[Rushtalk] Confronting the Supply Chain Crisis

Carl Spitzer {C Juno} cwsiv at juno.com
Sun Oct 24 18:28:31 MDT 2021


Confronting the Supply Chain Crisis

Joel Kotkin
Joel Kotkin
13 Oct 2021 



For a generation, the Long Beach and Los Angeles harbors in California handled more than 40 percent of all container cargo headed into the US and epitomized the power of a globalizing economy. Today, the ships—mostly from Asia—still dock, but they must wait in a seemingly endless conga line of as many as 60 vessels, sometimes for as long as three weeks. These are the worst delays in modern history, and the price per container has risen to as much as 10 times its cost before the pandemic. The shipping crisis is now projected to last through 2023.


A pandemic-driven shortage of parts and labor has combined with a
congested transport system to create an inflationary spike, with
shipping rates doubling on some routes. Prices for everything from
soybeans to natural gas have soared as supplies take longer to produce
and arrive, and this high inflation is wiping out wage gains in the US,
the UK, and Germany. The chaos on the ground may not disturb the
lifestyles of the tech and financial elites, but it is hurting the
middle and working classes, the groups most threatened by surging
inflation.

The supply chain disaster has also revealed the existence of crippling
economic dependence, particularly on China, in high-income countries.
Today, whole industries in the West—from medical equipment to chip and
car makers to food—rely on China for finished products and key
components. When China cannot (or decides not to) supply these parts,
whole industries suffer debilitating supply chain shortages. The notion
of a rational, self-regulating market system is unraveling and may yet
presage the demise of the prevailing neoliberal era.

Walking away from production

For generations, business consultants have persuaded businesses large
and small to move their production to China in search of cheaper costs.
This has had a devastating effect, particularly in the United States,
where between 2004 and 2017, the share of world manufacturing shrank
from 15 to 10 percent while reliance on Chinese inputs doubled. The
trade deficit with China, according to the Economic Policy Institute,
has cost as many as 3.7 million jobs since 2000. The consequences have
also been severe in the UK, which suffered 1.5 million job losses in
manufacturing between 1997 and 2009, in part due to climate policies
that threaten the last vestiges of heavy industry in the country that
invented it.

In the face of these trends, the general response of the Western elites
has been “Why worry?” Reflecting the ideological leanings of the
American establishment, Christina D. Romer, the former head of the
Council of Economic Advisers in the Obama administration, dismissed
concerns about manufacturing policy as nostalgic “sentiment,” declaring,
“American consumers value health care and haircuts as much as washing
machines and hair dryers.”

But unlike the local hair salon, the market for washing machines is
national and global and these goods have to be transported, often over
great distances. A factory that makes parts for washing machines in a
city, state, or region draws money to the local community. Moreover,
manufacturing has one of the highest multiplier effects of any sector—
one manufacturing job in a community is likely to generate numerous
other direct, indirect, and induced jobs, both locally and elsewhere.

Pandemic lessons

In the midst of the pandemic, even the world’s richest regions—the
European Union, the United Kingdom, North America—found themselves
without basic medical equipment like masks, and even the compounds
needed to make critical chemical treatments. In the early critical
months, “China's decision to block exports of these goods led to
widespread shortages,” observes Richard Haass, President of the Council
on Foreign Relations. “There is also the concern that an increasingly
assertive China might seek to exploit the world's dependence on it for
political purposes.”

This disaster, now playing out across the industrial landscape, reflects
the fracturing of supply chains over several decades. A generation of
politicians, economists, and pundits, particularly in Anglo-Saxon
countries like Australia, have paid little attention to nurturing the
“industrial commons,” which encompass production, research and
development, supply chains, embedded process development, and
engineering capacity.

This pattern affects industries besides medical equipment. This year,
auto production was curtailed due to a worldwide shortage of
semiconductors tied to a recent drought in Taiwan. America’s push into
renewables threatens to further bolster China’s dominance of the solar
panel industry and production of the essential metals needed to produce
“clean” energy and electric cars. The West’s trade deficit now extends
even to high-tech products. When companies move production abroad, they
often shift research and development as well. Remarkably, this has also
included sources of critical components for military goods, many of
which are now produced in China.

Reshoring: A possible answer

Camille Farhat—a former top executive at General Electric, Baxter, and
Medtronic, and now CEO of Michigan-based manufacturer RTI Surgical—told
me that many products, including medical supplies, can be produced
domestically. Farhat hopes the pandemic will convince other business
leaders to stop “destroying the supply ecosystem” that makes production
possible. “To stay safe, you have to do contingency planning—you have to
restore the network and maintain surplus production capacity. Hopefully,
we are learning that lesson.” There are signs that some are heeding
Farhat’s advice. Japan, France, the UK, and the European Union all
recognize that dependence on China carries enormous political and
economic risks. Japan is even offering loans to lure companies back home
from China.

There are signs of some change in the corporate suite as well, even
predating the current crisis. McKinsey and Company surveyed supply chain
executives last year and found that nearly all respondents believe their
supply chains are too vulnerable. According to March 2020’s Thomas
Industrial Survey, COVID-19 supply chain disruptions aggravated an
appetite for locally sourced materials and services—up to 70 percent of
firms surveyed said they were “likely” or “extremely likely” to re-shore
in the coming years. Similarly, a UBS study revealed that as many as 50
or 60 percent of firms now producing in China have moved or are planning
to move.

This shift includes some major companies, like Black and Decker, who
have moved production to a new facility in Fort Worth, Texas, as part of
its reshoring strategy. Appliance giant Whirlpool reshored 400 jobs,
along with General Electric, Apple, Caterpillar, Goodyear, General
Motors, and Polaris. Little Tikes, a major American toy maker, has
started shifting production out of China and back to Ohio. When Little
Tikes started out more than 40 years ago, everything was made in the
United States, but most production moved to China in the 1980s and ‘90s,
when the Chinese manufacturing sector began to take off. Now, “the wheel
is kind of coming full circle,” Executive vice president and worldwide
general manager Thomas Richmond told me.

Of course, such moves will be resisted by companies that have grown
hopelessly dependent on far-flung supply chains and no longer possess
the skills to make their own products. Some analysts suggest that
large-scale reshoring to North America will require strong government
action. Yet there are reasons for optimism. President Trump's tariffs
may not have done much to revive US manufacturing, but the Reshoring
Initiative’s Harry Moser told me that the annual number of jobs
returning from offshore has increased from 6,000 in 2010 to over 400,000
in 2019. Cumulative jobs brought back represent about five percent of
the United States’ total industrial employment. In 2019, for the first
time in a decade, the percentage of manufacturing goods imported to the
US dropped, notes a recent Kearny study, with much of the shift coming
from east Asia.

The China challenge

The supply chain crisis has made plain the grave threat posed by China’s
rise. In the early stages of China's embrace of capitalism, the
country’s industrial push was widely welcomed as a triumph of liberal
globalization. China, it was believed, simply wanted to succeed, and
would do so in a manner at least somewhat congruent with Western values.
Its trajectory was expected to follow that of Japan, Singapore, or South
Korea, all of which lack China’s military power, both in population and
resources.

But under the leadership of Xi Jinping, China has nurtured an economy
that works in a profoundly different way to those of capitalist
countries. In the West, profits and individual wealth accumulation drive
economic progress. Although Chinese people may also want to get rich,
the primary goal of the CCP is to bolster the Middle Kingdom’s global
power and influence. In China, the regime employs its power to restrain
and even imprison the country’s entrepreneurs if they defy its
authority. Social media is used as a political tool to promote China’s
ascendency, even on ostensibly frivolous sites like Tik Tok.

China’s agenda has stretched beyond consolidating its hold on existing
industries. Now it seeks to dominate such fields as artificial
intelligence, bio-medicine, and the dominance of space that will likely
shape the future economy. Economist Yi-Zheng Lian argues that stealing
technology is now encouraged as China becomes a “nation of patriotic
thieves.” The basic rules that underpin capitalist economies simply do
not much matter, big time investors now lament.

China is also determined to promote its alternative authoritarian model
of governance, particularly in developing countries. This drive could
accelerate with China’s military expansion, and may yet include the
conquest of Taiwan, which is now the world’s leader in semiconductor
technology. The feisty island nation is now subject to aerial incursions
from the mainland and could be blockaded. The Taiwan Semiconductor
Manufacturing Company’s decision to build a $12 billion new plant in
Arizona could be critical to assuring secure supplies for America’s
manufacturers.

Needed: A policy and political response

Revitalizing our “industrial commons” requires bold new initiatives and
measures from our economic past, which saw some very successful efforts
to spark industrial growth during World War Two and the Cold War.
Indeed, as two Harvard researchers have suggested, “Believing in the
power of markets does not preclude the judicious use of appropriate
government policies.”

While rejecting Trump’s crude unilateral approach, the Biden
administration has continued to pursue many of its predecessor’s themes,
including proposals to boost the domestic semiconductor and steel
industries. The Biden plan would spend $300 billion on R&D to revitalize
American industrial competitiveness and invest in alternatives to
four-year colleges, trade schools, apprenticeships, and community
colleges. A more ambitious part of the plan involves the use of taxes,
subsidies, and public-private partnerships to encourage companies to
retain the capacity to make critical supplies during a national
emergency.

Reshoring will require tariffs and bans, but also incentives, including
tax policies that encourage industrial investments, loans and loan
guarantees, grants, public-private partnerships, and supportive
educational and physical infrastructure. Additionally, steps could be
taken to promote the development of critical rare metals outside of
China.

Western countries could also justify shifts away from China on
environmental grounds. For businesses and consumers, attempts to move
out of China could cost as much as $1 trillion, but would detach firms
from the country’s notoriously high carbon supply chains, which emit
more greenhouse gasses than the United States and the European Union
combined. Indeed, according to one recent study, China is home to 23 of
the 25 largest cities in terms of GHG emissions.

A post-globalist politics?

Addressing our supply chain vulnerabilities is not just good policy but
also good politics. Robust efforts to counter China’s mounting challenge
in science and technology, such as the US Innovation and Competitiveness
Act, passed the Senate by a wide margin. A recent survey by the
left-leaning Center for American Progress found that far more Americans
prioritize protecting US jobs and reducing illegal immigration than
progressive goals like combatting climate change and improving relations
with allies.


        New public opinion poll. Insights into what Americans want US
        foreign policy objectives to be. Promoting democracy and
        freedoms comes in dead last. pic.twitter.com/RnD7GdLOYm
        
        — Bonnie Glaser / 葛來儀 (@BonnieGlaser) June 3, 2021


Despite the much-ballyhooed consumer benefits of low-cost imports, the
vast majority of Americans seem to be willing to pay higher prices that
would come from moving production out of China—a fact that has
encouraged retailers such as Walmart to seek out more domestic
suppliers. The current supply chain crisis can only reinforce these
trends. Economic boycotts of Chinese goods and firms—a successful
example of which is the US attempt to thwart telecommunications giant
Huawei—may be a harbinger of things to come, at least in strategically
critical areas.

Some may see such an effort as doomed, particularly on Wall Street, a
bastion of pro-China sentiment. But the Middle Kingdom may be far more
vulnerable than widely thought. China’s financial system is only now
feeling the impact of massive but unwise investments in high-rise
offices and residential towers, epitomized by the Evergrande’s pending
bankruptcy. A rapid decline in the workforce by over 200 million by
2050, a stubbornly low birth rate, and growing class conflict could also
pose challenges and provide opportunities for competitors. More
critically, Chinese regime controls could derail innovation. Certainly,
blocking data and analysis from the rest of the world is not the route
to information-era dominance. 

Handing the industrial and technological future to authoritarian states
is a recipe for undermining our own democracy. Of course, free countries
will still trade with autocracies, which seem to be ascendant. But the
focus needs to be on maintaining primary supply chains with partners who
essentially conform to the rule of law and are not seeking to establish
a global hegemony. What’s needed is a series of alliances with
likeminded countries that generally follow liberal capitalist values and
legal norms. This can be seen in the new defense pact between the US,
the UK, and Australia, with potential growing ties to Japan, South
Korea, and India.

In the long run, capitalist order can only be maintained by a common
belief in basic principles of fairness and legality. The ships stalled
at sea and empty supermarket shelves and relentlessly higher prices
represent warning signs of a new and dangerous economic reality. We can
either accept dependency as “the new normal” or we can address it
directly, abandoning dreams in favor of approaches based on reality and
greater self-reliance.

Politicseconomicstrade 
Joel Kotkin
Joel Kotkin 


Joel Kotkin is the presidential fellow in Urban Futures at Chapman
University and executive director of the Urban Reform Institute. His new
book is 'The Coming of Neo-Feudalism.'




https://quillette.com/2021/10/13/confronting-the-supply-chain-crisis/ 

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