One of the more apparent negative impacts of the COVID-19 pandemic on the global economy is the 2021-2022 Global Supply Chain Crisis. The crisis has persisted even when economies have opened up with the introduction and administration of vaccines beginning in the second quarter of 2021. Furthermore, other global events have strained further the already weakened global supply chains, thus affecting certain industries and markets. The crisis has notable macroeconomic and microeconomic implications.
Explaining the Causes of the 2021-2022 Global Supply Chain Crisis
Lockdowns and Economic Shutdowns: How the COVID-19 Pandemic Started the Global Crisis
The COVID-19 pandemic started as an outbreak in China in late 2019 until it became a global pandemic and a major public health crisis in the second quarter of 2020. To prevent control the spread of the SARS-CoV-2, the causative pathogen behind the coronavirus disease, governments around the world mandated lockdowns that slowed down business activities.
Of course, because of the interconnectedness of countries due to global trade and globalization, the lockdowns depressed not only specific economies but also the entire global economy. Stock markets around the world crashed. Unemployment increased. Consumption dwindled. Businesses reported losses. Gross domestic products decreased.
The impacts to supply chains collectively represent one of the most noticeable macroeconomic and microeconomic impacts of the pandemic. The government-mandated lockdown and the spread of the disease created human resource problems that affected the availability of personnel in both the manufacturing and transportation sectors.
Furthermore, because of the depressed economic situation around the world, the demand for tangible goods decreased, thus forcing businesses to cut down their operations or reduce the volume of their outputs. The entire situation is a representation of a chain of events that created a circular domino effect affecting different facets of the global supply chain.
Shortages in personnel meant that there are not enough labor inputs to extract and produce raw materials or production inputs that would supply end-use manufacturers. The economic downturns also lessened demand for these end-use products. However, even after the economies reopened and demand increased, suppliers and producers failed to catch up.
Oil and Gas Prices and Food Supply: How the Russia-Ukraine Conflict Sustained the Global Crisis
Another cause of the 2021-2022 Global Supply Chain Crisis is the escalation of the Russia-Ukraine Conflict following the invasion of Ukraine by the Russian Armed Forces under the direction of Vladimir Putin. To be specific, the conflict between the two countries worsened the situation by straining further the pandemic-weakened global supply chains.
Several countries such as the United States and the United Kingdom, and countries in the European Union rolled out a series of economic sanctions against Russia as part of their foreign policy. This restricted Russian products in the global market.
Russia is one of the largest producers and exporters of oil and gas. The sanctions made these commodities inaccessible to energy-dependent markets while also straining the supply of oil and gas in the global market. The resulting increases in oil and gas prices made manufacturing and product transportation or shipment more expensive.
Furthermore, it is also important to note that Ukraine is one of the largest producers and suppliers of important agricultural products such as corn and wheat. The Russian invasion disrupted its agricultural sector and depressed its agricultural output.
Both countries collectively supply more than 25 percent of wheat in the world. Ukraine is a major supplier of sunflower oil and barley. The impact of the Russia-Ukraine on global food security also affects the supply chains across the globe as nations and specific food producers have to reexamine and redirect their respective supply chains.
Impacts of the Ongoing Climate Emergency: How Climate Change is Disrupting the Global Supply Chain
Another important and persistent factor affecting supply chains around the world and one of the often overlooked and underappreciated causes of the 2021-2022 Global Supply Chain Crisis is the ongoing climate emergency due to human-made climate change. Several climate-related events have disrupted the different facets of the global supply chain.
For example, several institutions and experts have explained how the climate has impacted the supply chains of individual organizations and countries. A Harvard Business Review article noted that freak weather events have alarmed boardrooms across industries.
Instances of hurricanes and flooding, as well as heatwaves and wildfires, have negatively affected specific activities such as food production, extraction of natural resources, transportation of goods, and employment and manufacturing. These localized disruptions collectively contribute to the greater weakening of the global supply chain.
An earlier report by J. Woetzel et al. of McKinsey Global Institute explained that global economic production is organized around a complex system of interdependent supply chains. Weather-induced disruptions in particular areas create a domino effect.
The same report noted rare earth materials mining as an example. The majority of these resources are found in southeastern China where instances of extreme rainfall have increased in recent years. Landslides and flooding disrupt the regular operations of mining sites, thus causing delays in order fulfillment and affecting producers dependent on these inputs.
Understanding the 2021-2022 Global Supply Chain Crisis in a Nutshell
The cause of the 2021-2022 Global Supply Chain Crisis originally stems from the backlogs caused by economic downturns due to the COVID-19 pandemic that started in 2020 and the sudden boom in consumer demand after countries eased out movement restrictions and reopened their respective economies in 2021 and further in 2022.
Several supply chain hubs across the world and the critical components of the global supply chain failed to recuperate as fast as possible. This is due to the simplest reason that the interconnectedness of different supply chains, business organizations, and markets make the entire global supply chain complex and complicated
It is also important to emphasize the fact that the vulnerability of the global supply chain to the pandemic and other global events stems from the prevailing lean manufacturing and just-in-time manufacturing practices observed across numerous industries and sectors.
Lean manufacturing is a principle that centers on production cost-efficiency by minimizing the need for warehousing. Suppliers and manufacturers coordinate their schedules to ensure that the volume of raw material inputs matches the current and short-term production requirements, as well as the targeted end-use production outputs.
The main disadvantage of lean manufacturing is that it cannot respond effectively to sudden shifts in demands or unpredictable changes in market trends. The practice depends on accurate demand forecasting to maximize its cost-saving advantages.
Nevertheless, when other momentous global events such as the Russian invasion of Ukraine transpired, coupled with persistent problems such as instances of localized weather-induced disruptions due to the ongoing climate emergency, the already-vulnerable global supply chain weakened by the pandemic dealt another substantial blow.
The situation gets worse due to added macroeconomic pressures. For example, the pervasive high prices of oil and gas and the 2021-2023 Global Inflation Surge, as well as volatile movements in the financial markets, create disruption issues in global supplies and demands.
FURTHER READINGS AND REFERENCES
- Boyson, S., Gerst, M. D., Guntuka, L., Linton, T., Muraski, G., Vakil, B., and Vakil, S. 2022. “How Exposed Is Your Supply Chain To Climate Risks.” Harvard Business Review. Available online
- Jiang, B., Rigobon, D., and Rigobon, R. 2022. “From Just-in-Time, to Just-in-Case, to Just-in-Worst-Case: Simple Models of a Global Supply Chain under Uncertain Aggregate Shocks.” IMF Economic Review. 70: 141-184. DOI: 1057/s41308-021-00148-2
- P. Morgan. 2022. “What’s Behind The Global Supply Chain Crisis?” J. P. Morgan Research. J. P. Morgan. Available online
- Woetzel, J., Pinner, D., Samandari, H., Engel, H., Krishnan, M., Kampel, C., and Graabak, J. 2020. “Could Climate Become The Weak Link In Your Supply Chain?” McKinsey Sustainability. McKinsey Global Institute. Available online
