As geopolitical tensions, climate change and a public health emergency combine to form a perfect storm, the issue of supply-chain management has become a closely studied and debated matter, particularly with China’s role as a manufacturing powerhouse that has dominated global value chains. Jagannath Panda of the Manohar Parrikar Institute for Defence Studies and Analyses examines initiatives to create alternate global supply chains that are durable, resilient and less reliant on China.
Shifting global supply chains: China’s dominant role as a manufacturing powerhouse and its trade friction with other countries have prompted talk of diversification and decoupling (Credit: JAXPORT)
In April 2021, Australia, India and Japan launched the Supply Chain Resilience Initiative (SCRI) in Indo-Pacific. First conceived last year, the SCRI is the product of the supply-chain disruption caused by Covid-19, which served as a wake-up call exposing states’ excessive dependence on China for critical products such as food and pharmaceuticals. Furthermore, growing tensions between the Chinese and “like-minded” Indo-Pacific partners such as the United States, exacerbated by Beijing’s aggressive military and diplomatic tactics, only made risk diversification by moving value chains away from China a more urgent goal.
In this context, the Indo-Pacific centered SCRI has been conceived as a mechanism aimed at enhancing economic and political security by challenging China’s dominance in trade and Beijing’s growing clout from its more robust foreign policy particularly its ambitious Belt and Road Initiative (BRI). How does the SCRI stand in the post-pandemic economic order, especially vis-à-vis the BRI? Is SCRI focused solely on decoupling from China? And is a complete decoupling from the world’s second-largest economy by fostering alternate global supply chains a feasible goal?
The SCRI vs the BRI
Covid-19 has proved to be a black-swan event in global economics and geopolitics, over and above its grotesque impact on human life. It revealed the vulnerabilities of being too dependent on complex supply-chain networks that are China-centric. Beijing’s “wolf warrior” diplomatic tactics – such as banning imports or imposing massive tariffs to assert pressure or exact retribution for perceived slights – have only accentuated the risks.
In effect, Chinese aggressiveness has marked a shift away from garnering political influence through economic prowess and by promoting trade and investments. The BRI was conceived on the basis of such a strategy, aimed at providing infrastructure financing to countries along its land-based corridors and maritime passages to forge a massive economic network with China at its core. Although not a supply chain-focused initiative, the BRI seeks to reconfigure supply chains so as to reinforce China’s global economic dominance.
The SCRI, while not a counter to the BRI per se, does hold immense potential to help reshape and restructure Indo-Pacific supply-chain networks. It is, therefore, of major concern to China. In response to the creation of SCRI, China stated that it “hopes” countries will respect “market rules” while dismissing the initiative as “unrealistic”.
That three major Indo-Pacific democracies – each of which has a close partnership (if not an alliance) with the US – launched the SCRI gives the framework far greater acceptance and flexibility compared to China’s BRI, which has become the target of skepticism and allegations of debt-trap diplomacy. Notably, the three launch partners are, along with the US, the members of the Quadrilateral Security Dialogue, known as the Quad – an informal strategic grouping that began as a cooperative grouping for coordinating humanitarian response. There is potential for “expansion based on consensus”, with the US and “like-minded” countries joining. It could also fuse with other frameworks such as the proposed Quad Plus, which could include New Zealand, South Korea and Vietnam in the region, and the Blue Dot Network (BDN), a public-private initiative led by Australia, Japan and the US to provide assessment and certification of quality infrastructure development projects worldwide.
There are several other points of convergence between the SCRI and opportunities for Indo-Pacific collaboration. The concept fits well with the ideals of the Quad states, specifically the commitment to “open, transparent, rules-based and free economic transactions”. There are also prospects for meshing the SCRI with a host of national and regional initiatives including Japan’s Expanded Partnership for Quality Infrastructure (EPQI); India’s Sagarmala (to enhance the logistics sector), Bharatmala (for roads and highways), and Indo-Pacific Ocean Initiative (IPOI) for maritime security and stability; Australia’s Pacific Step-up to provide support for Pacific island countries; the US’s Free and Open Indo-Pacific (FOIP) strategy; Seoul’s New Southern Policy (NSP) to engage ASEAN members and India; and even Taiwan’s New Southbound Policy (NSP) for its relations across the region. (Taiwan is in talks with the US about securing semiconductor supply chains, which could add significant value to the global chip-supply networks currently dominated by China.)
Beijing’s BRI has already come under scrutiny by some of Asia’s economic powerhouses such as India, Japan and Australia. The pandemic has caused more setbacks and major delays to projects. The geographic proximity of the SCRI partners should make for more efficient arrangements, offering the opportunity for market diversification and greater resilience of supply chains by sharing risks and best practices, pooling competitive advantages, deploying digital technology, and adopting robust policies and contingency plans to avoid disruptions.
While the aims of the BRI are lofty – to “contribute to the global economic rebound by stabilizing supply chains among countries along the BRI route” – the reality is rather bleak. The initiative appears to be spread too thin without sustainable methods of maintaining an undisrupted flow of services, finance and information. How smooth information flows affects the efficiency of product synchronization, supply-chain management, and capability building. Despite reducing lead times in supply chains by linking far-flung regions, the issues of sustainability and the risk of interruption remain obstacles to the BRI achieving a high level of efficiency. In these areas, by contrast, the SCRI could excel.
The practicality of decoupling
Effective optimization of supply chains will lead to better collaboration, improved control over quality, a higher rate of efficiency, better demand-supply delivery, optimization of shipping, reduction in overhead costs, and improved cash flow as well as greater risk mitigation. Amid increasingly tense ties with China, the India-Australia-Japan trilateral of democracies is well placed to lead an Asia-led supply chain restructuring. India has the same demographic dividend as China did years ago. Reeling from a crushing second wave of Covid-19, India’s economy is taking severe hits from which its manufacturing industry will take time to recover. By standing alongside seasoned partners such as Japan and Australia – themselves nursing economic wounds from the pandemic – the three can combine to build SCRI into a strong competitive venture, taking advantage of their and US foreign-policy activism in the Indo-Pacific, especially with regard to China.
How can such an optimistic vision be implemented? Would the SCRI lead to a decoupling from China?
China’s prevailing economic supremacy is hard to discount or ignore, especially as the global economy will depend heavily on it to drive post-pandemic recovery (as it did after the 2008 financial crisis). What is important to note that the “Big Four” Chinese banks – Industrial & Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC) and Agricultural Bank of China (ABC) – all play a critical role in shaping global financing. They have maintained their rank as the world’s four biggest banks, having a total asset value of US$14.821 trillion in 2020, a 7.52 percent rise over the previous year.
China is a robust and continuously growing market, with a vast sophisticated middle-class consumer base in Beijing and other highly developed and industrialized metropolises along its coast and inland. The state sector remains a key fixture in China-centric global supply chains and is therefore vital for the vitality of the private profit-driven sector. China’s banks are deeply involved in global projects. The Export-Import Bank of China (China Exim Bank) supports 1,000 projects worth a combined US$80 billion while ICBC alone is working on 212 projects worth US$159 billion. A complete decoupling from the world’s second-largest economy, which is so deeply integrated into the global monetary system, is highly improbable and thus cannot possibly be the goal of the SCRI.
Yet, a partial decoupling in select areas is probably possible as countries and industries are looking for diversification (for risk management and security) and new market bases. This will mean meticulous implementation of the SCRI. As tensions with China rise, critical technologies naturally form one area which will see some decoupling amid cyber-security concerns. The exclusion by the SCRI states and the US of China’s Huawei Technologies from participating in 5G rollouts points to this. Nevertheless, China’s communications and telecommunications sectors are growing rapidly, making it difficult for other states to gain substantial market share and decouple entirely. Other industries – such as capital goods, healthcare equipment and services, banking, pharmaceuticals, semiconductors – hold relatively less weight in the market and could therefore be potential areas where partial decoupling would be feasible.
In the great-power competition between China and the US, critical and emerging technology is certain to be a focus of the supply-chain debate. During the pandemic, vaccine distribution has become another contentious issue. As concern about climate security mounts, supply-chain efficiency and sustainability have also become major priorities. Quad leaders highlighted all three topics at their virtual summit in March when they launched working groups for each. The SCRI could be a valuable mechanism for the related supply chains. It could, for instance, be used for effective distribution of vaccines using cold supply chains.
Similarly, by virtue of being a venture focused on resiliency, the SCRI could be instrumental in building green and sustainable supply chains. Critics have labelled the BRI as an “environmental disaster” for Southeast Asia that poses grave threats to sustainable supply chains and causes pollution and the production of harmful waste. The SCRI could emerge as a new post-pandemic mechanism that prioritizes ecological sustainability, drawing on the green policies of the launch partners and other states that may join such as South Korea with its Green New Deal to put together sustainable supply chains. Likewise, it could find synergy with the Quad’s objective of initiating a discussion on critical technology supply chains. The involvement of India (with its low-grade tech manufacturing capabilities) and, potentially, Taiwan (with its robust advanced tech industry), could help reduce reliance on China.
China’s focus on supply chains was underscored by supply-side structural reforms it initiated in 2016, which sought to stimulate growth by focusing on new, emerging industries, among other measures. The SCRI might well be construed as an alternative to the Chinese economic model rather than to just the BRI. Although it may only pose a challenge in certain sectors and not as a pathway for complete decoupling from China, if executed effectively, the SCRI could pose a significant challenge to China’s economic power in certain domains where the Chinese economy is losing weight.
In this vein, the SCRI could dramatically reduce the political and strategic reach of the BRI by countering or at least limiting some of the political clout that China has been gaining through its signature foreign economic policy tool. For the SCRI to succeed in such a goal, it must be enhanced in a constructive manner and executed in close collaboration with third countries. The US, ASEAN members and even some Middle East states, among others would be vital to any discussion of supply-chain reconfiguration. If the SCRI develops with a long-term vision, not as a reactionary plan, it could evolve into a strong, vital institutional framework in the Indo-Pacific.
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Manokhar Parrikar Institute for Defence Studies and Analyses