[100-Year Life Finance] Supply Chain Restructuring Changes the Game of Trade

Energy and Intermediate Goods Issues Hard to Resolve
US-China Rivalry Deepens Bloc Formation
Supply Chains Likely to Shake Global Economy for Years

Bottleneck phenomenon. It is a term that has frequently come up in conversations over the two years since the outbreak of COVID-19.

The bottleneck phenomenon has progressed in four forms. The first is energy. In China and India, coal stock shortages were an issue, while in advanced European countries, natural gas shortages became a problem. Since eco-friendly energy production varies depending on the weather, supply and demand are incomplete. To compensate for this, coal and natural gas are needed, but problems arose due to unstable supply.

The second is goods, including intermediate goods. Many of the products that experienced supply disruptions were low value-added goods produced in emerging countries. Therefore, the shortage of goods sparked various imaginations. One such imagination was that if a trade dispute between the U.S. and China were to break out again, the U.S. would also have to bear considerable costs. During the COVID-19 phase, China realized that its domestic products could be a weapon to pressure the U.S. This is because without China, the U.S. cannot even secure basic quarantine supplies. So, if the U.S. initiates a technology dispute against China over semiconductors, China can respond with products directly related to daily life. To prevent this situation, the U.S. must either secure production facilities domestically or find another emerging country outside China, which is not an easy task.

The third is logistics bottlenecks. In August last year, the on-time performance index, which shows whether global shipping companies kept their scheduled timelines, dropped to 33.6%. This was the lowest in 10 years, indicating how severe the logistics bottleneck was. The logistics supply shortage occurred due to excess demand. Since 2018, shipping companies had reduced the number of ships, but suddenly faced difficulties as cargo volume surged.

The last is labor. Filling low-wage jobs has become difficult. In the U.S., disaster relief funds and expanded unemployment benefits have weakened the willingness of low-wage workers to work. While the labor market supply shortage is expected to ease as household savings decrease, the increased wages remain.

Among the four bottlenecks, some can be naturally resolved over time, while others require structural changes to be resolved. Labor and logistics will naturally ease over time. Emerging countries will see a natural weakening of labor shortages as COVID-19 subsides, and the U.S. will experience easing as accumulated savings decrease. The logistics supply shortage can be easily resolved with a slight increase in the number of ships.

Energy and intermediate goods are different. Energy, especially oil, is unlikely to see fundamental changes. Oil is a product with a long turnaround time, taking over 10 years from exploration to commercialization. Since current oil prices are determined by past investments, prices are bound to continue fluctuating wildly. The bigger problem is goods. In the future, goods supply chains will be regionally dispersed. In the past, large factories were built in China, and supply chains were centered there, but rising costs including wages have eliminated reasons for global companies to maintain production facilities in China. Naturally, this will lead to fragmentation with production bases established regionally.

Block formation is also likely to intensify. The U.S. is leading efforts to reduce China’s influence in goods production by attempting to form blocks with allied countries. The attempt to form a semiconductor alliance with four countries including South Korea is one aspect of this block formation.

Supply chain restructuring will continue to be a major theme permeating the global economy for the coming years. Since it is a powerful issue that can change the landscape of trade, active response is necessary.

Lee Jong-woo, Economic Columnist