As more and more countries plan to stem exports to shore up their domestic needs, what will this mean for international trade and global supply chains?
When Russia invaded Ukraine, firms the world over looked to disentangle their supply chains from the warring countries, and governments were forced to take action as restrictions on gas and food would soon become a reality.
Many governments chose to shore up their trade and economy with ‘protectionism’ strategies, prioritising their national supplies to satisfy domestic needs, often through export bans. Of course, this goes far beyond the war.
Temporary protectionism measures offer security during a period of crisis, but the rise in its adoption, with no defined end point, can skew trade and cut off major suppliers from the global chain. As a trend, it’s a big concern: a report by European research group the Conference Board found almost 80% of CEOs believe an increasing number of sectors will be considered “national security priorities” in the next five years. Because while food and oil are common targets for protection schemes, this range of categories is expanding.
The EU’s European Chips Act demonstrates how what is considered a “national security priority” is constantly evolving, especially as societies grow evermore tech dependent. Triggered by pandemic-related factory closures that caused a global semiconductor shortage, the Act looks to make the bloc more self-sufficient and will include “priority order” mechanisms to ensure there are EU-made chips for EU countries during shortages. As Ursula von der Leyen said: “There is no digital without chips”.
So while procurement is calling for greater collaboration to increase resilience and reduce risk, how will the rise of protectionism impact operations?
Global food poverty
Protectionist policies are most pronounced in the world’s food supply chains, where they risk exacerbating global poverty. Following Russia’s invasion of Ukraine, 24 countries implemented export bans covering over 30 food items including ingredients such as wheat, sugar and oils, according to research by the International Food Policy Research Institute (IFPRI). These policies have affected over 17% of global calories traded.
Indonesia’s announcement in April that the country – the world’s biggest palm oil producer – was to ban all exports of the oil to offset domestic prices, albeit temporarily, sparked concerns this would trigger widespread supply shocks. Meanwhile, Malaysia imposed a ban on chicken exports, causing disruptions in Singapore which sources a third of its chicken from the country.
Such policies have a disproportionate impact on the world’s poorest, said David Laborde, senior research fellow at IFPRI and leader of its globalisation and markets project. “The poorest countries, which often depend extensively on imports for their food security, are overexposed to these policies due to the type of products targeted,” he said. The UN warned the current food crisis means up to 345m people face “acute food insecurity” due to the impact of the Russia-Ukraine war on food supply chains, and up to 45m of these could be on the brink of famine.
The current situation is “more intense” than the food disruptions seen at the beginning of the Covid-19 pandemic, or in 2008 following the financial crash, according to Laborde.
Protectionism breeds further protectionism, he warned, as countries look to gain supply security to battle external disruptions. “[Protectionism] tends to make importing countries more protectionist and push for some self-sufficiency agenda just to avoid being exposed to the ‘will’ of their partners. These policies undermine the trust in the global food system and question the capacity of governments to work together.”
A new trade war?
The situation extends beyond food supply chains and is contributing to the redefining of not only global procurement but also of geopolitical relationships. The EU’s new International Procurement Instrument (IPI) has been designed to “act as a deterrent to protectionism”, according to Anna-Michelle Asimakopoulou, vice-chair of the European Parliament’s International Trade Committee.
However, the IPI – which will limit non-EU companies’ ability to access the bloc’s public procurement market if their governments do not offer EU companies similar access to public tenders – have been described as “defensive”, being little more than protectionism under a guise.
The pandemic also saw countries use short-term protectionism to secure medical and vaccine supplies. US president Joe Biden evoked wartime powers using the Defence Protection Act (DPA) to ringfence medical supplies for US vaccines. This led to accusations the US was blocking other countries from accessing supplies, even if it didn’t amount to an official embargo on exports.
Despite the mounting examples, Ilaria Maselli, senior economist for Europe at the Conference Board, warned that short-term protectionist responses to the pandemic distract from wider trends. She said such patterns have been emerging since 2012 after the world began to adjust following the 2008 financial crash. These trends were later fuelled by the election of Donald Trump as US president in 2017 and his America first agenda while the pandemic exposed supply chain fragility.
Viewing this as a long-term trend demonstrates the importance of this shift. “Procurement as a function went from purely operations to much more strategic because a lot more geopolitics came into play,” Maselli told SM.
Further, she believes this increasingly insular approach to global trade, supply chains and procurement policy directly threatens future geopolitical equilibrium, and democracy.
“For a long time, there was the belief, especially in Europe, that by creating economic ties between countries and regions you would foster peace. And that was the overall policy strategy for a long time in Europe,” Maselli said. “I think that belief is not as strong anymore.”
Priorities and deglobalisation
Simply put, familiar supply chain structures are undergoing reconfiguration as protectionism means fewer connections in the network. As Maselli put it: “The period of globalisation on steroids is over.” However, she cautioned against using the phrase “deglobalisation”, arguing it reduces the nuances of how world trade is morphing. It is not just a matter of partnerships coming undone, but of the world entering a new phase of trading and supply relationships.
Research by the Conference Board found that four out of five CEOs expect an acceleration in the division of the world into competing economic blocs over the next five years. Such blocs could result in greater friendshoring – where entities form trade relationships with countries they are politically aligned with – as well as nearshoring and localisation, as governments look to avoid concentrating supply in countries and regions deemed politically unstable.
John Ashbourne, global economist at Fitch Solutions, told SM an increasingly deglobalised world could spell bad news for procurement and, more significantly, costs. “The more international trade we have in these goods, the more resilient the system is to a shock in any given country,” he said. “As this process of global economic integration stalls – or, in some areas, even reverses – this downward pressure on prices will ease. In a world that is no longer integrating ever closer we should expect to see stronger inflationary pressures over the medium to long term.”
Despite the necessary caution, the situation may not be as bad as it sounds, Ashbourne added. “It looks like the pace at which the world is globalising has stalled and we might be moving into a slightly less globalised economy. But it’s still very highly integrated,” he said. “We should just be really clear that when we talk about deglobalisation, we mean that this process is slowing, we don’t mean that we’re going back to the 1930s.”
Procurement is at the heart of this new era of trading relationships, whatever form that may take. As Ashbourne said: “It’s rules on procurement and rules on sourcing that are the key debates at the moment. And that won’t stop.”