Americans may think that all the critical systems they rely upon are failing. The country—nay, the globe—has endured years of social, political, environmental, and epidemiological upheaval. Choose your shock: wildfires and COVID-19; George Floyd protests or climate change. All of them seem to be harbingers for a chaotic future.
Pottery Barn backlogs are where the real trouble begins.
The past year saw a lot of media coverage on delays and price rises in the shipment and production of goods to America. Due to disruptions in the supply chain, semiconductor supplies were shorted and used car prices rose significantly due to them. The shortage of computer chips has caused Toyota, Ford and General Motors to reduce their production. The container ship will be empty Every Gift Ever Given temporarily ran aground in the Suez Canal, the Financial Times asserted that the accident showed “the inherent fragility of tightly stretched global supply chains at the very moment when they are already being buffeted by a pandemic and in an era when the philosophical underpinnings of global trade are being challenged.”
It’s not just journalists who are worried. In less than six weeks of his term, President Joe Biden signed an executive order that required eight Cabinet departments to assess the resilience of U.S. Supply chains. It warned of “pandemics or other biological threats,” cyber-attacks as well climate shocks and extreme weather, terrorist attacks and geopolitical competition. Biden also floated a variety of policy options, such as using the National Guard in order to disentangle choked supply chains.
This administration’s concerns about global supply chain fits with the larger ideological shift of the political elite away from trade liberalization in favor of a more mercantilist position. This is where Trump and Biden sound most alike. In a congressional hearing, Katherine Tai (U.S. Trade Representative) stated that her office no longer pursues trade liberalization or tariff reductions as its primary goals. Brian Deese from the National Economic Council, Biden’s director of trade, stated in June that “resilient supplies chains must be central to 21st Century industrial strategies.” Biden’s National Security Council director has said to me that “the U.S. does not depend on trade.” A second official from the administration questioned me about whether there is still a notion of comparative advantages in trade. Never one to be outdone in policy freakouts, Sen. Josh Hawley (R–Mo.) Sen. Josh Hawley (R-Mo.) has proposed a bill that would require more than half of the value added to any essential good to be domestically produced.
Recent convulsions within global supply chains highlight how the model of globalization in the last decade is different from that taught in economics courses. The globalization of markets has led to far greater market concentrations than was expected just a few years ago. A tripling in Baltic Dry Index (which is used to measure the cost of shipping goods such as steel and coal between ports) along with a quintupling in U.S. China container shipping rates during the past year show that there are no free markets. The ways in which great power competition can complicate cross-border trade are revealed by the rising geopolitical tensions that exist between the United States of America and China. Pandemic proved how global economic can be affected by shocks not covered in textbooks.
Looking closely at global value chains shows how both private and public sector actors place emphasis on short-term efficiency at expense of long term resilience. It also shows a disconnect between overheated political rhetoric, and a real understanding of the workings of global economics. Many of the past year’s issues are temporary—and when it comes to strained global supply chains, globalization is more often the solution than the problem.
Ford created the factory responsible for every part of its car production when it built its huge River Rouge plant in 1928. Although trade volume was very high, few intermediate goods were exported during that era. Since then the industrial organization has evolved a little.
While trade was mostly in finished goods 100 years ago, today manufacturing is broken down into many chains of subcontractors. One of the most important aspects in manufacturing is its ability to disaggregate itself into myriad chains of subcontractors. MIT Sloan Management Review article summarized the phenomenon, we have a “deeper tiering of supply chains whereby suppliers draw upon They suppliers who in turn draw on their own networks of suppliers in multistage production networks.”
This is why? Most geopolitical worries about the location of production plants were eliminated by the end of Cold War. In China, a low-cost production location, basic trade theory dictated that there were a great many facilities built. It was easier to disaggregate production and manage it remotely due to the lower transportation costs and communications cost. Manufacturing that is “just-in-time,” encouraged businesses to keep a minimum inventory and to rely on suppliers to react quickly to consumer demand fluctuations. Consultants for management stressed the importance of outsourcing offshore.
Apple’s iPhone is the best-known instance of globalized supply chains. The iPhone was manufactured in China, and shipped to America. The fact that China has only a small role in creating the added value of the iPhone is something less known. Toshiba, a Japanese company, provides the flash drive for iPhone. South Korean manufacturer Samsung provides the application processor. The camera module is provided by a German firm, while the Bluetooth application is supplied by a U.S. Subcontractor. Foxconn is a Taiwanese company that assembles these components. It has its headquarters in Shenzhen.
Management consultants had it right when they said efficiency is key. Although productivity declined in the service industry after the beginning of the 21st century, it continued to rise in manufacturing.
After the fall of Lehman Brothers, political economic advantages also became apparent. This was before the Great Depression and the trade wars. 2008 was another story. The World Bank studied trade restrictions after 2008. It found that vertical specialization was the strongest economic factor to limit tariff rises. A country that is more closely linked to global supply chains will be less likely to increase trade barriers if it has a large economy. The Great Recession didn’t lead to trade wars similar to those that occurred during the Great Depression.
Global value chains were a unalloyed commodity. Then came the decade of 2010.
Global supply chains became increasingly complex and there was concern about the future. The Chao Phraya River flooding in Thailand caused a temporary halt to production of hard drives. Nearly half of the global output came from Thailand. The U.S. suffered an acute shortage in IV bags following Hurricane Maria’s destruction of a Puerto Rico-based production facility.
Key nodes of global manufacturing were affected by Fukushima’s 2011 earthquake and tsunami. Due to key ingredients being stored close Fukushima, some companies stopped selling cars made in particular colors. An iPhone designer warned The New York Times that “there are all kinds of little specialized parts without second sources, like connectors, speakers, microphones, batteries and sensors that don’t get the love they deserve. Many of them are Japanese.
These supply chain problems highlighted a hidden phenomenon of globalization. Globalization did more than increase competition in the market. Instead, it increased market concentration. All consumer-facing businesses, from Walmart to Ford and Apple to Home Depot, stressed cost minimization. ubër alles. Effectively producing one piece of a component made firms near-monopolists. Taiwan Semiconductor Manufacturing Company, (TSMC), became the global leader in customized semiconductor chips. The design and subcontracting of physical production to Taiwanese firms was the focus for other chipmakers. Even established rivals like Intel were unable to compete with TSMC’s chip production capabilities.
Producers are being affected by geopolitical competitiveness. China has a central role in virtually every global value-chain. As Xi Jinping’s power has grown, China has made a series of moves that has raised eyebrows in Western capitals. Some, like the Belt and Road Initiative have been hyped up. Other initiatives, including the Uyghurs’ subjugation and repression in Hong Kong as well as increasing UN agency control, the expanding China’s nuclear arsenal and increased control of United Nations agencies have received less attention. Xi’s “wolf-warrior diplomacy”, which was launched by the Chinese government, has prompted evaluations across Europe and America about how susceptible their economies are to being disrupted by Chinese suppliers. Japan’s imposition of a rare earth embargo in 2010 in protest to East China Sea territory disputes prompted concern about China using global interdependence as a weapon. Huawei’s 5G dominance was another warning. Trump’s chaotic policies served to warn about the dangers of Western governments disrupting global value chains.
The COVID-19 Pandemic, which exacerbated both political whimsy and market concentration, was the final straw. China suffered the effects of the initial wave of the pandemic, which caused disruptions in the entire global economy. China used its state power to take possession of domestically manufactured personal protective equipment, and other medical supplies. The United States quickly reciprocated. Global Trade Alert reports that 157 export restrictions on medicines and medical supplies were imposed in 86 countries during the initial six months of this pandemic. Leaders in the United States expressed concern about China’s potential for militarization of its medical supply chain role. Journalists also expressed concern: May 2021 60 Minutes warned that “COVID showed that the global supply chain of chips is fragile.” The Washington Post concurred: “The pandemic has exposed fragile global supply chains across multiple continents.”
Countries adopted vaccine nationalism to prevent global vaccination against COVID-19. This led to a slowdown in immunization and the development of even more severe variants. The Chinese port facilities and Bangladeshi textile factories have been infected by the delta variant. This has led to frequent shutdowns, which have increased container shipping costs and increased order backlogs.
Produces seemed stuck in fastsand throughout all of this. In the past decade, firms have been alerted that global supply chains are becoming increasingly fragmented. Management consultants continue to pile on, as if natural disasters and pandemics weren’t enough. These same consultants that pushed offshoring decades ago now advise firms to cut back on globalized supply chains. However, most companies aren’t keen to change their current practices. Apple and other multinational corporations have not changed their supply chain in the face of political pressure. The results of both business surveys and journalistic reports are consistent: American firms don’t plan to move their supply chain away from China, regardless of whether they look at them in the form of data.
Imagine a world in which goods distribution is slowed down by disruptions to the supply chain. This would be less ideal. It is possible to change it.
It would be wonderful if everybody would recognize that many of the problems with global value chain are more about supply than demand.
The pandemic caused a sharp contraction in demand and an immediate response. Produced believed that this was the new normal, and they reduced their production. They made a mistake. Combining emergency COVID-19 relief with the “work-from-home” phenomenon resulted in a rebound of demand. It was the affluent who had substantial amounts of disposable income. They spent their disposable income instead on services because of the pandemic. stuffThese include furniture, cars, furnishings, computers, game systems, renovations and home offices. Due to unexpected double rebounds in the demand for consumer electronics and cars, there was a shortage of semiconductor chip. According to a Federal Reserve analysis, the “pause in demand” was shorter than expected and that demand rebounded faster than predicted. This unexpected demand surge surprised the suppliers, and resulted in production bottlenecks currently squeezing Pottery Barn orders.
Demand was higher than predicted, but supply in key sectors has fared better. It was overestimated that the pandemic-like breakdown of supply chains for medical and food supplies would occur. Last year’s survey of logistics firms revealed that there were minimal impacts on the ability to operate due to the pandemic. After the March 2020 shock, even when it was concerned with medicines and personal protective gear there were very few disruptions. The claims that the world supply chain for medical products made states more vulnerable to interdependence were wildly exaggerated. Tourism was more affected by the pandemic than any other manufacturing sector. Indeed, SlateJordan Weissmann from’s noted recently that “imports increased 5 percent year over year in September and up 17% compared to the same time last year.” This occurred despite the fact that air passenger traffic has declined, which made it difficult to ship goods by air. Supply has increased—it’s just that demand has surged even more.
Market signals are being heeded by the private sector, which is increasing production and providing multiple supply channels. Intel, Samsung and TSMC all spend tens to billions of dollars on new American chip factories. Skyrocketing shipping rates are encouraging more construction of container ships. The Wall Street Journal According to reports, the number of new containers ships ordered in 2021’s first five months was nearly double that of 2020 and 2019. Walmart and Home Depot are the biggest retailers to chart their own containers ships in order to guarantee holiday inventory. Shipping rates for containers have started to drop since September peak.
However, these capital investments that are designed to increase resilience may take many years before they start to pay off. Private-sector players have not been quick to make investments in resilient supply chain infrastructures in the past because of this time lag. Such investments could seem overreactive if disruptions can be expected to be short-term. This is understandable, given the amount of money at stake.
Investments in resilience are a good long-term investment, while robustness is a better short-term option. It is the capacity to respond to any permanent shocks. Robustness can be defined as the ability of maintaining output levels when there is a short-term loss. Stockpiling key components is one of the best ways firms can increase their resilience. For example, auto manufacturers are promising to build up inventories of crucial components in order to provide a reliable supply stream.
The auto sector seems to be an exception, not the rule when it comes boosting inventories. For many companies, growing their inventory of components is a costly proposition. Holding inventory can be compared to holding cash. Why would you hold onto an asset with no return rate? Because it increased profits, lean manufacturing is a popular choice.
Chipmakers and chip customers have been battling over which companies will pay more for semiconductors, even as they have become scarcer. According to the just-in time system, chipmakers held inventory. According to a semiconductor CEO, this shortage has altered the power balance. [suppliers]To be the bank and to have a large working capital to support them, it is easy to forget.”
US macroeconomics and microeconomic health are at stake due to bottlenecks in global supply chains. Supply chain problems are driving inflation fears on the macro-side. If not addressed, it could lead to the Fed raising interest rates prematurely. Another problem is panic among consumers about rumored shortages. See, for example, the effect of the ransomware attack on Colonial Pipeline—drivers panicked and went to gas stations to top off their tanks, temporarily worsening the problem.
The high cost of shipping and inventories threatens the market’s competition on the micro-side. Small and medium businesses are less likely to be affected by supply risk than larger companies. Multinational corporations are able to invest large amounts in resilience and strength. Multinational corporations can also use their market power for continued access to rare container billets on ships. Your local bodega cannot charter an entire container vessel. As the supply chain becomes more complex, more of the world’s sectors will appear to be monopolies and less like competitive markets.
There have been many really stupid ideas on what government can do when it comes to fixing problems. Hawley’s suggestion of basically nationalizing supply chain is by far the most absurd. It would be much longer than the time he suggests to implement. Due to inefficiencies, prices will continue rising. Rent-seeking is a lucrative business. Every sector of the economy would lobby Washington to ensure that their products are “critical.” It’s also important to remember that Hawley has taken a lot of blame for delays in delivery due to the absence of truck drivers.
Biden Administration’s responses varied widely. Jen Psaki, White House Press Secretary tried to make light of it by calling the situation “the tragedy that the treadmill is delayed”. It will not be popular in a country that values just-in time delivery and tries to get past the pandemic. Biden’s offer to keep the port open 24/7 will have little effect. While ports are currently jammed, there are also bottlenecks in railroad cars and truck drivers—both of which are issues that predated the pandemic. The traffic jams will continue to migrate towards America’s highways and railroads, even if it is cleared up at the port.
Looking more broadly at manufacturing, some companies have admitted that they did not know where their suppliers were located prior to the pandemic. One area in which the Biden administration might be useful is this: collecting data on supply chain information.
If the federal government is able to identify or stock priority components that will affect multiple sectors, these strategic reserves may theoretically boost the strength of the U.S. Economy. These investments shouldn’t be used to protectionism.
Evidence from the past year indicates that economies can recover quicker from supply chain problems if they are globalized than if they try to homeshoring aggressively. Globalization is more effective than aggressive homeshoring because many shocks are locally based. Access to global value chains allows for faster recovery. Protectionism may be partly responsible for this mess. Scott Lincicome of the Cato Institute noted that the Jones Act requires U.S.-built ships with crews and flagged to carry cargo. This has increased the cost of shipping coastwise, putting additional pressure on rail and truck transport.
Unsurprisingly, American producers are asking the Biden administration for a reduction in tariffs to help them get relief from rising shipping costs. This is not the answer to the problems in supply chains. Protectionism is part of the solution.
The post Where's My Stuff? Reason.com first published the post Where’s My Stuff?