Supply Chain Resilience Initiative

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CWA # 487, 7 June 2021
Supply Chain Resilience Initiative
The SCRI will fail before it takes off, for three reasons

  Dincy Adlakha

While the most significant factor behind the initiative was the over-dependence on supply chains involving China in a strong position, the same is also a trap that will fail the SCRI

Recently, Japan, Australia, and India have launched the Supply Chain Resilience Initiative (SCRI), as a platform for economic dialogue in the Indo-Pacific. The plan is to convene at least once a year on the progress and agree to expand the initiative to provide a solid initial foothold. The business and academic aspects of the initiative are not lost on the officials. However, despite the rigour and enthusiasm pledged to the initiative, it will still prove to be a failed attempt at projecting false power. 

There are serious issues that plague the success of SCRI and will tank its chances.

Overdependence on China

While the most significant factor behind the initiative was the over-dependence on supply chains involving China in a strong position, the same is also a trap that will fail the SCRI. Decoupling from China and its economic linkages will not be an easy task for either of the three countries. 

China is in the middle within the economies of Japan, Australia, and India, creating a predicament for the initiative. India has recently made a few attempts to oust the Chinese firms from its economy following the border clashes with China. However, it is yet to create a dent in the trade volume between the two. According to a BBC report in late February 2021, China had regained its spot as the top trading partner of India in 2020 despite the ongoing political tensions. The two-way trade between India and China is at USD 77.7 billion. While the value for Japan and China is as high as USD 317 billion, and Australia has USD 252 billion of bilateral trade with China. Hence, even if India tries to disengage with China, it will be bound by the strings of Japan and Australia, making an unrealistic goal. Not possessing excessive levels of global economic influence, it will be difficult for India to find capable economic partners willing to shift their focus away from Chinese supply chains. 

Multilateral restrictions

Various international financial institutions largely govern the economic laws and agreements. These institutions make it difficult for any country to discriminate against the firms from another prospective trading partner. For instance, even though the Indian government has curtailed some Chinese companies in the previous year, exemptions are provided to multilateral agencies like the Asian Development Bank (ADB), World Bank, and the Asian Infrastructure and Investment Bank. This gives a chance to Chinese firms to enter Indian markets, especially in the infrastructure sector. Hence, projects like the China Railway Tunnel Group Co. Ltd, China Harbour Engineering Co. Ltd in Mumbai, and the Shanghai Tunnel Engineering Co. can continue to make large profits from the Indian market. As members of these multilateral organizations, Japan, Australia, and India cannot show the door to Chinese firms without violating the set regulations.

Even if these are considered as exceptions, SCRI needs to expand within the region to develop a larger and stronger chain. ASEAN will be a crucial addition to the initiative. Japan's keenness to involve ASEAN proves the same. However, if ASEAN is included in SCRI, it will ultimately lead to profits being generated in the Chinese economy as ASEAN's economy is currently overshadowed by Chinese schemes. 

Other big players like the EU are apprehensive of moving away from Chinese supply chains. They do not echo the US rhetoric of decoupling from China and instead focus on "mutual technology dependency" and "strategic dependencies". They believe in reinforcing the future of technology mutually. Their reluctance leaves SCRI alone to navigate through a China-dominated web of supply chains. 

Domestic policy problems

Although India and the US can be considered as alternatives to China for some supply chains, they do not possess the internal environment to promote such a change. India has repeatedly failed to enhance its manufacturing sector. It misses out on the comparative advantage it holds in the labour sector. Furthermore, the US has limited its technological spread. To improve supply chain resilience, it becomes imperative to have effective domestic economic policies which promote linkages and engage with a diversified network. This network is not tapped by India. India has tried to follow the Chinese model, but the undemanding measures make it a disappointing attempt. 'Make in India' and 'Aatamnirbhar Bharat' have not yielded the expected or preferred results. The manufacturing sector is unhurried and the contraction of GDP from 6.2 per cent in 2014 to 4 per cent in 2019 (added on by the 23.9 per cent in the COVID-19 pandemic) have created further challenges for the Indian economy. According to an ORF report, low ease of doing business and corruption in the country also pose challenges to diversification. Japan, Australia, and India need to improve their domestic economies if they want SCRI to grow stronger. India should adopt simpler labour laws, improve its infrastructure, and promote digital openness. Japan needs to improve its productivity and enhance its corporate governance. It needs to curb the falling labour inputs. And, Australia should avoid 'rigid production systems based on the worst and most infrequent of events'.

Expecting such high results from an agreement may be warranted. But, an initiative does not fall under the same potential outcomes. Without overcoming the above challenges, SCRI will not live long enough to sustain part of these expectations. It may be too early to declare the project destined for doom but, the logical conclusions do not let it take off. SCRI is deprived of major winning cards; it will not last. 

About the author

Dincy Adlakha is a research intern at the School of Conflict and Security Studies, NIAS, Bangalore. She is currently pursuing Masters of Arts in International Studies at CHRIST (Deemed to be University). Her research areas include China and the BRI project, the soft power expansion of China, Chinese and Indian engagement in the Middle East. 

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