How to prepare supply chains for the next global crisis
From our morning coffee to the COVID-19 vaccines some of us have been lucky enough to receive, supply chains make modern life possible. But as we have discovered in the past year, they are vulnerable to disruption.
When the pandemic struck, lockdowns and border restrictions upended the flow of raw materials, components, and finished goods across multi-country production networks. But after the initial shocks, supply chain operations were quick to resume. Trade became a lifeline for moving food, raw materials, and medical supplies around the world. Even as the value of global merchandise trade shrank by 8% in 2020, amid the worst economic recession since the 1930s, the value of trade in medical products grew by 16%.
Sudden shocks create dramatic headlines, such as a giant container ship stuck in the Suez Canal. But a slower-moving set of threats comes from climate change. When sea levels rise and ports flood, or water scarcity causes crop yields and hydroelectric production to fall, the damage is lasting.
As climate change intensifies, open trade will be essential to bring essential climate-adaptation goods and services to where they are needed. Consider coffee. Estimates are that climate change will halve the suitable growing area for the crop, endangering the livelihoods of more than 100 million people. In response, development agencies and international brands are working with farmers to shift to heat- and drought-resistant varietals and introduce farming methods that save on water and fertilizer.
Nonagricultural supply chains are also vulnerable to climate-induced disruption. McKinsey estimates that by 2040, semiconductor supply chains in Southeast Asia will be two to four times more vulnerable to intense hurricanes.
International trade must start taking climate risk seriously, and this means investing in resilience now. As we have seen over the pandemic, international trade and supply chains help maintain access to critical supplies in a crisis.
International cooperation will be crucial. Early in the pandemic, reopening borders to trade helped avert a food crisis. As climate threats intensify, governments must keep working together. One way to enhance cooperation would be for states to craft a new framework for trade during a global crisis. Cooperation between the public and private sectors would also help with assessing and responding to long-term climate risks.
Companies have begun investing in climate adaptation as an insurance mechanism. For example, Seagate, a semiconductor manufacturer, and Fujikura, an electrical equipment manufacturer, have both invested in making their factories in Thailand more flood-proof after a 2011 disaster wiped out production. Studies indicate that companies that include climate science in their risk assessments do better at mitigating supply chain risks.
More open trade would help accelerate the deployment of cutting-edge technologies for climate change adaptation and mitigation. Lowering tariffs and nontariff barriers would lead to increased specialization, scale, and competition in these environmental goods and services. This would lower the costs for all countries to get to net zero and adapt to a hotter world.
An encouraging example of this is the Agreement on Climate Change, Trade, and Sustainability (ACCTS) initiated by Costa Rica, Fiji, Iceland, New Zealand, and Norway in 2019. The five countries aim to use trade rules to tackle environmental degradation by eliminating fossil fuel subsidies, removing tariffs on environmental goods such as wind turbines and solar panels, and developing guidelines for eco-labeling.
Trade and investment for climate adaptation will help future-proof our economies. Making supply chains more resilient to climate change will almost certainly make us better prepared for the next shocks, whatever the source.
Ngozi Okonjo-Iweala is director-general of the World Trade Organization.
Patrick Verkooijen is CEO of the Global Center on Adaptation.
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