Europe is facing disruptions to its energy supplies, the Middle East and Africa are grappling with grain shortages, and virtually everyone has been struggling to get their hands on semiconductors.
As disruptions to flows of vital products become increasingly common, economies and companies have important choices to make. The most fundamental seems to be whether to retreat from global integration or reimagine it.
For many, the temptation to retreat could be strong. From Russia’s war on Ukraine to the Sino-American rivalry, the world order is increasingly contested, and when value chains are global, a single disruption can reverberate across the planet.
However, withdrawing from these value chains would not be nearly as easy as one might assume.
For decades, the world pursued rapid and comprehensive economic integration, and for good reason. By enabling greater specialization and economies of scale, global value chains have enhanced efficiency, lowered prices, and increased the range and quality of available goods. By supporting economic growth, this boosted incomes and employment — albeit not for all — helping to lift people out of poverty.
With integration came interdependence, and no region today is even close to being self-sufficient. Every major world region imports more than 25 percent of at least one important resource or manufactured good.
In many cases, the figures are much higher. Latin America, sub-Saharan Africa, eastern Europe and Central Asia import more than 50 percent of the electronics they need. The EU imports more than 50 percent of its energy resources. The Asia-Pacific region imports more than 25 percent of its energy resources. Even North America, which has fewer areas of very high dependency, relies on imports of resources and manufactured goods.
This undoubtedly generates risks, especially when it comes to goods for which production is highly concentrated. For example, most of the world’s lithium and graphite — both used in electric vehicle (EV) batteries — is extracted largely from three or fewer countries. Natural graphite is highly concentrated not because of reserves, but because more than 80 percent is refined in China.
Likewise, the Democratic Republic of the Congo extracts 69 percent of the world’s cobalt, Indonesia accounts for 32 percent of the world’s nickel and Chile produces 28 percent of the world’s copper. A disruption of supplies from any of these sources would have far-reaching consequences.
The question is whether countries — and businesses — can mitigate these risks without giving up the myriad advantages of global trade. Some are already embracing diversification. Many consumer electronics companies have expanded their manufacturing footprint in India and Vietnam to reduce reliance on China and tap into emerging markets. Similarly, the US, the EU, South Korea, China and Japan have all announced measures to increase domestic production of semiconductors.
Although semiconductors account for less than 10 percent of total trade, products that directly or indirectly depend on them account for an estimated 65 percent of all goods exports.
However, diversification can take time, and often requires significant upfront investment. Minerals — among the most concentrated products in the global system — are a case in point. As the International Energy Agency has said, developing new deposits of critical minerals has historically taken more than 16 years on average.
This is not just a matter of developing new mines. Countries must also build their processing capabilities and secure workers with the relevant skills, and done in a way that mitigates the considerable environmental impact of mining and processing.
Innovation could enable participants to circumvent these hurdles. Already, efforts are being made to develop technologies that are less reliant on natural graphite, and EV manufacturers are experimenting with approaches that use less cobalt, or none at all. Faced with rising palladium prices, the chemicals multinational BASF has developed a new catalyst technology that allows for partial substitution with platinum.
Yet another way to boost resilience could be to change approaches to sourcing. Companies can work with one another and with governments, through public-private partnerships, to leverage their pooled purchasing power, strengthen their supplies of vital goods and help build more sustainable economies.
Models of such cooperation are already emerging. The Canada Growth Fund aims to use public funds to attract private capital to accelerate the deployment of technologies needed to decarbonize the economy, including by increasing the domestic production of critical materials such as zinc, cobalt and rare-earth elements. The First Movers Coalition — comprising more than 50 private companies globally — also has pledged to use its collective purchasing power to create markets for innovative clean technologies across eight sectors that are difficult to abate.
Such strategies show that we can mitigate risks and build economic resilience without abandoning the interconnectedness that has enabled more than a billion people to escape poverty in the past few decades. Rather than attempt to retreat from the global economy, we must reimagine it.
Olivia White, a senior partner in McKinsey & Company’s San Francisco office, is a director of the McKinsey Global Institute. Jonathan Woetzel, a McKinsey senior partner, is Leader of McKinsey’s Cities Special Initiative and a director of the McKinsey Global Institute.
Copyright: Project Syndicate
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