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The end of global supply chains?

June 27, 2018


By Dr Joe Zammit-Lucia, Co-Founder of the Radix think tank and co-author of Backlash: Saving Globalisation from Itself

Much has been made of America’s unilateral tariffs and the threat they pose to the global trading system. In spite of the current hysteria seemingly gripping all and sundry, in a few years’ time these tariffs will be seen as largely an irrelevance in and of themselves. But what is relevant about them is the use of the national security umbrella as justification.

The use of the national security justification for tariffs on steel and aluminium is highly debatable on its merits. What is not, however, debatable is that national security concerns will dominate the pattern of international trade over the coming decades. Businesses with globally distributed supply chains should take note.

A decade ago, cyberattacks did not even deserve a mention in the US ‘Threat Assessment’ submitted annually by intelligence agencies to Congress. Last year, they were front and centre. Cyberwarfare is rapidly becoming the central component of defence preparedness.

The US mounted effective cyberattacks on Iranian and North Korean nuclear weapons programmes. America itself has suffered from some, relatively mild, cyberattacks from foreign powers including its banks and, most notoriously, interference in the last presidential election. Yet these are all no more than skirmishes compared to what could be. In an increasingly interconnected world a massive cyberattack could paralyse a country. Shutting off electricity and water supplies, bringing down the financial system and disrupting all communications prior to a conventional attack. Given the damage done, the latter may not even be necessary. It is no wonder that the Pentagon now believes that cyberwarfare is a greater threat to national security than terrorism.

Corporations have got comfortably used to minimizing their costs through distributed supply chains. Significant manufacturing and/or assembly of electronic goods happens in China. Nobody can possibly know what kind of weaknesses can be built into such goods that would facilitate a cyberattack. And with the relentless rise of the internet of things, almost every good from refrigerators to cars, from fire alarm systems to life support machines are open to being hacked and used as vulnerabilities.

Corporations will argue that they have strong controls over the quality of their products. Such flim-flam is unlikely to work – and for two reasons.

First of all, it is patently untrue. Corporations still act surprised when journalists or NGOs uncover obvious abuses such as slave labour or uncontrolled environmental damage in global supply chains. Everyone has long since stopped believing the lawyer-drafted and totally unconvincing responses about quality control and steps being taken to eliminate such problems. How likely is anyone to believe that these same corporations are capable of stopping the covert insertion of electronic back-doors into their goods?

Secondly, the national security consequences are potentially far too serious for governments to want to take risks – even if the likelihood of interference is portrayed as being relatively small.

Neither is it likely that any post-assembly quality control process can detect every potential loophole.

No. The likelihood is that, over the coming years, governments will start to clamp down on distributed supply chains where these are seen to be a potential threat to national security.

In April this year, the Federal Communications Commission unanimously decided to bar federally subsidized communications carriers from using suppliers that are a potential threat to national security. Consider that the first salvo. There is little doubt that more will come. And when will the next step come – that which bars not only finished products but components being sourced from companies that are potentially a national security threat? And then maybe the question will arise whether ‘Assembled in China’ outweighs the much touted ‘Designed in California’ when it comes to evaluating what constitutes a potential threat.

Layer on to all that increasing concerns about intellectual property abuses and the stage is well set for significant disruption in global supply chains and the relatively free movement of goods between countries.

It is, of course, tempting to dismiss all of this as unwarranted alarmism. Or simply a manifestation of bizarre Trumpism. For corporate leaders to start spending millions on self-justifying studies and intense lobbying to protect their business models. But let’s put ourselves for a minute in the shoes of a senior officer at the Pentagon. What does the world look like from there? And what will it look like to any Administration simultaneously trying to ensure the security of its citizens and reduce its trade deficit.

Nobody can predict the future. None of this may come to pass. Or it may be more rapid and more intense than we can imagine. But can corporate leaders afford to take the risk? They should start preparing now for the eventuality of a world where distributed supply chains run into the uncontrollable turbulence of national security.

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