A global debate is raging on the efficacy of freight and global trade at a time when countries’ external dependence and resilience is being tested. At the heart of this is the Just in Time (JIT) principle, which connects seamlessly products at varying manufacturing stages, while reducing inventory and improving efficiency. While this has worked wonderfully for decades, today, ‘Just in Time’ is not only woefully expensive, but it is running late!
When the world’s manufacturing capital was under lockdown in the early days of the pandemic, there was a widespread belief that demand-supply problems would not persist. However, a few months later, we even fought – fist and kicks – in supermarket aisles for some commodities, like toilet paper. While having a clean butt is important, the challenge was much deeper, underlining how globalization cemented geographical dependence and production, along with an unsustainable trading landscape. Look at the semiconductor shortage, a key element in millions of products, forcing car manufacturers around the world to cut production while global semiconductor makers predict record growth in margins because some customers are willing to pay higher to secure delivery. In a time where we need to reduce the green premium on green technology – essential for decarbonisation, this is an area of increasing concern.
A change in consumption and shipping patterns is also witnessed, where not only the demand for pandemic essentials is high, but higher disposable incomes in many countries are also driving demand for non-essentials. Interestingly, the scarcity economy is driving up freight costs by almost 10x, while the schedule reliability is in a dismal low of 35% (from pre-pandemic 80%), and some routes are taking up 83% longer as opposed to 2019. Global trade is broken, and when over 80% of the goods we consume are carried by ships, this is an area where policy makers are now losing sleep over. Imagine the frustrations that will be observed over Christmas shipping! This is perhaps why recommendations calling for increased manufacturing & supply chain resilience is on the rise, where Google Trends estimate an 89% increase in popularity in just a few months following the first Wuhan lockdown.
In fact, this is not new. Sustainability models have been calling for more resilience for decades, and beyond the pandemic, we have the underlying issue of climate change. With the recent bleak IPCC report (Aug 2021) and pressures on governments to increase climate commitments, a deep decarbonization process is desired. The NDC Synthesis Report (Sep 2021) underlines that the most popular measure is Renewable Energy, a key component in fighting climate change. Not only retrofitting energy grids seamlessly looks challenging, but there are also other economic challenges impacting on investment and trade. Tackling the upcoming transitioning challenges for energy, carbon offsets, efficiency quotas by governments, amongst others, is extremely complex when trading between geographies, as all this highlights the perceived need for increasing capital expenditure to expand capacity, pushing higher prices for access to shipping and products, impacting both governments and consumers.
A traditional approach to regulating trade is that of protectionist policies, favouring allies over foes. However, this may be outdated as it contributes to the shortage economy, impacting principally on consumers. A pre-pandemic example is that of Brexit, causing a consumer price rise in the UK due to lorry driver shortages and the costs of Brexit-induced red tapes. With a 4% economic yearly hit over 15 years, costing GBP 3,600 to every UK household, arguments can be made that trading blocks need to be more inclusive and open to cross-border/institutional trade. Two central questions to this will be: (1) how will countries retain their geo-political mileage and resilience if they do accept larger cross-border trades? and (2) how can countries meet, and fund shortage demands while pursuing decarbonisation agendas?
The latter question is interesting as it will be paramount that countries do not relax emissions targets just to meet trade shortage demands. Instead, we need well-crafted plans that can navigate the pandemic-induced trade challenge while offering an outlook to the future: For energy policies, this will mean moving from fossil fuel to renewable energies, while supporting innovative research aligning with longer term plans, like hydrogen cells. This journey, however, has a cost, and even more if transitioning must be done fast. But that’s only if there is a lack of foresight, and a lack of willingness and incentives. It can (actually, it must) be done, especially in our time – offering geographies with new opportunities to redefine their economic landscape. It can even be used as means to repair socio-economic fractures and improving Gini Coefficients; hence as avenues to seek equity.
COP26 reinforces this narrative and countries and corporations that fail to understand that decarbonisation is key, will be forced in a corner and pay a heavy price. While we battle to ‘adapt or perish’, the conversation must also be geared towards who is going to bear the price of sustainability transitions? Beyond the need for operationalisation of rulebook of the Paris Agreement to access the promised USD 100 Billion pledged by developed economies to their developing counterparts, fundamental questions must be framed: who is going to pay the price of decarbonisation? For countries, is it developed ones? For corporates, is it countries or consumers?
While it may be easier for corporates to offset the cost of increased capital expenditures to consumers, it may not be the most ideal solution for the climate or the society. Fans of the popular Netflix show ‘Squid Game’ will understand this. What is required is a deeper and more meaningful re-alignment between nations and global prosperity targets, and between shareholder and stakeholder interests. A global re-balancing act is thus required, and for those choosing the ‘red pill’, it will be a willingness to adapt to life-changing truth, opening doors for unmapped opportunities.
Dr. Zaheer Allam is writing as Research Associate at Deakin University and Université Paris 1 Panthéon-Sorbonne.
Mehul Bhatt is the Chief Strategy and Sustainable Development Executive at Rogers, Managing Director of Velogic Kenya, and occupied executive roles at A P Moller-Maersk and Maersk Tankers in Denmark, East Africa, and India.