Supply chain resilience is the new tradecraft: Why this matters

The disruptions of geopolitics on trade mean that definitions of supply chain resilience need to adapt to include the techniques of tradecraft.

On the face of it, Supply Chain Resilience (SCR) and Tradecraft occupy different worlds. Tradecraft, as it is defined by the Cambridge Dictionary is, ‘the skills used by people who work for organisations involved in secret activities such as intelligence and spying’, while SAP defines SCR as the ‘capability to mitigate most supply chain disruptions and greatly limit the impact of those that occur’. So far, so different.

However, since the start of the Russia-Ukraine crisis, trade measures such as sanctions and export controls have combined with limiting access to financial markets and technologies to constrain Russia’s military power by NATO, the US and its allies. This is the largest and most focused attempt to use such means to limit an adversary in the modern era, and it is providing a test-case for the possibility that similar measures might be used should China take military action against Taiwan. More than this, since President Putin defined such tactics as an existential threat to Russia that could trigger a nuclear response, effectively trade and economics have become a means of constraining adversaries and hence a domain of warfare. 

This matters because the conventional definition of SCR itself needs to change, and urgently. We are no longer talking just about the consequences on critical supply chains of, say, a pandemic or a ship stuck in the Suez Canal, or even of a conflict such as the Russia-Ukraine one. Rather, SCR is critically about national security as well. The intelligence it needs becomes the New Tradecraft. 

Three examples show us how this is happening and why it matters. First, the use of drones in the Russia-Ukraine conflict illustrates the case in point perfectly – drones are “cheap, deadly and made in China” according to Faine Greenwood, a consultant and writer on civilian drone technology. However, their extensive use is not explicitly military – Aerorozvidka has been working with individual hobbyists to self-assemble small drones for use against Russia since 2014. It is crowdfunded and initially consisted of IT enthusiasts but was a key part of the Ukraine defence against convoys of Russian tanks at the start of the conflict. 

This may seem straightforward but according to Greenwood’s research of 900 cases of drone use by Russians and Ukrainians in the last year, 59% of drones used by both sides come from one source: the Chinese-owned DJI with locations globally. The company reportedly used US as well as Chinese technologies in its manufacture until it was put on the US Entity list in June 2021. DJI has withdrawn from both the Russian and the Ukrainian consumer markets, but the supply of drones is informal and funded by private individuals outside of the conflict zone. Ukraine remains better resourced than Russia, which has been reporting shortages.

There is a lot of ambiguity from a national security, and military, and even supply chain finance perspective in this brief illustrative overview, but it raises numerous, arguably unanswerable, questions. Are the drones as originally manufactured military ones? How much US, UK or European technology do they contain and is this technology dual use or directly military? Are they a weapon in a conventional military context since they are being used for surveillance and to drop grenades by non-state actors? Since DJI has the capacity to geofence (remotely to limit the reach of the drones geographically), does this mean that Chinese authorities are involved in supporting either Russia or Ukraine? Or does the fact that it hasn’t used this capacity suggest it is neutral? If a large trade finance provider had at any point before the company was on the entity list supplied letters of credit to DJI, could it have known the end users of these ‘consumer goods’? Or, more worryingly, can the source of funding be traced for their use in the current conflict given the challenges with tracking activity in deep-tier supply chains?  

This is the essence of ‘weaponised trade’ or ‘weaponised interdependence’ which increasingly defines great power conflict and it requires very specific supply chain information and intelligence cooperation between defence and security, trade finance providers and corporations themselves. 

What it illustrates is that strategic competition between nations is no longer just geopolitical or military. Rather, it is geoeconomic and defined as much in terms of a capacity to control information flows, to own and use data, and to innovate to create new sources of market or coercive advantage. And as we are seeing with the US Inflation Reduction Act’s incentives for Clean Tech, it is even the capacity to control and finance the vision of a sustainable future. In short, it is the battle for the 21st Century.

Critical supply chains

The second example is Critical Supply Chains and particularly rare earth metals. The US, EU and UK governments have all focused on defining Critical Supply Chains since the pandemic. These supply chains are vital to national security in that they ensure food and energy supplies. They also include transition metals and rare earth elements that are core to the digital and renewable future. As tensions with both Russia and China have escalated, increasing supply chain resilience and self-sufficiency becomes a pre-requisite because there are currently such significant dependencies on those two countries.

Rare metals are used in everyday life and are essential to the way in which we transition to clean energy, adapt our economies to make them digital, and produce more efficient technology-based weapons. The facts speak for themselves: China accounts for around 25% of all rare earth exports and around 60% of all lithium production, while Russia accounts for nearly 20% of all palladium and 11% of all nickel exports according to Comtrade. 

China’s control over lithium, renewables and electronics is extended by the fact that it controls a large proportion of the world’s mining, processing and production of these commodities through the businesses it owns – estimated at 63% of mining, 85% of processing and 92% of rare earth magnet production. There is a military dimension to this too: the Pentagon reportedly suspended F-35 fighter jet deliveries after Lockheed Martin found that a rare metal component in a magnet had come from China.

In other words, there is an ‘unforeseen consequence’ of the shift from Russia as a supplier of fossil-fuel based energy in Europe: that allies unwittingly shift their dependency to China. All of this goes to show just how difficult it is to gain adequate intelligence about the origin and sources of components in critical supply chains, but equally, to reduce dependency on countries which at best are seen as ‘strategic competitors’ and at worst, a ‘strategic threat.’

The third example reinforces this by adding the further challenge of monitoring containers and shipments of critical supply chain components while goods are on the high seas. Trafigura made public its exposure to nickel fraud worth some $577 million. The company had been trading with a Dubai based company, TMT Metals, without issues for a decade. It provided ‘transit finance’ to shipments of nickel once they were loaded on to container ships. When these containers started to take longer to arrive than expected, and when the owner of TMT was exposed for fraud by the State Bank of India, compliance red flags were raised by the trade finance provider, Citigroup. It was discovered that the containers did not contain nickel at all – meaning a potential disruption to supply chains that relied on their delivery.

One of the reasons why it was not picked up earlier is arguably because the supply chain finance documents and processes are predominantly manual and therefore prone to human error or deliberate fraud in the form of falsification or double financing (selling more than one cargo to multiple buyers).  More than this, it is increasingly clear that sanctions policy has not limited Russian oil trade because of its capacity to work with businesses and finance providers in Hong Kong and the UAE outside of normal compliance regimes. Smaller companies, second-hand tankers and smaller banks have created a ‘shadow’ shipping and financing infrastructure that is robust and extensive and is becoming more rather than less important as the conflict deepens. 

Yet despite the fact that more robust electronic systems have been available for the bill of lading document, of the 45 million bills of lading produced per year, only 1.2% of them are electronic. Shippers and the trade finance sector back moves to limit fraud by making trade documentation digital and paperless. But despite the compelling case for making this change, progress towards adoption appears slow.

Greater digital and electronic documents, and data, are key

All of this tells us that greater digital and electronic documentation as well as cooperation around data sharing will be key to the intelligence that is needed to ensure the resilience of supply chains in this new world of ‘securitised’ trade. As President Biden said in his State of the Union address, America will invest in its alliances and work with its allies to “protect our advanced technologies so they are not used against us.” This comment has to be seen in the context of the Chinese Spy Balloon that flew into US airspace and which may have contained US technology since some of the components and their manufacturers were listed on blacklists.

Nevertheless, despite the context of heightened tensions with China, it is a strident statement about just how interdependent through supply chains the modern world and modern conflict are. There is a need to manage and coordinate data and intelligence between the commercial and the defence and security partners in these deep tier supply chains to ensure their resilience on national security grounds. 

Of course, there will be major concerns of the consequences of such comprehensive data acquisition and tracking. Not least, the costs of implementing digital systems in financial services are huge. These can be set against the significant benefits of reaching wider markets and clients. Work by the International Chamber of Commerce and the Commonwealth Secretariat shows the business case clearly. However, the scale and interoperability on which such intelligence needs to be gathered goes way beyond the scope of current digital trade as that case of Chinese drones demonstrates. This comes down to data and intelligence sharing that no one organisation can do alone but which is vital both for national security and commercial security purposes.

And this is the heart of the problem. At the Munich Security Conference the current intensification of great power conflict was attributed to ‘autocratic revisionism’ demonstrated by Russia and China. The Russia-Ukraine crisis has been captured as a play for geopolitical power and the threat of Total War. But both Russia and China have a hybrid approach to warfare which in China’s case is geoeconomics with supply chains as a means of control and coercion at its heart. 

We need to ask ourselves the question: if we are we willing to accept that data and intelligence is itself a means of understanding and constraining our adversaries, is there an extent to which we also have to accept that there is a need for greater collaboration between the state, business and finance to enable this? And as a consequence of this, might there be losses in terms of personal or commercial freedoms that need to what we gain in national security? 

All of this is fundamental to the nature of the democratic values that are central to NATO, the US, the EU and their allies. Issues with data and intelligence sharing are less about the data itself and more about who owns that data. The post-World War II order has been changing irrevocably over the past five years with the disintegration of globalisation and the reinvention of Great Power conflict that emanates both from the immediate effects of the Russia-Ukraine crisis and from the role of China in many of our critical supply chains. It is now reasonable to assume that the military-industrial complex as it was conceived as part of that post war political order must now focus on the digital, data and information infrastructures that support supply chain resilience. 

If this is the case, then trade and supply chain data are the way of “subduing our enemies without fighting” and so, quite literally, the New Trade-craft.