As we are pushed into isolation supply chains, we must protect the open

Friday, April 22, 2022 7:30 a.m.

Chip Bergh, CEO of Levi’s, said globalization is dead. (Photo by Justin Sullivan/Getty Images)

Globalization is dead. So said Chip Bergh, CEO of Levi’s, the maker of the iconic 501 jeans, at this year’s World Retail Congress. This does not mean that globalization is going away; but it will have to take a form very different from that which we once knew.

The principle of comparative advantage is the economic foundation of globalization – it is stronger than ever today. It is a recognition that some countries are better equipped to produce certain goods and services; as economists say, they can do it at a lower opportunity cost than others.

As each country focuses on production in specific sectors where it has a comparative advantage, international trade and global supply chains become necessary to meet domestic demand in all other sectors.

But, interestingly, the supply chains of many companies are becoming less global today than in the past. Tritax’s 2021 survey of the European logistics real estate sector showed that shortening or “relocating” the supply chain is probably the single most important change for companies as they seek to mitigate risk. After decades of lengthening supply chains, the tide is turning – and fast. For many, this sounded like the death knell for globalization and a rallying cry for isolationism.

The pandemic has exposed the vulnerabilities of long and narrow global supply chains. Businesses across all sectors have found that temporary trade restrictions and lockdowns are disrupting the delivery of goods. Levi’s, like so many other global companies, missed sales because goods were stuck in ports.

The response has been a recognition of the urgent need to build more resilient supply chains. We can see this happening: occupier demand for UK logistics jumped 30% in the first quarter of 2022, compared to the same period in 2021. This includes a move away from “just in time” supply chains, where the minimum of inventory was maintained to reduce costs. In many cases, this has also meant bringing production closer to demand – whether that means bringing it ashore or at least moving it to a closer country.

The second factor is political. The proliferation of more protectionist governments around the world is having an impact on the economic sphere. Consider former President Donald Trump’s very public rebuke of business leaders who sought to move American manufacturing overseas. Many of Trump’s protectionist tariffs and regulations have been extended under President Biden.

In the UK, many point to the effect of Brexit on trade. Last month, the Office for Budget Responsibility estimated that UK trade volumes were 15% lower than they would have been had the UK remained in the EU. According to the Tritax survey, Brexit was among the challenges most frequently identified by the UK logistics sector, although it ranked far behind the supply of new buildings and access to labour.

The strategic importance of the origin of supply has also increased in an uncertain geopolitical context. The war in Ukraine has raised questions about economic justification versus the ethics of distributing goods and services, with several well-known companies ceasing or suspending operations in Russia. They had to consider new long-term solutions to ensure that they can continue to distribute to their customers, while remaining accountable for best practices.

The pace of change in supply chains – and the underlying factors driving those changes – has propelled them into the public consciousness like never before. Many of these changes are still emerging, but are becoming increasingly urgent as companies realize that their existing infrastructure is not suited to long-term behavioral changes.

And more major transformations are on the horizon with ESG policies reinforcing the need for a more efficient, productive and local supply chain. The need to provide sustainable and modern warehouses will require real change in terms of ESG initiatives. The growing strategic importance of electricity should not be underestimated as, in the future, the resilience of electricity supply in real estate will have to be a major consideration for companies looking to be at the forefront. of the sustainable supply chain.

Globalization is a complicated beast, full of challenges. But it will also deliver ever-higher standards of living around the world. It is a value of the modern financial system that we must preserve, even if we are pushed inward. International trade stimulates economic growth and understanding between cultures. To continue to reap the benefits of comparative advantage, we must look to the future and future-proof our supply chains to create a more resilient and sustainable version of globalization.

About Terry Simmons

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