Explore Topics and Trends impacting today's markets

Supply chains were disrupted long before the pandemic by U.S.-China trade tensions.  The situation was exacerbated as consumer demand for manufactured goods began to increase in countries that were slow to recover from the pandemic amid restrictions on services such as travel and dining out.

This shift in spending benefitted the world’s industrial sector, notably China’s.  Moreover, it also led to a shortage of shipping containers as there was more one-way traffic of manufactured goods out of China instead of the normal two-way trade that involved bringing goods, such as agricultural products, back into China.  In short, containers were in the wrong place and in short supply. 

Diversifying Supply Chains

These disruptions renewed the long-standing debate over diversifying supply chains by, for example, reducing dependence on China in favor of sourcing supply from nearer markets like Mexico (U.S.) and Eastern Europe (Western Europe).  The problem is that reshaping supply lines is easier said than done.  For starters, supply lines have been optimized to minimize costs.  Moving factories involves building new plants and equipment, retraining the workforce, sourcing raw materials and making certain that the new location has access to transportation facilities such as railways and ports. 

Adding new objectives such as resilience and diversification is likely to make supply lines cost more, and companies aren’t sure whether or not they can pass on those extra costs. Ultimately, there might be a trade off between supply-line diversification on the one hand and some combination of lower corporate profits and higher consumer prices on the other.  As such, it is always possible that once memories of the trade tensions and pandemic fade, supply lines are still not diversified because it involves high investment and uncertain returns. 


 

 

OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.

All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).

©2022 CME Group Inc. All rights reserved