New local supply chains may be the solution.

The pandemic is not the reason why companies will have to pay more for the same thing: what has happened in 40 years of global value chains that will now make us "live worse".

The PlayStation 5 was released on the market on November 12, 2020. Few (very few) were the lucky ones who were able to get that Christmas with the latest model from Sony Interactive Entertainment. Two years later, the console is still difficult to get around the world and the delays in restocks will remain until 2023.

To return the supply to normal, the manufacturer needs a semiconductor that is used for the manufacture of cars, computers and other electronic equipment. The shipment of chips is not insured for any of them, although they depend on those pieces to bring the product to market.

Local supply chains

Toshiba, which provides these power processors to TSM (Taiwan Semiconductor Manufacturing), has warned that the situation is unlikely to normalize even in 2022.

With the stoppages and restrictions that were imposed during the beginning of the pandemic, the delays in the manufacture of this type of chips have become the greatest evidence of how dangerous it is for the international economy to depend on a highly specialized good produced in a single corner of the world.

However, despite the impact of the spread of the virus, these types of supply disruptions are not the result of the pandemic and will continue to occur in the coming years.

As happened during the financial crisis of 2008 and, now, with Russia's war in Ukraine, the coronavirus has only accelerated the spreading effects of the mechanism that moves international production.

This instrument is known as global value chains (GVCs) and represents the stages of the production of a good divided between different countries. Today, it accounts for 50% of international trade and, until now, it was considered the paradigm of large-scale production.

Local supply chains details

Since the 80s, technological advances in the transport sector, telecommunications, trade agreements and the reduction of tariff barriers have allowed the relocation of production worldwide to produce more for less.

Multinationals, which had more power and capacity to invest in new infrastructure beyond their borders, spread their production all over the world. This made it possible that today you can change your mobile every year or have exotic fruits out of season.

They took their production centers or reached commercial agreements with suppliers in countries where labor, production costs and obtaining raw materials were very cheap.

So far.

These countries have gradually become economies specialized in key productions - as is the case with semiconductors -, where the inflow of foreign direct investment, technology and trade agreements have led to sustained income growth. China, for example, was one of them and today it is the second largest economy in the world.

"The dependence on China, which had a very small weight in international markets, has been increasing and also the one we have on Chinese intermediate products. This is a vulnerability for Western economies," explains Rosario Gandoy, Professor of Applied Economics and Research and Innovation Prize laureate, in an interview with  Spain.

Basically, it is no longer so profitable to go manufacturing thousands of kilometers away.

Local supply chains factors

For more inri, the factors that drove the creation of these chains are the main decelerators of their growth.

The price of transport had not stopped decreasing since the 70s. Since the spread of the coronavirus, the costs of transportation, fuel, energy, the technology itself and the freedom of trade are straining the links in the chain.

This situation has been compounded by the loss of control of the inflationary tendencies with the war of Russia in Ukraine, the impact of the increase in unit labour costs in emerging economies; and by the rise in the price of intermediate goods (inputs that produce the final good, as the PlayStation).

Tariff and non-trade barriers have also been increased to the benefit of a greater degree of protectionism. The most obvious case is that of the trade war between China and the United States, but so is the United Kingdom's exit from the European Union. And restrictions on export subsidies, licensing and public procurement.