Supply chains, which have been tested to their limits in the last few years, will need to continue to increase their flexibility in 2023.
Covid-19 took us by surprise in 2020. Overnight, offices and businesses were shuttered, and supply lines collapsed. We adapted by working from home, limiting socialization, and lowering expectations on the resiliency and flexibility of “just-in-time” supply chains.
But the pandemic is slowly fading in the rearview mirror as a cause of supply-chain disruptions, and other factors that surfaced this year are likely to take its place in 2023. These include war, extreme weather, the threat of a global recession, and politics.
Also—different from the Covid era—inflation, rising interest rates, and the strong US dollar will play a leading role in supply-chain dynamics for the coming year. Because of developments this year, next year will likely be worse for worldwide supply chains than either 2020 or 2021.
Russia-Ukraine War
Russia and Ukraine account for major portions of the world’s production of wheat, barley, and sunflower oil. But Russia’s invasion of Ukraine has made Russia a trading partner pariah, and, due to the conflict, Ukraine exports of grain were initially curtailed or shut down as ports were blocked and grain production fell. While some relief came from the lifting of grain embargoes by Russia in July, Russia’s withdrawal from the Black Sea safe passage compact in late October is again jeopardizing global food resources, particularly in developing countries.
The effects of these wartime disturbances mainly fall on Ukraine’s major trading partners. But rising food and energy prices and shortages know no borders, and are occurring globally.
The Ukrainian economy is projected to contract by 35% in 2022 because of the destruction caused by the war and the displacement of millions of Ukrainians, according to the World Bank. The enormous economic cost of the war on both sides (including their allies) will fuel inflation and be a drag on the global economy.
Perhaps the most damaging economic effects of the invasion are the surging energy prices in Europe. Russia has been accused of “weaponizing” its hydrocarbon resources in retaliation for European economic sanctions and Ukrainian aid. Energy shortages and rising costs in Europe this winter due to the curtailment of natural gas supplies from the Nord Stream pipeline, alleged pipeline sabotage, and oil embargoes will test the strength of Ukraine’s European allies’ resolve.
Weather Disasters
Extreme global weather has fueled wildfires, historic droughts, and unprecedented flooding in 2022. These climate-change phenomena will undoubtedly continue into 2023. In addition to human suffering and economic and ecological damage, their effects on world food and water resources are likely to be of the greatest consequence. As the impact of weather-related incidents intensifies, supply-chain participants must begin to develop adaptation strategies, such as moving critical logistics centers away from storm-prone locations, to diversify sourcing and distribution channels and to alleviate supply-chain stress.
Natural disasters caused by severe weather are traditionally considered “force majeure” events to the extent that they prevent or impede supply-chain participants’ contractual obligations. That’s small comfort for populations caught in the middle, however, since they suffer both the physical effects of the natural disaster and the resulting shortages.
Recession Fears
Some experts question whether we’re already in a recession; others only disagree as to the timing and whether the landing will be “soft” or “hard.” In any event, we will need to deal with recession scenarios in 2023.
If the economy contracts significantly, declines in spending and employment could signal an increase in extended payment terms, payment defaults, and supplier bankruptcies. Higher interest rates may dampen US demand even as the strong dollar makes imports more affordable. Coupled with inflationary price pressures, a recession may jeopardize demand/supply equilibrium leading to a longer-term recovery with fewer market players. Buyers with cash will hold an advantage. In this novel environment, transactional lawyers’ creativity, ingenuity, and expertise will be in high client demand.
Political Ploys
International politics will continue to play an oversized role in supply-chain supply and demand as national interests take precedence over international needs.
India, for example—in an effort to increase the price of a leading commodity—imposed a duty on certain rice exports in September 2022, leading neighboring Asian countries to search for alternate sources of supply and adding to food shortages. OPEC’s production cutbacks are maintaining high fuel prices worldwide.
The full effect of the US Uyghur Forced Labor Prevention Act (UFLPA) on worldwide supply chains will become clearer in the new year. This law, which became effective in June 2022, creates a rebuttable presumption that any goods that have been produced, manufactured, or mined in the Xinjiang Uyghur Autonomous Region of China or by certain named entities have been made using forced labor. Unless the importer can show by clear and convincing evidence that no forced labor was used in the goods’ production, the goods may not enter the US. This high bar effectively bans Xinjiang-based products, including cotton and polysilicon products principally used in the production of solar panels, from US import. Europe is developing similar legislation so that goods made with forced labor may soon find themselves without a welcoming Western port.
Ongoing national security tensions between the US and China may continue to restrict semiconductor trade and trade in other advanced components, as China accuses the US of “politicizing” science, technology, and trade issues. If China experiences another Covid-19 outbreak in 2023, a resulting shutdown of manufacturing or shipping facilities could again reverberate negatively throughout the global supply infrastructure.
Stay the Course
Next year will continue to see supply-chain disruptions, albeit from different causes than in 2020 and 2021. The 2023 disruptions may be more subtle and geographically dispersed than the collapse occasioned by Covid-19, but the key again will be to build flexibility into supply-chain structures. Buyers will want the flexibility to modulate quantity in response to demand changes, and sellers will require price protection in the face of rising costs. Challenges will abound.
Access additional analyses from our Bloomberg Law 2023 series here, covering trends in Litigation, Transactional, ESG & Employment, Technology, and the Future of the Legal Industry.
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