Circular Economy: A potential thrombolytic for global supply chains?

Circular Economy: A potential thrombolytic for global supply chains?

by Meletios Bimpizas and Prof. Andrea Genovese
(University of Sheffield, Management School)

So, the “Capitalist Thrombosis” linked to the Suez Canal crisis has been apparently resolved. However, our Global Value Chains will make “blood clots” like this more and more likely in the future. As a solution, either we have quite a number of surgeries, to have a few “arterial bypasses” installed, or, we undergo a strict “diet” to rethink resource flows. An ambitious Circular Economy, relying on closed, narrower, slower and shorter resource loops might be what we need to avoid a disaster.

The thrombosis incident

March 23rd found the Suez Canal, one of the world’s key waterways, blocked in both directions by a 400-metre-long container megaship crippling international trade and causing multi-billion-dollar losses. Opened in 1869, the artificial sea-level 193.3km waterway in Egypt is the shortest link between the East and West, offering a more direct route between the North Atlantic and northern Indian oceans by connecting the Mediterranean Sea and the Red Sea. With around 12% of global trade flowing through it, the canal offers passage to approximately 90 vessels on its Westbound and Eastbound lanes per day, with an estimated daily container value at $9.7bn. The six day blockage resulted in a total trade loss of $54 bn, while the state-owned Suez Canal Authority (SCA) estimated the lost fees for the Canal at around $90m. However, the extent of the actual economic damage at a global scale is likely to be even higher considering the effect of global shipping prices increase on commodity prices. The incident is expected to put additional pressure on global supply chains which have already been strained by the pandemic, exacerbating the shortage of empty containers over the last year and leading to an increasing number of port delays.

Past symptoms

With almost 80 per cent of global trade taking place through the sea routes, maritime transport is the backbone of international trade and the global economy. Driven by cost efficiency, the last few years have witnessed the development of container mega-ships, with a capacity larger than 20,000 TEUs. In addition, over the last decade, technology has also progressed, making supply chain management an easier task, thanks to powerful data analytics techniques and real-time tracking. However, even assuming 2020 to be an anomaly due to the unprecedented nature of the coronavirus pandemic, 2019 recorded the highest rate of supply chains disruptions in the last three years. Corporations managing complex global supply networks found themselves up against even more challenges, ranging from factory shutdowns, changes in business ownership, extreme weather events and natural disasters, to regulatory changes, mergers, acquisitions, trade and geopolitical conflicts.

Considerations in selecting thrombolytic therapies

The recent Suez Canal blockage is just a reminder that such “blood clots” are likely to be repeated in the future, disrupting global value chains. Unfortunately, the response so far is not equal to the challenge of such events. Faithful to the dogma of offshoring and outsourcing as the key to increase profit margins, companies are postponing the inevitable by perpetuating the same prescription; either a few number of surgeries by constantly changing suppliers, or have a few arterial bypasses by creating different logistical routes. In the case of the Suez Canal blockage, the issue was confronted through a 3,500-mile detour round Africa that while it is uncertain whether it will save time, it will for sure increase fuel costs by hundreds of thousands of dollars – a cost that will be escalated across multiple supply chain networks until it finally reaches the final customer. Nonetheless, this is not the first and definitely not the last “arterial bypass” that has taken place in recent years. In 2014, the Egyptian government started the 35 km (22 mi) expansion and widen of the Ballah Bypass in order to reduce the canal’s transit time. The $9bn “New Suez Canal” was delivered to service in the mid-late summer of 2015, nearly doubling the capacity of the passage from 49 to 97 ships per day. The recent crisis also revived past talks about alternative routes, such as the Ben Gurion waterway between the Red Sea and the Mediterranean through Eilat, while providing a first rate chance for other countries to promote the value of their own, such as the Northern Sea Route to Asia along its Arctic coast. Attention has also been shifted to land alternatives, placing the attention on the Belt and Road Initiative (BRI or B&R) which involves overland routes for land and rail transportation through Central Asia along the historical Silk Road routes that connected it with the Western Regions. Acknowledging the need for urgent solutions, BRI saw the demand for its cross-border cargo trains significantly growing. While it will be impossible for trains to replace maritime transport due to the carrying capacity of the latter, the BRI proposition as a reliable alternative is reaching a growing audience, cutting delivery times from China to Europe in half. Given the involvement of different countries, their conflicting interests, and the economic importance of these alternative routes to them, it is clear that all alternatives are associated with deep structural changes in geopolitical balances, thus further increasing the already high volatility and uncertainty in global supply chains.

Circular economy as a radical thrombolytic therapy?

Hitherto, it seems that similar supply chain thrombosis incidents have been dealt with by performing a few arterial bypasses, in order to preserve the organisation of global production networks for the pursuit of perennial economic growth through maximalist and frictionless free trade. However, as pointed out above, this approach just postpones the problem rather than offering a viable solution. At the same time, continuing along this path disregards the environmental implications of global value chains; the finite resources reality and associated environmental pollution and degradation externalities are regarded as heresy. A radical therapy against the risk of such “blood clots” would be to reduce the volume, speed, and mileage of material flows. In contrast to the traditional “take-make-use-dispose” linear business model of production and consumption, Circular Economy (CE) offers an alternative and suitable proposition by replacing the end-of-life concept with restoration. Redefining business model strategies according to the mechanisms the resources flow within a system, CE aims at slowing, closing, and narrowing resource flows. Rethinking these mechanisms could mitigate the market’s expanding dependence on global sourcing, whose deficiencies became even more apparent during the recent pandemic. The problematic nature of these long, geographically fragmented multi-tier supply chain mega-structures has also been exacerbated, as mentioned above, by the recent empty container shortage crisis that has more than doubled shipping costs across continents. In a circular economic system, supply chains could serve a different model of production and consumption where products are more durable and designed in such a way to facilitate repairability, thus resulting in shorter supply chains, which require much less trans-continental transportation. Upon this new thinking, global production could focus more on what is needed, putting not only less stress on transcontinental supply chains but also mitigating the conflicting effects resulting from the pot shots at macroeconomic targets. However, such a radical therapy, an extreme diet for our contemporary production systems, cannot take place without the adoption of economic planning approaches, according to the needs of the majority of the population, which should guide governments in shaping industrial policy and structural interventions aimed at redesigning supply chains, also through public support aimed at fostering the production of essential and durable goods minimising resource consumption. Of course, within such a framework, global value chains are not going to disappear; however, they should not be based on imperialist principles, but rather on long-lasting international partnerships and peaceful relationships.

A global market reform based on the circular principles of slowing and narrowing the loops would require a wide international political consensus. This idea needs to be embraced not only by academics and think-tanks, but also by political organisations and trade unionists. At this stage, it might sound as an utopian dream. However, it is practically impossible to lay the concrete foundations for a truly sustainable future, if we do not acknowledge the reality of current “economic system failures” and look for radical solutions, rather than adopting temporary fixes.