What a difference a year makes. The U.S. inflation rate was at 1.4 percent when Joe Biden was sworn in as President in January 2021. In just fifteen months, it has since risen rapidly to a 40-year high of 8.5 percent, the result of global supply chain issues.
Many hoped that those issues would resolve themselves as the pandemic eased. But hopes that inflation would prove transitory have been dashed by current events in Ukraine and Shanghai—events which prove not only that the supply chain crisis is ongoing, but that it spells the end of most global supply chains as we know them.
Putin's invasion of Ukraine sparked geopolitical tensions unseen since 1989. Russia's aggression—and the West's anti-Russia sanctions—have shattered key foundations of global supply chains built after the fall of the Berlin Wall 30 years ago. A growing number of multinational companies can no longer afford to separate business and geopolitics, and they are under pressure to stop importing from, exporting to, and operating in Russia and its allies.
Meanwhile, in response to the recent Omicron wave, Shanghai has imposed what is likely the most stringent lockdown the world has ever seen. Under China's zero-COVID policy, residents have been barred from leaving their apartments; they are not even allowed out for grocery shopping or medical appointments, and infected children have been separated from their parents.
And almost all modes of transportation have been prohibited, making it difficult for retailers to restock and deliver food products. A massive food shortage has been reported in Shanghai, one that is possible even worse than the one experienced during the Great Chinese Famine of 1959–1961.
And in addition to the massive humanitarian crisis, Shanghai's current lockdown has disrupted operations at the factories in Shanghai, disrupting import operations across China. Shanghai is China's largest city and home to the world's largest port, meaning that when it is under lockdown, the reverberations cross the globe.
The war in Ukraine and the lockdown of Shanghai mark a huge shift in how commerce happens across the world. They signal nothing less than the end of globalized supply chains. As deglobalization takes hold, future supply chains will be regionalized, more responsive, and more resilient.
To be sure, the world has continued to rely on China-centric global supply chains over the COVID-19 pandemic. But this is different.
First, unlike previous supply chain disruptions caused by natural disasters such as earthquakes or floods, the supply chain disruptions from Ukraine and Shanghai are primarily due to geopolitics. In Ukraine, Putin's aggression prompted the West to impose broad and coordinated anti-Russia sanctions. In Shanghai, a key factor behind the harsh lockdown is Beijing's desire to prove that its pandemic policy is superior to the West's.
Second, both the events in Ukraine and Shanghai revealed how critical global logistics are and how global supply chains can break down overnight. Prior to 2022, the pandemic's disruption was primarily limited to human movement, with global freight logistics remaining structurally unaffected. The twin events have major logistical implications. Following the Russian aggression, all ocean freights were suspended in the Sea of Azov and the Black Sea, and most air freight was suspended when dozens of countries closed their airspace to Russian aircraft. In the case of Shanghai, the port of Shanghai has experienced major disruptions not seen since the beginning of the pandemic.
Third, the COVID-19 pandemic has brought environmental, social, and governance (ESG) issues to the forefront, and CEOs are paying close attention to them. The events in Ukraine and Shanghai have heightened geopolitical tensions and exposed various ESG risks of operating a global supply chain. From Apple to Tesla, companies' operations have been severely disrupted in these two countries.
These two events generated serious geopolitical tensions and created unprecedented global supply chain disruptions.
So what can companies do to mitigate both political and operational risks?
American businesses can mitigate these risks by leveraging two types of supply chains: a global one that can sustain the growth of their global operations, and a regional one that is more responsive and resilient.
China will undoubtedly continue to play an important role in those global supply chains. For regional supply chains, the United States-Mexico-Canada Agreement provides a platform for American businesses to develop more regionalized supply chains. Mexico has low-cost labor and a strong industrial base, whereas Canada has a highly skilled workforce and an abundance of energy resources. Furthermore, Latin America offers room for future supply chain expansion.
Now is the time for business leaders to reshape their supply chains. Developing both global and regional supply chains can mitigate their supply chain risks drastically.
Tinglong Dai is a professor of operations management and business analytics at the Johns Hopkins University's Carey Business School. Christopher S. Tang is a University Distinguished Professor and Edward W. Carter Chair in Business Administration at the UCLA Anderson School of Management. Both are members of the Institute for Operations Research and the Management Sciences (INFORMS).