- In a move to counter China’s dominance of the supply chain in the Indo-Pacific region, trade ministers of India, Japan and Australia formally launched the Supply Chain Resilience Initiative (SCRI) in April 2021.
- 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.
- Initially, SCRI will focus on sharing best practices on supply chain resilience and holding investment promotion events and buyer-seller matching events to provide opportunities for stakeholders to explore the possibility of diversification of their supply chains.
- In the context of international trade, supply chain resilience is an approach that helps a country to ensure that it has diversified its supply risk across a clutch of supplying nations instead of being dependent on just one or a few.
- 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 trade and economic relations with China need to be reduced to avoid future production disruptions.
- 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.
Roadmap of RSCI
- 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.
Potential of RSCI
- 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.
- The RSCI is one of the first examples of a distinct anti-China geoeconomic alliance taking shape in the post-COVID-19 world.
- 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.
Why in News?
- Prime Minister Narendra Modi is set to attend an event hosted by US President Joe Biden on the Supply Chain Resilience initiative.