An indication of the likely shifts in the post-COVID19 global economic order is visible from the Resilient Supply Chain Initiative (RSCI) proposal mooted jointly by Australia, India, and Japan on September 1. Committed to building resilient supply chains in the Indo-Pacific in the aftermath of COVID-19 pandemic, the initiative is set to fundamentally reshape the geographical character of cross-border production networks in the region.
The COVID-19 pandemic has driven home the need to address weaknesses of several traditional supply chains. The imposition of lockdowns and halt in production across locations severely affected global distribution of inputs and final products. In the beginning, the effect was mostly confined to products sourced from China. With more countries pausing industrial production, other supply chains encountered severe disruptions.
Built over decades on principles of economic efficiency, regional supply chains were clearly incapable of handling exogenous shocks of the magnitude inflicted by COVID-19. The need for restructuring them, in order to make them more resilient to unexpected disruptions, has been a fundamental lesson imparted by the pandemic.
For major Indo-Pacific economies like India, Japan, and Australia, it has become essential to diversify sourcing across various segments of different supply chains in order to minimize risks from disruption and enhance resilience. In this respect, their deep, nearly organic, trade and economic relations with China need to be reduced to avoid future production disruptions.
As COVID-19 progressed, the economic imperative behind resilience was compounded by strong political motives as India’s, Australia’s, Japan’s, and the United States’ relations with China worsened. Restructuring supply chains away from China became a major objective for these countries as concerns increased over security risks associated with production networks significantly embedded in, or connected to, China.
By disengaging strategic supply chains — semiconductors, automobiles, pharmaceuticals, and telecommunications — from China, and repositioning them substantially in countries without security threats, proponents of the RSCI hope to decouple from China in a broader strategic sense. The ostensible purpose behind the organized effort to decouple is also to develop a coalition of like-minded countries for taking on an assertive China in the Indo-Pacific.
RSCI would not have matured as a committed multi-country initiative without strong political and security compulsions. The political hostilities between China and the initiative’s proponents in recent months have been decisive in this regard. Tensions on the Sino-Indian border in the Himalayas continue to remain high following the worst military clash in decades. China’s multiple trade spats with Australia have heavily soured bilateral relations, exacerbated by repatriation of Australian journalists. China-Japan relations too have worsened significantly after old disputes over territorial claims in the East China Sea resurfaced.
The RSCI is looking to restructure cross border production networks and trade relations primarily based on geostrategic factors. This is different from fundamental economic ones, particularly cost efficiencies, that typically determine growth of supply chains. However, migration of supply chains out of China on largely non-economic grounds would still require support of some of the economic factors in order to be successful.
Financial incentives are crucial for repositioning supply chains. Businesses, including lead firms, vendors, and distributors across various supply chains, would have to be compensated for migrating to locations much less efficient than China. Japan is offering subsidies to its businesses for relocation from China. While these were initially being offered for relocating back to Japan, and also to Southeast Asia, India and Bangladesh have lately been added to locations eligible for subsidies. Japanese industries and investors have considerable presence in China, with a much larger footprint than those from India and Australia. However, over time Australia and India would also have to consider suitable incentives to attract those moving away from China.
The RSCI’s long-term success depends significantly on the extent to which Japan, India, Australia, and Southeast Asian countries join it and are able to work out common rules for effective growth of supply chains. While it’s premature to think of a common trade agreement that includes these countries, preferential investment rules, agreement on key tariffs specific to supply chains, quality standards, rules of origin for determining value addition, cross-border data flow rules, and dispute settlement mechanisms all need to be agreed upon — fast.
The RSCI is one of the first examples of a distinct anti-China geoeconomic alliance taking shape in the post-COVID-19 world. Its growth might complicate prospects for existing regional economic constructs and upcoming ones like the multilateral free-trade Regional Comprehensive Economic Partnership agreement. As the initiative expands, new trade and investment architectures would be necessary for the Indo-Pacific.
The new initiative also symbolizes segregation of global and regional supply chains along geopolitical lines. It points to the wider possibility of the post-COVID-19 global economic order being fashioned into distinct blocs of cross-border production networks representing specific political alliances. Its success might spur more such initiatives elsewhere.
Amitendu Palit is Senior Research Fellow and Research Lead (Trade and Economics) at the Institute of South Asian Studies in the National University of Singapore. Follow him on Twitter @Amitendu1. Views expressed here are personal.
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