Navigating Supply Chain Risks: OECD

A recent paper by the Organization for Economic Co-operation and Development offered its analysis on resilient supply chains, after examining evidence-based research and analysis, complemented by a series of expert discussions and multi-stakeholder dialogues, including with the participation and support of Business at the OECD (BIAC) and the OECD Trade Union Advisory Committee (TUAC).

The group notes that the research highlights the "importance of a balanced approach to mitigating supply chain risks without undermining the upside benefits that come with expanding international trade."

To secure the benefits of international trade the group notes that: "Navigating risk, not isolation, builds supply chain resilience. Policy plays a key role in creating an enabling environment for agile, adaptable and aligned supply chains that are an essential antidote to a fragile, frozen and fractured international trading system." 

The conclusions of the research are excerpted below:

Most global trade remains diversified, but import concentration is on the rise

Based on a broad assessment of supply chain structures and vulnerabilities, this report finds that most trade flows remain relatively diversified. Approximately 30% of exported products are subject to high levels of concentration in few trading partners. That said, import concentration is on the rise, as countries are increasingly sourcing products from fewer suppliers than is globally possible. The number of cases of suboptimal diversification is 50% higher in the 2020s than it was in the late 1990s.

Some sectors and countries may be more exposed to shocks than others

Economies with strong vertical links to major foreign economies tend to be more exposed to international supply chain shocks. However, the impacts of shocks occurring in domestic sectors tend to be larger than impacts of shocks occurring in foreign sectors. Industries also vary in their exposure to foreign markets. For example, the strategic manufacturing sector (including industries such as petroleum and electronics) has one of the highest levels of upstream and downstream foreign product exposure.

In the OECD, 26% of inputs for strategic manufacturing industries are sourced from abroad, and 27% of their output depends on foreign final demand. These supply chains are highly complex, often requiring more production steps and border crossings.

Relocalizing supply chains can come at a high economic cost

Modelling presented in the report demonstrates that re-localization could decrease global trade by more than 18% and global real GDP by more than 5%, with no consistent improvements in resilience. GDP stability would decrease in more than half of the economies analyzed.

Global supply chains are affected by the digital transformation and by policies pursuing environmental objectives

The digital transformation policies pursuing environmental objectives are driving change across most economies. They offer opportunities for improving supply chain efficiencies, resilience and sustainability (both environmental and social), but also raise potential risks.

Emerging sustainability requirements and the accelerated pace of digitalization are adding to pressures on supply chains, which are already facing substantial challenges from factors such as geopolitical uncertainty, economic fluctuations, and the concentration of critical raw materials (CRMs) in certain regions. However, these pressures also open the door to transformative change.

Supply chains can be resilient without undermining the benefits of open trade

To ensure agility, adaptability and alignment in global supply chains, governments play an important role as facilitators, integrators, and providers of infrastructure and emergency resources, in co-operation with the private sector. While these resilience strategies can be implemented at the country level, they are more efficient if coordinated internationally.

Policy can:

• Promote trade facilitation policies: Reduce frictions to trade and create a stable, transparent and predictable regulatory framework for businesses.

• Strengthen key supply chain service sectors: Remove market access barriers for critical service sectors, and work towards greater regulatory interoperability across countries.

• Facilitate the digitalization of supply chain operations: Enable firms to digitize processes and be more agile in responding to supply chain shocks by lowering tariffs on ICT goods, streamlining regulations and cooperating on international regulations for digital trade.

• Support international co-operation and co-ordination with the private sector: Use multigovernment trade agreements and supply chain partnerships to set rules, co-ordinate and reduce regulatory heterogeneity for the above measures, and work with the private sector to prepare for emergencies.

• Design policies that balance sustainability, efficiency and resilience: Focus on the performance of global supply chains as an ecosystem and not target a single objective (such as assurance of supply) without assessing possible trade-offs with economic outcomes, sustainability and implementation costs.