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Jabil Blogger Asks: Is Regionalization the Answer to Supply Chain Risk Mitigation?

By Yann Le Derf, Senior Director of Supply Chain Management, Jabil Healthcare

In his 1776 book, “The Wealth of Nations,” economist Adam Smith introduced “absolute advantage” as the ability to produce goods and services more efficiently than competitors. Nineteenth century British economist David Ricardo built on this with what he called “comparative advantage”: the ability to carry out a particular economic activity (such as making a specific product) more efficiently than another activity. Although these theories are more than 200 years old, they continue to influence our perspective of globalization.

After all, if a country can produce a certain product or service cheaper and more effectively than other countries can, it should focus on producing that good or service, and other countries should buy this good or service from them. Theoretically, this process fuels nations to be more competitive and efficient, which promotes innovation within an economy.

However, over the past 10 years or so, the globalization model has come under scrutiny and is being increasingly challenged by various geopolitical events, including tariff barriers between major trading blocks. Between October 2018 and 2019, the WTO recorded 102 new trade-restrictive measures, covering $747 billion of trade flows. The COVID-19 pandemic has further challenged the concept of economic globalization.

Is COVID-19 the Last Straw for Globalization?

According to Philippe Legrain, senior fellow at the London School of Economics, the COVID-19 pandemic may actually be the tipping point that pushes organizations to re-think and establish a supply chain closer to home (i.e. regionalization). For instance, U.S. companies are likely to shift some of the manufacturing production back to North America. The recently signed trade deal between the U.S., Mexico and Canada (the USMCA Agreement) is likely to accelerate this process. Concurrently, European companies are potentially relocating manufacturing to Eastern Europe, Turkey or North Africa.

Meanwhile, government interventions and attempts at regulating international supply chains are increasing. A Gartner report published in May 2020 pointed to Japan releasing a multi-billion-dollar stimulus package to help their companies bring manufacturing back to the country.

In the healthcare industry, which is critical to maintaining the health of nations during pandemics, a number of countries and regional trading areas (such as the U.S., European Union and India) have restricted exports to other countries to ensure local supply as well as insisting on a “Made in USA” or “Made in the European Union” label.

The notion of “true cost economics” may also increasingly play a part in the drive for governments to regionalize or localize manufacturing for sectors and products considered strategically important.

True cost economics consider the difference between the market price or cost of a product and the comprehensive cost and benefit of that product to society. In the case of healthcare equipment such as ventilators, the inability to meet rising demand during a pandemic has had a profound impact on the most severe COVID-19 cases. The personal protective equipment (PPE) shortage during the first few months of the pandemic was a factor in our inability to go back to some kind of normalcy, which has had a negative impact on the global economy, employment and the welfare of populations.

Can we expect a less global world with increasingly regionalized trading tendencies?

The recent agreements between the three major trading blocks (North America, the European Union and the Asia Pacific) seem to point this way. Within these areas, products and supply chains would benefit from relative freedom of movement, which may become increasingly restricted outside of those trading zones.

However, should organizations solely look at regionalization, macro-economic and political trends and risks associated with them to redesign their supply chain with a view to making them more resilient?

According to the recent Jabil-sponsored Special Report: Supply Chain Resilience in a Post-Pandemic World, the ability to respond quickly to business and supply disruption as well as resulting risk reduction are the guiding factors when trying to redefine supply chain needs.

Download the full survey report.

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