On Economic Resilience

Introduction

Resilience has become one of the most popular words used by leaders when discussing international trade and economics. For example, in May 2023 there was the ‘G7 Leaders’ Statement on Economic Resilience and Economic Security’. There also are formal agreements such as the recently signed US-led ‘Indo-Pacific Economic Framework for Prosperity Supply Chain Agreement’, whose stated headline objective is to make supply chains more resilient.

Resilience is of course a comfortable word, hard to argue against. Defined as the ability to withstand difficulties, it seems obvious that should welcome this for an economy, trade policy, or supply chain. Arising in particular from the double shocks of covid and Russia’s invasion of Ukraine, there has been an understandable desire to ensure that problems encountered then will not be repeated.

These are however problematic examples. The supply chain response to covid was near exemplary, in that the goods needed to respond to a pandemic were quickly produced, not least the vaccines that appeared at amazing speed as the result of an international collaboration. By contrast, national back-up stocks of various materials were demonstrated to be poorly maintained in too many cases.

Restrictions on imports of energy from Russia led to doom-laden predictions of the impact on Europe in particular, but once again supply chains evolved. While there has been an inflationary surge, this is now easing, and the lights stayed on. What makes this an even worse example is that it was the political leaders themselves that had negotiated a position of dependence for their countries.

Arguably, supply of goods is more resilient on any standard definition than at any time in human history. A huge array of products is available to consumers in developed countries for almost immediate purchase and delivery. While there can be particular shortages, for example various pharmaceuticals have been reported in short supply at different times in different countries, broad shortages are rare.

This isn’t to say that there is no problem. How products come to consumers is largely hidden from view, and in that situation it is understandable that governments are concerned. This is amplified by the inclusion of potentially hostile powers in this supply. In the event of break-down, there is vulnerability.

Equally, there also seems to be a use of resilience as a politer way of talking about protectionism, not least with reference to economic relations with China. One could argue that we are seeing a step towards resilience being a general exception from world trade rules, at least de facto. One where countries justify subsidies or outright product restrictions on the grounds of resilience, as an extension of the national security argument.

There is also the less dangerous but more likely scenario in which various government policies introduced in the name of resilience actually have precisely the opposite effect. This would be particularly likely in the situation that resilience was actually cover for national production.

Defining resilience and the modern global economic system

While exact figures are unattainable, and estimates differ, it is reasonable to assume that around 80% of world trade takes place in supply chains. Perhaps half of this in turn is trade within the same group of companies. This isn’t just a matter of goods trade, since services also form part of goods supply chains, as well as forming their own in sectors including financial, broadcasting, education and so on.

These supply chains are almost entirely run by private companies, and collectively form a network that dominates global economic activity. Most have been entirely constructed since 1990, driven in particular by the opportunities offered by technology, and around the constraints put in place by regulation.

Governments undoubtedly assisted the creation of this network through pursuing generally open borders with regard to goods, services, and investment, but it hard to link particular policies beyond this to the growth of supply chains. Though it is popular in some circles to see the creation of the WTO as a high-point for designing ‘hyper-globalisation’, the evidence of what happened against what was agreed then doesn’t support the theory.

What is notable in the recent debate is how the creation of this modern global economy is largely ignored in political discourse, particularly in the main centres of discussion such as Washington, London, and Brussels. While discussion of Free Trade Agreements occasionally touches on advantages to supply chains, it is more usually focused on support to exporters of wholly obtained products, or cheaper specific imports.

This discontinuity helps explain the emergence of resilience as a key international economy concept. Going back to the Brexit referendum of June 2016 one can see the slogan “Take Back Control” as encompassing in part the idea of a country at the mercy of foreign forces. This goes alongside what has been seen in many countries of employment losses in specific communities seen to have been dictated by a remote corporation.

Following from this, resilience could be defined as maintaining political support for the economic fundamentals. There is a reasonable argument that between the actions of companies and governments this was ignored, and that there has to be space within supply chain networks for greater consideration of national interests as expressed by politics.

Such an approach would tie into one of the more reasonable definitions of resilience applied to date, which is the need for governments to understand the supply chain networks that apply to their country. For core products like food or drugs, there is a reason to be worried if there are particular dependencies, and action should then be taken. When Japan established their economic security programme, working with business to provide a clear picture of the economic situation was a core part of this.

In both of these cases, the international economic law considerations of resilience may be limited. If there is a situation where governments simply cannot get information from multinationals then there may be an issue, but this would not be any kind of new situation, such tensions have existed on different issues for some time.

Other meanings of resilience are increasingly problematic. Most commonly considered is the idea that there are currently problems in supply which governments can fix particularly by subsidising their own production, or blocking what might be unfair competition with a view to establishing dominance. This goes further with the concept of ‘friend-shoring’ where supply chains should operate only among allies, although this may just be a step on the road towards resilience as either meaning cutting China out of supply chains entirely, or of far greater domestic production.

Part of the US reasoning for these positions is that China’s dominance of manufacturing goods supplies is inherently not resilient, and ensuring their own manufacturing jobs is inherently the better option. While some of this can tie back to the concepts of political resilience, there is no doubt that the argument in the US is taking on increasingly protectionist overtones. What is in turn notable is how even the closest US allies, Australia, the UK, and Japan, are not following this approach. Instead, alongside the EU, there is an attempt to find a more nuanced approach that can be labelled ‘de-risking’, though what this means in terms of actions remains to be seen. Diversity of supply options is however a much more reasonable approach.

Overlaying regulatory activity onto resilience introduces even further complexity. Arguably the need to meet ever more stringent regulations is a factor that reduces resilience by limiting the number of providers of particular products. Indeed, this is one of the factors that has helped China, that it can produce at scale and low cost meeting the regulations of others, a model that is now seen in other areas such as Brazil with regard to agricultural products.

This link between regulation and resilience is another that is rarely made in between the more established positions of whether to regulate or not, but there is a growing awareness in the EU in particular that its high costs might be leading to poor economic outcomes. With continued general demand for a high level of regulation, this is leading to the attempt to essentially export the problem by forcing foreign producers to meet EU production standards. This is turning out to be both unpopular and also heading into the territory of likely WTO disputes.

Such trade disputes are already made more likely by the loose and hidden definitions of resilience. What can seem like a harmless way to reach international agreements could be leading to a greater fracturing of global trade rules.

Developing the concept of resilience

There is always a chance that a concept like resilience simply falls out of fashion. This could be for good reasons, such as that it is seen as too overtly protectionist, or bad ones, that it is replaced by overt decoupling as populist nationalism continues to spread.

Assuming though that resilience remains a relevant term, then it should be helpful to establish a wider understanding of what this means, and what should be excluded. At the very least, to ensure that the term is not simply taken to mean anything that a government may want to do.

In the first instance it would be helpful to restate that trade has increased overall resilience in the global economy. Responses to covid and energy crises are actually very good examples of this, but it can also be seen daily in products available around the globe, or the way that disruptions such as that recently in the Red Sea are not actually making a notable difference. There is also absolutely no evidence that greater domestic production makes an economy any more resilient to shocks, and plenty that the exact opposite is the case.

That said, supply chain networks cannot be considered as a faultless ‘black box’ which has sometimes been suggested. There is a reasonable case that governments need to know what is happening with their own economy, and that they haven’t to a sufficient degree. Primarily though this should be a matter of domestic operating conditions, and not one that requires the intervention of international economic law. There may be an overlap to core TBT and SPS provisions of equal treatment, which should be fine. Equally, one would hope that companies would not see a requirement to provide information as breaching any investment treaties. Interestingly, it is in the sharing of information that IPEF provisions have focused, which seems reasonable.

Governments should also be able to promote particular sectors of their economy, as indeed has always been the case. There has always been an element of resilience which leads to a certain amount of domestic subsidies or particular regulations, and while this starts to intrude more on trade rules, there is no reason why this cannot be handled. Similarly, genuine dependence on one particular country on a particular product is quite possibly a national security concern from which actions can be taken. That probably doesn’t include the car sector, but quite possibly might for staple food products or pharmaceuticals.

Critical raw materials access can be considered a slightly different issue, and one which shows the complexities of the business-government relationship. For it is the companies that probably have to secure access, but treaties can help. Concerns over individual countries having dominance over these markets have in the past proven not to be well-founded, but it is again reasonable to be thinking about the issue.

Where resilience slips overtly into restrictions on China, protectionism in general, or promotion of national manufacturing then this is the most problematic definition. Arguably, all of these should probably be defined differently anyway. Anti-dumping actions are reasonable enough, but otherwise these actions wouldn’t really be about resilience, just using the term to disguise something else. In this case, that should be called out.

Taking the more reasonable definitions, what should then be added to make resilience a useful term would be to start talking about the global economy as it really exists, the choices that are made, and how a country can affect this. That can sometimes be seen in political speeches, but there is also a need for the academic and policy communities to be reflecting realities more accurarely. At the moment, there is more attention being given to the narrative of de-globalisation, suggesting unconvincingly that resilience may mean more national production in the future. This is not helping understanding.

Demonstrating how Europe and the US have benefitted from supply chains has to be a part of a successful conversation. For the assumption has taken hold that that only some kinds of activity are important, and this doesn’t for example include the head office operations that are managing the supply chain networks. Equally one shouldn’t just point to these activities, for manufacturing does continue in most economies, but with high levels of productivity meaning that fewer workers are needed.

This leads to a final thought on the definition of resilience, of an economy which is well understood by its participants. Given modern economic complexity, this probably isn’t happening. Since supply chains have been evolving for more than thirty years, this has been a significant failure of the whole trade and business community. If we can’t describe the modern economy, then it is hard to argue it is resilient, or that politicians shouldn’t have greater involvement.

Conclusion

Resilience has rather crept up on international policy-making circles as the emergence of supply chains has done over a longer period. Typically for such a term of fashion, few have stopped to define this particularly closely, resulting in quite a number of assumptions as to its meaning. Doing so is something that the policy community can usefully undertake, appreciating that while many of the intents are harmful, there are also some genuine issues to be resolved. In particular, a poorly understood economy in which governments don’t understand what its companies are doing is not a resilient one. Similarly, promoting national champions over international trade is not resilient. Showing that there is space between these for a reasonable definition of resilience would be a useful function.