Washington — The war in Ukraine — coupled with the pandemic’s chronic supply chain snarls — has persuaded global manufacturers to cut their reliance on China and spread factories across a wider array of countries, the director general of the World Trade Organization said Tuesday.
Russia’s invasion of Ukraine has blocked shipments of grains and fertilizer for two months, sending commodity prices soaring, and has triggered tough U.S. and allied financial sanctions that have isolated Moscow. Hopes of improved supply chain performance this year, meanwhile, were dashed by fresh coronavirus outbreaks in China, where the government’s zero-COVID policy prompted lockdowns in Shanghai and other commercial hubs.
After several years of rolling supply disruptions, companies are overhauling their global footprints to emphasize resilience rather than cost savings. The shift of some overseas factories back to North America is “becoming a more permanent fact,” Keith Harvey, the chief executive of Kaiser Aluminum, told investors this month.
That’s because the supply woes that seemed to be a temporary headache in the first months of the pandemic have hardened into apparent permanence. To guard against lost sales caused by supply interruptions, more companies are accepting the cost of redundant factories, according to Ngozi Okonjo-Iweala, the WTO chief.
“They’re trying to manage risks, and they want to de-concentrate manufacturing. They’ve seen that manufacturing of certain inputs and outputs are too concentrated,” she told a small group of reporters in Washington.
The supply line shake-up — which Okonjo-Iweala bills as “re-globalization” — probably would come at the expense of China. But it could be a boon for some developing countries. Even before the pandemic, rising labor costs in China and persistent trade tensions between Washington and Beijing were fueling the migration of manufacturers from Chinese sites to lower-cost locales including Cambodia, Ethiopia and Bangladesh.
“That approach — of trying to de-concentrate manufacturing — could actually benefit developing countries. If they move their manufacturing to these, it could bring them into the mainstream of globalization,” she said. “We see at the WTO a clear opportunity for this decentralization to go to countries that normally don’t benefit from the global supply chain and could be brought in.”
Many governments, including in the United States, encourage companies to reduce vulnerable supply lines and boost domestic employment by undertaking more of their production at home. The Biden administration’s infrastructure program requires all “iron, steel, manufactured products and construction materials” used to build new bridges, railways and water systems to be American-made.
In a speech this month, Treasury Secretary Janet L. Yellen endorsed the relocation of production to countries “we know we can count on.” Her call for such “friend-shoring” is a sharp departure from three decades of growing economic ties between the U.S. business community and China, which is both a commercial partner and strategic rival.
“We cannot allow countries to use their market position in key raw materials, technologies or products to have the power to disrupt our economy or exercise unwanted geopolitical leverage,” Yellen told the Atlantic Council.
Likewise, Okonjo-Iweala said she expects the war in Ukraine to lead to a major shift in the global energy trade, as Europe moves to reduce its dependence on Russian oil and natural gas.
The reshaping of global commerce is emerging as efforts to further liberalize trade have stalled. Expectations are low for the WTO’s June ministerial meeting, which was postponed from its original November date. And President Joe Biden’s trade agenda has concentrated on enforcing existing agreements and promoting worker rights rather than signing new deals on market access.
As the head of an institution dedicated to promoting global trade, Okonjo-Iweala is worried about a potential retreat into protectionism or the emergence of rival economic blocs. A Cold War-style partition of the global economy into two antagonistic spheres would shave 5% from world output, just in losses from reduced efficiencies and technology spillovers, WTO economists concluded in a recent study.
That’s an amount greater than the entire German economy.