when various nations are affected by supply shocks. The IMF simulation indicates that diversification offers protection when there is a major disruption in all economies, such as during the COVID-19 pandemic.
Generally, supply diversification is an important step in boosting trade resilience and mitigating the risks in the global economy. The COVID-19 pandemic has shown the importance of having a diverse and resilient supply chain that has the potential to withstand any form of disruption and shock. Through this approach, nations can minimize their dependence on a few suppliers and ensure a more stable and resilient global economy. On the other hand, governments, businesses and international organizations need to work together to promote supply diversification, develop friendly policy frameworks and build a more robust global trade system.