Photo by Quick PS on Unsplash
In 2021, every car factory around the world sat idle. Not because of a lack of labor or funds. But because of a tiny piece of technology known as the microchip. A single disruption in these select factories slowed the economy, exposing a previously undiscovered flaw: The modern global economy relies on the products of just a few countries.
Countries specialize in products they can produce both cheapest and fastest. Take Nauru, the world’s smallest island nation. The island is almost entirely dependent on phosphate mining, and was one of the richest countries per capita in the 1970s, until it finally ran out of the finite resource and collapsed. Globalization created scenarios where certain countries only produce the cheapest and most profitable goods, leading countries worldwide to rely on them for essential materials. Furthermore, in the same capacity, companies also moved their factories overseas, clustered in the countries with the cheapest wages or weakest regulations. This moved production away from domestic areas, creating a system of reliance.
Not only are countries outsourcing their work to other, cheaper countries, but many essential goods are only produced in a few places. For example, take semiconductors, the crucial piece of technology that broke the economy in 2021. A small number of countries produce these vital advanced chips. These chips are not only necessary for cars, though. They are also used in everyday objects like your phones, medical devices, and even military systems. Losing access to just one supplier creates a chain reaction, which slows the global economy.
Yet, companies still decided to take on the risk. Cutting these costs increased profits in competitive markets. Who doesn’t want more profit? Through their eyes, backup suppliers were simply seen as unnecessary expenses. This just-in-time manufacturing minimized their inventory at the cost of safety margins, with the lack of safety causing a higher chance of factory failure.
But what really happens when the system breaks? Well, first, understand the causes of what can create a failure. COVID, wars, trade conflicts, and even natural disasters. All these factors can disrupt production. In these cases, shortages spread globally within just a few weeks. Consumers and workers feel affected, even though they are far from the source. As disruptions spread, it became clear that economic dependence carries political consequences as well. Countries that control key industries gain political leverage, with this economic dependence turning into national security concerns. Recognizing these risks, governments have begun searching for ways to reduce dependence on these countries. They are pushing for reshoring and supplier diversification, with 62% of industrial companies making significant changes to their supplier bases according to a 2022 EY study. Additionally, governments are using “friend-shoring”, a strategy where governments and companies shift their supply chains to “politically friendly” countries with which they are allied. Although these solutions increase costs, they reduce vulnerability to a political advantage to countries that are the base of global economics.
However, reducing risk often means sacrificing some of the efficiency that globalization once promised. If these solutions reduce risk, why weren’t they done earlier, and what do they cost? In our current world, highly efficient supply chains rely on the cheapest production of goods and minimal inventory to keep costs low. But, diversifying production across multiple countries raises average costs, with some countries having higher labor costs. This reduces the advantages that globalization once created, with the trade-off being political stability.
Globalization prioritized efficiency over resilience, creating an economy that is cheap but fragile. Diversifying the economy increases political stability, but it trades away the cheapness that globalization promised. The challenge ahead is not to choose between globalization and efficiency, but to decide how much efficiency the world is willing to sacrifice to achieve both.
Be First to Comment