Confronting the Supply Chain Crisis

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.


This is a companion discussion topic for the original entry at https://quillette.com/2021/10/13/confronting-the-supply-chain-crisis/

How is it that this author, in a single essay, questions the command/controlled economy of China, but then says this:

“Reshoring will require tariffs and bans, but also incentives, including tax policies that encourage industrial investments, loans and loan guarantees, grants, public-private partnerships . . . .”

Just let free markets work their magic. Keep government planning out of it, please.

I would, however, be interested to learn what neo-feudalism is.

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Anytime I see ‘public/private partnerships’ or ‘loan guarantees’, I tend to suspect that the government is giving away somebody else’s money, and that elite ‘consultants’ are getting a hefty cut.

I’m for tariffs, significant ones in some cases. They are useful source of revenue, even. And they are consistent with the idea of a free market economy, in which the market is open to the nation’s citizens, and the allies with whom we share common interests and common culture. And let that market work.

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America has the land, the infrastructure, the knowledge, and the workers to “repatriate” the means of production and its dissemination.

But do we have the courage?

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Don’t look now, but an eevil right-wing conspiracy site supported by armed insurrectionists says that two of the California port problems are:

  1. The looming switch in California to electric trucks.
  2. The AB-5 law that was designed to hobble Uber and Lyft and prohibits contract labor, like owner-operator truck drivers.

Nothing to see here, move right along.

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And, for most part, the proven natural resources, certainly the natural gas, but also a lot of interesting minerals. From among Canada, US and Australia, the rare earth metals are pretty well covered, but some have them have been cheaper from China, or Congo, and so of course, in the short term, cheaper is better. But the ‘short term’ may be very short indeed, if all that matters is price.

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Yes, absolutely! We are blessed beyond measure and yet we traded it all to ensure that t-shirts would only cost $1.99 / six pack at Walmart…

A good essay, I saw the container crisis as it began to develop and wrote about it in my Substack in early July, albeit as an aside to other changes in the economy. I was less prophetic with the driver shortages, only being a few weeks ahead of the curve- but I tend to be better with hard problems than soft ones, and hindsight, they say, is 2020. I’m glad the author mentioned the high multiplier effect of high value manufacturing- when Rover was in trouble, although their direct employees only accounted for 6,000 workers, there were 100,000 workers in the locally integrated supply chain, and a further million workers whose jobs and incomes were adversely affected.

The UK government should have allowed the sale of Rover to Nissan, they wanted to turn it into a flagship brand. The Germans simply wanted to eliminate a competitor to BMW, because Rover was eating into their market share- one of their first acts was to shut the dealership network in Europe. The Rover 75 in particular, had BMW and Mercedes worried.

The question which should worry all experts of world affairs is how do we reshore manufacturing, without triggering the Thucydides Trap with China? It’s a serious question, because for the last thirty years trade has done a great deal to diffuse tension between America and China. The then British Empire and America were able to sidestep this issue, partially because of friendship built up during the Second World War, partly because of historic ties and similar outlooks on liberty- but the far more convincing elements in disarming the Thucydides Trap was the emerging threat of the Soviet Union in tandem with a friendly American industrial policy which saw companies like Ford locate significant portions of their Europe orientated production base in Britain.

Unfortunately, very few of these factors exist between America and China. Culturally, the West and China are aliens, with none of the common language affinity which characterised the Anglo-American relationship. Although the Chinese understand the West very well, most lay Western onlookers are largely ignorant of Chinese cultural nuances. In particular, Westerners lack the insight to see that the Chinese Government is the same thing to most Chinese citizens as the Chinese people and any insult to their government is likely to be taken as a national slight by their people. The only schism between the Chinese people and the Chinese government relates to concerns to occasional concerns over corruption, which can usually be traced to the local level.

To understand the Chinese ethos and philosophy, particularly in relation to their perceptions of the West, we need to understand a few basic factors. First, irrespective of the issue of Hong Kong, there are two China’s one comprising of the 300 million or so living in coastal areas, largely cosmopolitan and very much an advanced economy, and the other poorer, more ideologically orientated towards Communist doctrine, despite various ongoing economic development projects managed by a meritocratic class of party technocrats and very able managers.

Second, they see Western democracies as schizophrenic, and increasingly, unreliable in terms of making treaties to which they will stick. They don’t understand the West’s attitude to Islam, which they see as a backward religion and inherent threat, largely as a result of the higher population growth rates found in most religious groups, compared to secular populations. Part of this bias can be traced to Marx and differing cultural interpretations of his attitude to religion- when Marx said ‘religion is the opiate of the masses’ he meant it in terms of the far more sedate and benign apathy engendered within the middle classes through laudanum, rather than through the social destructive and destabilising influence of the opium den. But more broadly speaking, given some of the grass roots incompatibilities of Western value pluralism and Islam, which also possesses more of an inherent tilt towards the political than Christianity, especially through Sharia Law, the Chinese may well have a point.

Another destabilising influence in the relationship is Western media. The friction of the Culture War, with its bipolar attitudes towards China, is always going to impart offense- especially within legacy media which is increasingly forced to rely upon gotcha and clickbait journalism, because of the low levels of trust towards institutional media in many age groups and any non-Democrat affiliation. Much of Chinese etiquette is construed to minimise means of giving offense, and often goes out of its way to help others avoid embarrassment. This finds its ultimate form in the often well-paid jobs offered to foreigners of all nationalities and ethnicities in the form of the somewhat disingenuously named white monkey work- which no Chinese citizen would want to do, because of the shame it would entail, or because of the value adding that can come form having perceived White Western consumers. Regardless, to the Chinese mindset the Western attitude of outspoken criticism and causing shame, can seem needlessly rude and cruel.

Finally, there is the issue of trade and diplomacy, especially when it comes to negotiations and business relationships. Westerners operate on the principal of enlightened self-interest, which is a mistake. Chinese corporate relationships have two settings, friendly and adversarial with a temporary ceasefire in place. With the friend setting, the Chinese can be extraordinarily gracious and operate automatically towards the pursuit of mutually beneficial relationships, almost considerable the partners position as much as their own, but in the second setting, the default setting is tough and always contrived to gain maximum advantage. Western negotiators and diplomats would have done better to bear this in mind, rather than to automatically expect adherence to deals and good faith. But perhaps this is overly optimistic, with the Western penchant for acting as the proverbial bull in a china shop, international relations might have been doomed from the start.

So what is the solution to the Thucydides Trap in relation to China? How do we maintain trade engagement and avoid a potentially nuclear World War Three? In a word, Keiretsu. For those unfamiliar with the term, Keiretsu, were the successors to the old pre- WWII zaibatsu in Japan. They were large scale conglomerates in which a collection of corporations could operate competitively against other keiretsu, fulfilling virtually any human need within the conglomerate. They reached their ultimate zenith in the eighties, with Japan playing a huge role in international production.

In this sense, I am talking about keiretsu in the vertically integrated manufacturing model rather than the more horizontal financial model, but with the caveat that I see a newer keiretsu model for manufacturing operating horizontally, in a few specialised spheres across multiple jurisdictions and trade zones, with even head office and design offices split across multiple locations, contributing to a decentralised hub. The model would entail scale in breadth of market and global reach, not through market domination across several sectors.

The benefits of operating separated design, engineering and science cells should be obvious. Whilst we want people communicating across cells, in terms of sharing ideas, the example of tech giants will soon illustrate how a common works culture (especially when of an ideological nature) can inhibit innovation, even if some might claim that it hasn’t done so already. In innovative terms, it often more beneficial to have lots of smaller teams operating independently, than fewer larger ones. Such keiretsu would also be useful for tax purposes, and protect against governments which seek to impose the wrecker’s force upon companies- adding to business resilience.

So how would they work and why do we need them? Well, basically any corporation seeking to diversify across trade zones, would divide the world into a series of trade zones, regions and areas, which each zone supplying its own service and goods needs, even down to parts and supply chains where possible and either outsourcing or exporting to other zones, depending upon the market and the various regulatory hurdles they may face, depending upon whether assembly is within a given region, or outside of it.

The reason for this new approach is simple- most advanced economies have woken up to the reality that labour is just as important to the virtuous cycle of the market as is the capital. It acts as its own self-feeding ecosystem, or as a coupled system. Otherwise, how do we explain the Chinese economic miracle, when most of their contracts barely scrapped a 6% profit margin- only just enough to cover tax, risk and inflation? This answer lies in the multiplier effect of the labour, acting as the seed for all manner of local consumer orientated goods and services.

Most advanced economies now wish to grow their mid to high value manufacturing as they are beginning to realise that their population aren’t blank slates for whom it is not possible to shift large segments into higher band employment, whilst simultaneously realising that while service labour can provide employment it doesn’t provide as high income levels as tradables- with large portions of the male population in particular unsuitable for the higher educational route, retail or service (other than a few highly regarded jobs like cheffing).

There is also an extent to which blue collar workers in Western countries feel betrayed, and it’s leading to political and cultural instability. In this type of global cultural environment it becomes all but impossible to instigate mutually beneficial trade over the mid- to long-term. Ultimately, the only game theory which works is resorting to the new keiretsu acting as distributive third parties, susceptible to the pressure to locate fabrications for domestic and regional markets internally, but ultimately able to create an ecosystem which benefits all nations and peoples in terms of labour, as much as they are able.

There may be resistance from neoliberals on principle, especially with regard to vested interests like finance. But in the West at least, the emphasis on climate change will be a motivating force, because shorter, more integrated supply chains coupled with fabrications plants which are closer to market will drastically reduce the carbon footprint of container fleets and air freight. As an added bonus, less competition between zones, and more competition within them, automatically reduces the competitive disincentive to innovate our way out of bunkers fuels- a horrendously dirty and polluting, but very cheap, transport fuel employed by most elements of maritime transport.

For China, the incentives are equally clear. They are facing the 421 problem with their population. They face increasingly hostile consumer markets abroad, and many Western corporations are looking at reshoring parts of their manufacturing businesses back into the countries which originally made them, or at least to other parts of Asia. At the same time, Western societies have been made painfully aware of just how vulnerable our global transport and supply system is during the pandemic, and they are unlikely to tolerate democratically elected governments which only make a superficial show of trying to address the issue. With the coming midterms, unless Biden changes his policies on tariff exclusions, with 549 separate tariff exclusions for Chinese companies, his Republican opposition is likely to make a meal of his misfortunate positioning.

Ultimately, we need a cooperative system which can sustain and regionalise trade, without the sea of domestic turmoil creating politics and diplomacy which introduces systemic instability and potential conflict. Maslow was wrong not to include labour is his hierarchy of needs, although he probably excluded it because it is the one need which stretches all the way from basic need to self-actualising. And it’s not just individuals who need labour, it’s families, communities and even nations. In our current paradigm, a distributed model of the keiretsu system is the only thing that stands between us and World War III. As sovereign nations we all need to acknowledge that every people needs labour and a system which helps each country maximise theirs without jeopardising others is the only way to leave the Thucydides Trap unsprung.

As usual, my essays are available on my Substack and free to view and comment:

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