With the long-term fate of the United States-Mexico-Canada Agreement in doubt, two trade experts are claiming to have identified a “critical gap” in the way such pacts are created and assessed.
Chris Meíja-Argueta at MIT’s Center for Transportation & Logistics and Gastón Cedillo at Texas A&M International University have teamed up to publish research that details a new way of determining how trade policy measures regional competitiveness. Agreements such as USMCA are customarily designed around the concept of where goods are manufactured and the amount of “local content” they contain. But that approach says nothing about a product’s predictability, security and ability to overcome infrastructure failures, says Mejía-Argueta, who directs the Emerging Market Economies Logistics Lab at MIT CTL.
The volatility arising from political tensions and constantly shifting trade policies are forcing supply chains to become more resilient, Mejía-Argueta says. With some 65% of raw materials located in developing economies in the “global south,” too few companies are considering the risks they incur by sole-sourcing critical parts in areas racked by turmoil and geopolitical strife. “We need to starting making new alliances with countries to keep operations going,” he says. “Not considering these factors creates a lot of issues.”
The answer, say the researchers, lies in adoption of a pair of new metrics that focus on overall supply chain resilience. The first is a “logistics resilience credit score,” which measures four key attributes of global manufacturing: reliability, security, redundancy of inventory through diversification (“just-in-case,” not “just-in-time,” says Mejía-Argueta), and infrastructure, the last including the availability of human talent.
The authors say the credit score serves as an incentive for companies to adopt broad measures that boost manufacturing reliability, including new telematics and security technology, and promote conversion to fleets running on “clean” fuel.
Mejía-Argueta says the metric is similar in content and purpose to the Logistics Performance Index, created by the World Bank as a means for countries to benchmark their performance in that area, and adopt ways to improve it.
A second metric proposed by MIT and Texas A&M, the “digital certificate of resilience,” measures the resilience profile of each shipment, with a particular focus on logistics performance. “It’s an instrument to make sure everybody is able to connect the dots,” says Mejía-Argueta, especially when it comes to assessing access to critical raw materials.
He believes the deeper perspective achievable by the two metrics can lead to development of new sourcing strategies on three levels. One is basic procurement, helping that function to make the right decisions on a daily basis. The second is a middle level that informs an organization’s tactics for identifying alternative sourcing of specific materials in key corridors. The third is a more strategic perspective that addresses the larger issue of tariffs, with an eye toward mitigating their impact by sourcing in countries with friendly relations with the U.S.
Initially, the researchers are looking to apply their findings through a pilot that scores companies manufacturing within North America, but Mejía-Argueta says the same principles can be applied to other regional trade relationships such as Europe-Latin America. He anticipates the current pilot wrapping up by the first quarter of next year, “when we should have something to show the world.”
Mejía-Argueta hopes the measures’ impact will extend beyond sourcing decisions to help businesses shape regulatory policy and create future multilateral trade pacts. Drawing on insights gained through the scoring systems, regulators could incorporate sourcing risk into their policymaking.
For their part, private companies need to understand that resilience is now a competitive differentiator, Mejía-Argueta says, and that the supposed advantages of traditional trade agreements don’t cover all of the considerations that go into the forging of maximally efficient global supply chains.
“Organizations that can predict disruptions, recover faster, and maintain service continuity gain measurement advantages in customer satisfaction, working capital efficiency, and risk mitigation,” he says.