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. You can choose your shock: Wildfires, COVID-19 and George Floyd protests. Climate change is January 6. These all look like signs of an unpredictable future.
Backlogs in Pottery Barn orders can be a sign that things are slowing down.
There has been a lot of coverage in recent years about issues such as price spikes and delays in goods production to the United States. 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. Container ship 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.”
The panic isn’t limited to journalists. Six weeks into President Joe Biden’s term, he issued an executive order directing eight departments to examine U.S. supply chain resilience. He warned that pandemics, other biological threats and cyber-attacks as well climate shocks and extreme weather, terrorist attacks and geopolitical competition could all lead to a reduction in critical manufacturing capacities and lower availability and integrity for critical goods, services, and products. Biden also floated a variety of policy options, such as using the National Guard in order to disentangle choked supply chains.
Concerns about global supply chains fit in with the wider ideological pivot of the political elite towards mercantilist positions and away from free trade. 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 (Director of the National Economic Council) stated that resilient supply chains are essential to a 21st-century industrial strategy. 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.) A bill was introduced by Senator Josh Hawley (R.Mo.). It requires that more than half of all critical goods to be domestically manufactured.
Global supply chain convulsions have highlighted how globalization has changed over the past decade. This is in stark contrast to the models that were taught in introductory economics classes. 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 frictionless markets are not possible. The increasing geopolitical tensions in the United States and China show how great power competition could complicate cross border exchange. The pandemic was a clear example of how shocks can disrupt the global economy in ways that textbooks don’t usually discuss.
An in-depth look at global value chain analysis reveals that public and private sector actors prioritize short-term efficiency over 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. The industrial organization of production has seen a slight shift in the intervening years.
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 Their 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. The basic trade theory required that a lot of manufacturing facilities were built in China. It was easier to disaggregate production and manage it remotely due to the lower transportation costs and communications cost. Companies were encouraged to have minimal inventory and rely on their suppliers to quickly respond to changes in consumer demand. Consultants for management stressed the importance of outsourcing offshore.
Apple’s iPhone is the most well-known example of a globalized supply chain. 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. The application processor is provided by Samsung, which is a South Korean company. The camera module is provided by a German firm, while the Bluetooth application is supplied by a U.S. Subcontractor. Foxconn in Taiwan, which has operations in Shenzhen (China), then assembles all of the parts.
Management consultants proved right on efficiency. 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. It was the Great Depression’s trade wars that caused a financial shock this severe. 2008 was different. According to a World Bank study, trade restrictions in 2008 were limited by “vertical specificization”. 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. Because of global supply chains, the Great Recession was not accompanied by trade wars as the Great Depression.
These global value chains looked like an inexorable good. Then, the 2010s came along.
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. After Hurricane Maria destroyed a major production plant in Puerto Rico, U.S. hospitals were faced with an urgent shortage of IV bags.
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 come from Japan.
These supply chain problems highlighted a hidden phenomenon of globalization. Globalization did more than increase competition in the market. Instead, it increased market concentration. From Walmart to Ford, Apple to Home Depot to Apple, consumer-facing companies stressed the importance of cost minimization ubër alles. Companies that were able to produce one component efficiently became almost monopolists in that part. Taiwan Semiconductor Manufacturing Company, (TSMC), became the global leader in customized semiconductor chips. Others chipmakers specialized in design. They subcontract to Taiwanese companies for physical production. 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. The Chinese state took a lot of actions over the past decade as Xi Jinping has consolidated power. This has caused concern in Western capitals. Some, like the Belt and Road Initiative have been hyped up. Some, like the Uyghur subjugation, Hong Kong repression, increased control over United Nations agencies and China’s expansion of its nuclear arsenal have been under-hyped. Xi’s “wolf-warrior diplomacy”, which was launched by the Chinese government, has triggered assessments in America, Europe and Pacific Rim on how susceptible their economies are to being disrupted by Chinese suppliers. Japan’s 2010 embargo of rare earths against Japan was in response to an East China Sea territorial dispute. Huawei’s dominant position in 5G provided another warning. Trump’s chaotic policies served to warn about the dangers of Western governments disrupting global value chains.
Last but not least, the COVID-19-related pandemic only exacerbated market concentration as well as political whimsy. 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 reported that in the six-months prior to the outbreak, there were 157 restrictions placed on export of medical supplies and medicine in 86 different countries. The vulnerability of China militarizing its position in medical supply chains was a concern for U.S. officials. Journalists shared their concerns: On May 20, 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.”
Many countries practiced vaccine nationalism which stunted global immunization against COVID-19. In turn, this facilitated the development and spread of even more severe variants of the new coronavirus. 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 led to longer order wait times.
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. As if natural catastrophes, pandemics, or geopolitical tensions are not enough, management consultants have stepped in. These same consultants that urged outsourcing a century ago now advise firms to cut off from globalized supply chain networks. However, most companies aren’t keen to change their current practices. Apple, a multinational corporation, has not modified its supply chains to meet political pressure. No matter if you look at journalistic accounts or business surveys, most U.S. companies do not intend to shift their supply chains from China.
Imagine a world where the delivery of goods is slowed down by disruptions in supply chains. 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.
There was an acute and immediate contraction in demand when the pandemic started. Produced believed that this was the new normal, and they reduced their production. They were wrong. Combining emergency COVID-19 relief with the “work-from-home” phenomenon resulted in a rebound of demand. Affluent people had large amounts of 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. Federal Reserve analysts explained that the pause in consumer demand was significantly shorter than forecasted and that the rebound in demand proved to be much more powerful than originally expected. 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 overpredicted that there would be a pandemic in the supply chain for medical and food supplies. According to surveys of logistical companies last year, the effects of pandemic on operational capability were negligible. After the March 2020 shock, even when it was concerned with medicines and personal protective gear there were very few disruptions. Claims that the worldwide supply chain of medical products left states open to weapons interdependence have been proven to be exaggerated. Service sectors like tourism were more severely affected than manufacturing. Indeed, SlateJordan Weissmann, a spokesman for’s pointed out that imports rose by 5 percent in September year-over-year and 17 percent in comparison to the same period in 2019. This was despite the decrease in passenger air traffic which has restricted another way of shipping goods via air. Supply has increased—it’s just that demand has surged even more.
Private sector responds to market signals and increases production. Intel, Samsung and TSMC all spend tens to billions of dollars on new American chip factories. The skyrocketing shipping costs are driving more construction of new 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, two of the largest retailers in America have chartered container ships to ensure that holiday stock is available. 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 infrastructure in the past because of this time lag. These investments may seem excessive if disruptions are not expected to last for long. This is understandable given the amount of money at stake.
While long-term investments are sensible in resilience, short-term investments make more sense in robustness. 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 temporary loss. One way firms can improve their robustness, is by storing key components. To ensure more reliability in production, car manufacturers have pledged to increase their inventory of key components.
The auto industry is an exception to the general rule when it comes boosting inventories. It is expensive to increase your inventory of parts. Stockpiling inventory to a company is just like having cash. Profits soared and Lean Manufacturing was popularized.
Even though semiconductors are becoming more scarce, chipmakers have been battling chip customers over who should pay for the additional inventory. 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 macroeconomic health is at stake if there are 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. Consumer panic due to rumored shortages is another problem. 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.
Market competition is threatened by the rising cost of inventory and shipping. Larger firms are more vulnerable to supply risks than small- and medium-sized enterprises. 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. There will be more global supply chains that appear monopolistic than competitive, and the longer they are.
In the area of fixes there have been lots of very stupid suggestions about what government could do. Hawley’s proposal to essentially nationalize supply chains is the most stupid. It would be much longer than the time he suggests to implement. Due to inefficiencies, prices will continue rising. There are many opportunities to rent-seek; all sectors would lobby Washington for the right to produce what is considered “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 seeking to end the pandemic. Biden’s plan to make Los Angeles the nation’s largest port will not have much 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. Even if the port is freed from congestion, traffic jams are bound to move onto America’s roads and railways.
If we look at manufacturing in general, many firms admit that prior to the outbreak of the pandemic they didn’t know the geographical distribution of their suppliers. 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. However, such investments should not be used as a shield against 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. Because most shocks occur locally, globalization facilitates faster recovery. The current state of affairs is partially due to protectionism. Scott Lincicome, Cato Institute, recently pointed out that the Jones Act which requires U.S.-built and crewed ships to transport cargo between U.S. ports, has increased shipping costs, putting more strain on train and truck transport.
Unsurprisingly, American producers are asking the Biden administration for a reduction in tariffs to help them get out of skyrocketing shipping prices. These supply chain breakdowns are not the result of protectionism. It’s part and parcel of the problem.
The post Where's My Stuff? Reason.com was the first to publish this article.