May 7, 2020 / 3:59 PM / 18 days ago

Breakingviews - Supply chains’ tectonic shift will get viral jolt

Fisherman Giuseppe Temperani gives freshly caught fish to volunteers who will deliver it to needy families, as Italy remains on lockdown to combat the spread of the coronavirus disease (COVID-19), in the Tuscan city of Castiglione della Pescaia, Italy, April 7, 2020.

LONDON (Reuters Breakingviews) - Most people pay no attention to a machine’s inner workings until it breaks down. Empty supermarket shelves and shortages of vital coronavirus-fighting products focused attention on international supply chains. In a United States election year, it could well accelerate a rethink of globalisation.

That may sound economically sacrilegious. Between 2004 and 2017 globalisation’s ability to cut corporate taxes and other costs increased net margins for S&P 500 Index companies by 2.2 percentage points, according to Bank of America research. Even so, the bank’s February survey of 3,000 companies found that bosses at more than 80% of firms in 12 sectors with international supply chains planned to shift at least some of their operations from current locations.

There were already plenty of reasons to. President Donald Trump’s many trade fights had prompted industries from tech to carmakers to ponder moving some factories or changing suppliers. Automation could reduce the difference between emerging- and developed-market labour costs. Climate change is playing a larger role, too: The carbon footprint of a U.S.-made bicycle, for example, is 90% lower than one made in Taiwan and exported, BofA reckons.

Trump administration officials now talk of “turbocharging” the unpicking of industrial supply chains from China, home of a quarter of global manufacturing’s value-added. That could be an effective populist gambit with Americans who blame Beijing for its handling of Covid-19. It could spell trouble for so-called just-in-time manufacturers, which maintain low inventory to control costs.

Meanwhile supply chains that already had more padding, like supermarkets, may get more. Consider two countries which import half their food. In one, the United Kingdom, most retail supply chains store up to a month’s worth of stock. The coronavirus has shown how much that leaves the country exposed to broken global supply chains. Landlocked Switzerland, meanwhile, charges its citizens 12 Swiss francs a year to subsidise companies to create three-month stockpiles of fuel, fertilisers and basic foodstuffs like rice and wheat.

Throwing sand in the wheels of global trade might sound excessive were the virus a one-off. But it’s just a nastier version of a slew of epidemics over the past two decades. And there may be worse to come, along with other challenges like increasingly extreme and changing weather patterns. These will put greater onus on security of supplies, relegating cost to an important but secondary consideration.

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