It is a system the ordinary consumer doesn't think about, yet it is vital in supplying daily necessities from coffee to laptops - that of global value chains (GVCs).
Now more people are now awakened to the necessity - and fragility - of this system of production of goods and services across multiple locations worldwide, thanks to the delays, shortages and other shocks arising from the pandemic's disruptions.
Even though the current upheavals will eventually ease and settle, an even bigger challenge looms - the requirement under Paris Agreement on climate change to cut planet-warming carbon emissions.
A growing number of countries and companies are pledging to achieve net zero emissions. The push towards this goal and the transition present a challenge that has many implications for Singapore, given that GVC activities and trade have been our economic lifeline. With trade that is more than three times our GDP, many of our companies - together with multinationals - are all engaged in value chain activities of some kind.
The role and evolution of GVCs, together with challenges and implications regarding carbon emissions, are spelt out in the latest publication by the Asian Infrastructure Investment Bank (AIIB), Sustaining Global Value Chains, to be released at its annual meeting next week.
We estimate that more than 70 per cent of Singapore's exports are GVC-related. As companies come under increasing pressure from governments and consumers to decarbonise, it stands to reason that Singapore will need to act quickly.
The pressure is on as GVC products and activities embed a significant amount of carbon emissions, which are then traded across borders.
How our exports will be affected
True, by gross emissions embedded in trade, Singapore is not significant because of the relatively small size of our economy.
But when emissions are priced at a conservative US$40 (S$54) per tonne (the lower level recommended by the High-Level Commission on Carbon Prices) and expressed as a percentage of Singapore's GDP, net emissions exported are around 0.7 per cent of GDP annually.
This is not Singapore's emissions alone, but the net emission exported through trade. Furthermore, carbon prices are expected to go up to US$50-US$100 per tonne by 2030, as recommended by the commission.
If emissions are not controlled, border tax adjustments by other countries might follow, and Singapore's exports will be affected.
The European Union, for example, is already planning such border taxes on carbon-intensive imports.
As well, GVC activities are transport-intensive. Intermediate goods have to flow from multiple locations, often crossing borders several times in different stages of production, before reaching final destinations.
Looking at our wholesale trade and transport sectors, Singapore not only benefits from its own GVC exports but also from trade activities passing through its airport and ports. Transport related to international trade now accounts for more than two billion tonnes of emissions a year and is expected to rise quickly. Emissions will be even higher if local freighting is included. This, too, will not be sustainable without emission controls.
So how to prepare?
For renewable energy generation, Singapore naturally begins with a disadvantage, given its small size and lack of renewable energy endowments.
Our recent investments into utility-size floating solar farms are necessary and encouraging, but will be far from sufficient to meet the needs of GVC activities.
Yet Singapore sits in a region that is relatively well endowed with renewable energy potential, and electricity generated by renewable sources can be imported when transmission lines and grids are connected.
Such import of electricity naturally raises some concerns over energy security.
In principle, imported electricity does not give rise to any more long-term security risks than imported fossil fuel - both depend on international cooperation that underpins well-functioning energy markets.
In short, the transition towards net zero emissions will present disruptions for Singapore, both from our position as a hub for companies and as a hub for transport. Singapore needs to urgently prepare for this.
The additional risks for imported renewable electricity are its intermittency and zero time lag in the event of operational disruptions.
Furthermore, disruptions may occur in other jurisdictions, making remedy more challenging.
There are no easy solutions to energy security, but this can be mitigated through a mix of various present and likely future technologies - standby power generation capacity, battery storage, and transitioning to clean hydrogen or biofuels which can be stored.
Realistically, Singapore will also have to accept that some energy intensive industries will have to be relocated closer to renewable energy sources in the longer run.
Away from production of energy intensive goods, Singapore has a better set of circumstances. There is a certain clustering benefit and "stickiness" to GVC activities. With a strong history of hosting international companies, it is well positioned to work with companies to organise these value chains for greener production, to provide greater data transparency, and to offset GVC emissions.
As a financial centre, it is also well-positioned to be a centre of green finance and ensuring high financing standards.
The Monetary Authority of Singapore has rightly been an early advocate on this. Infrastructure Asia's efforts to catalyse sustainable infrastructure in the region will also indirectly help Singapore.
On aviation and sea transport, two growing but hard to abate sectors, it should be noted that Singapore does not face any particular disadvantage compared with other hubs as far as green fuels are concerned. The key is to implement fast when the technology and economics allow.
Planning for higher prices
While the carbon tax in Singapore is still low in the interim, Government and companies will have to plan as if a very high carbon price is already upon us, with a tight constraint already in place.
This realisation and mindset must be the first step in our net zero transition. Large companies, with their sizeable GVC operations, have a particular responsibility on this, given their emissions and their ability to influence the rest of the supply chains, often across multiple jurisdictions.
Infrastructure plans for various scenarios will also have to be made ready, to allow companies and sectors to transit to different fuel sources once the economics for hydrogen and biofuels make these commercially feasible.
The ingenuity of GVCs is to allow each production step to be shored to a location with the greatest relative advantage, before coming together for the final product.
This is the source of its tremendous economic efficiency. But less recognised is the fact that fossil fuel, given its storability and transportability, has been the secret "dirty" ingredient that allows humanity to decouple production from where the fuel is found.
Because of fossil fuels, economic geography has not been tied to energy geography. Singapore's small size and lack of energy resources have not constrained its prosperity.
The phasing out of fossil fuels thus poses a severe challenge to GVCs and their model of distributed production.
Falling transport costs, which have facilitated the dramatic rise in international trade that benefits open economies like Singapore, will have to rise. Singapore will be deeply affected.
Our energy mix, industrial production, transport, and infrastructure will need to change significantly over the next three decades.
While technology around renewable energy production, storage and transport holds much promise, the transition towards net zero promises to be difficult, as seen in recent disruptions in energy markets.
Economies that provide green production opportunities will gain an advantage and become attractive hosts to GVC activities. The race for sustainable GVCs and future prosperity has already begun.
- Dr Thia Jang Ping is lead economist and manager of the economics department at the Asian Infrastructure Investment Bank