Re-Engineering Our Supply Chains
It's time for a coherent national logistics system, regulating and coordinating what has been privatized.
BY DAVID DAYEN
FEBRUARY 11, 2022
Since the supply chain shock hit the public consciousness last summer, we keep reading ubiquitous and premature media reports using the word "easing." In November, the Los Angeles Times assured us, "Cargo Jam at L.A. and Long Beach Ports Begins to Ease," as did Forbes. "Supply-Chain Problems Show Signs of Easing," The Wall Street Journal added later that month. New York magazine even cobbled together "6 Signs That the Supply-Chain Crisis Is (Slowly) Ending."
But despite another wave of these stories in December, celebrating Christmas presents getting into the hands of children, the delays, shortages, and rising shipping costs we've seen for nearly two years remain very much in evidence. Manufacturing CEOs believe snags will last through 2023. And retailers are raising their prices in anticipation: IKEA announced a 9 percent increase, while the biggest food manufacturers made plans for price spikes on everything from Campbell's soup to Jell-O pudding.
Risks to the supply chain, established through decades of perverse policy decisions made by both parties, will always be with us, unless there's a course correction. The biggest catalyst now is the strong transmissibility of the omicron variant, creating labor shortages and local lockdowns that hinder production and transportation. But because of how we built our supply chain, virtually any well-timed disruption can cut off a vital source of components or finished goods. It's an engineering flaw, where single points of failure cascade all the way to store shelves.
You can make a credible argument that extreme weather drove more supply chain issues last year than COVID. Not only can flooding, hurricanes, cold snaps, and droughts reduce commodity supply through crops spoiling or lumber going ablaze, but they can generate power outages that snarl production, or storm surges that shutter ports and trucks. And these will only grow in frequency and intensity as the climate heats up.
Meanwhile, because so much production is concentrated in individual factories, risks have escalated. A fire at a Japanese semiconductor plant last March removed a chunk of global chip production at an already fraught time. A second fire in Berlin just after New Year's hit a plant run by ASML, a Dutch firm that makes the machines that make most semiconductors.
The main chip fabricator, Taiwan Semiconductor Manufacturing Company (TSMC), sits on a contested island China claims as part of its mainland, and its status is precarious until that settles. And global production of raw materials is so razor-thin that political unrest in Kazakhstan, the world's largest supplier of uranium, sent commodity prices soaring.
Pandemic or no pandemic, "supply chain disruptions will continue to happen both more frequently, and with potentially larger magnitude," McKinsey's operations co-lead Dan Swan told Axios in November.
The growing threats to long, concentrated supply chains make re-engineering away from a tightly interconnected system essential.
You solve that only by rebuilding redundancy and resiliency. That means taking down the policy tyrannies that have forced reliance on faraway manufacturing plants, self-interested ocean shipping oligopolies, overwhelmed ports, deregulated trucking and rail systems, and retail giants and middlemen that see these cumulative problems as an opportunity to raise prices well above increased input costs. It means viewing the system as an engineer would, redesigning it for sustainability and strength rather than profit.
This is the dilemma for the Biden administration. The political need to get goods moving and logistics costs low is immediate, though its tools to do so are limited. Longer-term, structural fixes will do the job, but they will take years to mature. The administration must operate on both tracks, freeing near-term bottlenecks while building supply chains better to make them less vulnerable. It's in some ways a thankless task, but one that's vital to our prosperity and our future.
THERE ARE PLENTY OF EASY OPTIONS to make supply chains more efficient, low-hanging fruit that Port Envoy John Porcari and the Biden administration have targeted. This includes the oft-threatened dwell fees at the Ports of Los Angeles and Long Beach that have succeeded in moving some cargo out, and the pop-up container yard at the Port of Savannah (which the White House funded) that freed up dock space and reduced the offshore ship backlog there from 30 to two. The Port of Oakland is readying its own pop-up yard to give agricultural exporters easy access to containers.
As my colleague Robert Kuttner has reported, the biggest near-term challenge is the utter lack of coordination between different supply chain participants, making it impossible to know where cargo is and when it might reach its intended location. Sharing the data, which customs officials have but which cannot be given to other agencies, would allow everyone to anticipate bottlenecks. Porcari has assembled industry executives in meetings, but hasn't yet convinced them to give up what they see as proprietary information.
President Biden has also taken stabs at regulation, much of which came out of last July's executive order to promote competition in the U.S. economy. The Federal Maritime Commission has made it easier for cargo owners to file complaints against ocean shipping companies for unfair business practices, violations of shipping laws, and retaliation. The FMC is also auditing ocean shippers for overcharging on fees.
Federal officials have urged carriers to take more agricultural exports overseas, rather than stranding them at the ports because it's more profitable to send empty containers right back to China. Congress can add teeth to that with legislation that would re-regulate the ocean carrier cartel for the first time in decades. The Ocean Shipping Reform Act of 2021 would increase the FMC's authority to investigate industry practices, set minimum service standards on shipping contracts, mandate reasonable and transparent cargo fees, and require carriers to take exports in containers rather than sail with empties.
OSRA 2021 passed the House with 364 votes and is moving through the Senate. It would go a long way to breaking the power of a concentrated spoke of the supply chain. It's made the shipping lobby quite unhappy—"It's hard to imagine the chaos" if it passes, sniffed John Butler, CEO of the World Shipping Council—so it must be good for something.
While the White House is making it easier to obtain commercial trucking licenses—including by allowing teenage drivers to hit the road—the real action is happening at the National Labor Relations Board, which is looking at cases that might end worker misclassification. This could alter the parlous lives of truck drivers by turning them into employees, giving them the decent pay and benefits needed to actually stay in the industry. That alone would dramatically improve throughput at the ports and help raise living standards for workers.
The White House has also singled out large corporations for engaging in price hikes that have made inflation worse. For example, the president and administration economic officials have repeatedly made the case that oligopolistic meatpacking companies are buying beef, pork, and poultry cheap from farmers and ranchers, and selling high to grocery stores. The White House action plan for competition in meatpacking, including $375 million in grants to startup processing interests, is a bit thin. But stronger rules to prevent abuses from meatpackers, which are in process, and a joint project between the Justice Department and Department of Agriculture to take complaints from ranchers about industry abuses are both welcome.
The direction of the administration's ire toward corporate profiteering is notable. The Federal Trade Commission's Lina Khan has followed this by seeking information from dominant retailers, suppliers, and wholesalers on the impact of market concentration on supply chain disruptions. The investigation seeks information about how big retailers, suppliers, and wholesalers managed supply chain disruptions and shortages, and what the impacts were on the industry and its competitors. This is really important: an unprecedented study into corporate power's role in a societal problem. You can't fix what you don't understand.
Still, the administration can go further. If the FTC study does show large firms using their influence to command secret supplier deals, the agency can revive the Robinson-Patman Act, which is supposed to ban that activity. Aggressively enforcing anti-competitive behavior, including by breaking up dominant firms, would send industry a message that their schemes to outmuscle rivals are over.
Congressional re-regulation of ocean shipping could be paired with new regulations on trucking and rail to ensure common-carrier status and improve the fates of workers in those industries. Better labor rulings could not only help make independent truckers employees, but give warehouse workers a leg up in unionizing workplaces without retaliation (a recent settlement between the National Labor Relations Board and Amazon will help in this regard).
Finally, there's a strong need for investment at all levels. In December, the Department of Transportation gave out $241 million for needed port improvement, and that's not part of the $17 billion investment from the bipartisan infrastructure bill, much of it earmarked for more dredging to allow bigger ships to dock. Technological upgrades for real-time data would be useful too.
Other investments would revitalize stateside manufacturing, something the administration has prioritized from the Biden presidency's earliest days. Ultimately, the way to make supply chains durable is to diversify production, with good-paying jobs for American workers a nice side effect. But securing funding for such an investment is the real trick. The Defense Department's $30 million investment last year in domestic rare earth mineral production is way too puny. The U.S. Innovation and Competition Act (USICA), which passed the Senate, would provide $52 billion for semiconductor production, and the Build Back Better Act currently foundering in the Senate has billions more for advanced manufacturing.
The overall goal is to re-create a coherent national logistics system, in which government regains the power to regulate and coordinate what has been privatized. The supply chain disaster is an epic market failure, producing fragmentation and chaos. A national system for moving freight has to be seen as a public good. As the several articles in this special issue have shown, government needs not only to re-regulate ports, ocean shipping, trucking, warehousing and rail, as well as to reduce dependence on so much offshoring, but to view all those elements as a systemic, engineered whole.
THE BIDEN ADMINISTRATION may have an unlikely partner in rebuilding domestic industry and restoring resilient supply chains: corporate America.
One thing businesses constantly ask for is certainty. Usually, they're doing so in an effort to extend corporate tax breaks. But supply shocks breed far more uncertainty than taxes. Manufacturers cannot produce and retailers cannot sell if they cannot lock in components and goods. The ambiguities make it hard to plan for the future. And many companies have finally recognized the dangers of a vulnerable supply chain, and have consequently thought twice about two of their dominant philosophies: rampant offshoring and just-in-time logistics.
Almost 90 percent of supply chain leaders in a McKinsey survey said they would opt for regionalization over the next three years. That means siting factories closer to customers, specifically to avoid supply chain instability. It's already under way: Reshoring added over 160,000 U.S. jobs in 2020, and expectations are for 200,000 more in 2022. Suddenly, small towns in America are advertising themselves as likely locations for manufacturing's return. A secondary option is "nearshoring": locating facilities in Mexico instead of Asia, for example. The labor costs associated with reshoring and nearshoring are supposed to make it impossible, but with ocean freight shipping rates so high for so long, those concerns start to evaporate.
The biggest shift can be seen in semiconductors, where reliance on too few factories overseas has companies rethinking outsourcing at all costs. In November, Ford announced a partnership with a U.S.-based semiconductor manufacturer to develop and produce chips for its own vehicles. A month earlier, General Motors inked its own deal with Wolfspeed, a New York–based manufacturer that makes silicon carbide devices for use in its electric vehicles. Samsung, the South Korean phone maker, is building a $17 billion chip fabrication factory in Taylor, Texas. U.S.-based Intel has invested nearly $100 billion into domestic factory production. Even TSMC is building a fab in Phoenix. The U.S is expected to increase its share of the market for the most leading-edge chips by 33 percent between now and 2027, according to Counterpoint Research.
The ongoing chip shortage and expected federal investment are driving this. But it's happening all over the world: There's now a European chipmaking hub nicknamed "Silicon Saxony" in Germany. And it's happening across inputs; car companies are moving toward replicating Tesla's insourced battery production, for example. Putting advanced manufacturing production closer to customers in an age of supply chain uncertainty is increasingly seen as good business sense, a wild reversal from recent years. Not every factory will suddenly move across the shore, but policymakers are beginning to agree that inputs critical to national security or public health should have some domestic capacity. Self-sufficiency is trumping efficiency.
It's also not lost on business executives that Toyota overtook GM as the U.S.'s best-selling automaker in part because the company stockpiled semiconductor chips. That's remarkably ironic, since Toyota ushered in the era of just-in-time logistics and lean inventories decades ago. But companies are shifting mantras, from "just in time" to "just in case." They have valued low costs at the expense of risk, and they have seen exactly what those risks yield. Increasing inventory provides a safety valve if supply chains fracture, that certainty businesses need.
Adding resiliency through onshoring, nearshoring, or expanded warehouse capacity will likely trigger a one-time increase in the price level. But given the skyrocketing shipping costs under the unsustainable old system, it's not such a big difference, and transitioning now makes sense. It's not a perfect solution: Many of these domestic onshore factories are locating in right-to-work states, and bad weather can happen anywhere (last year's Texas deep freeze snarled the production of raw materials in plastics, causing a global shortage). But the growing threats to long, concentrated supply chains make re-engineering away from a tightly interconnected system essential rather than optional.
Only one thing can block this momentum: the counterproductive forces of the status quo. Minutes from the Federal Reserve's December meeting show that officials discussed raising interest rates faster than previous expectations. This would dampen investment and undoubtedly lead to layoffs; in fact, that is in general the goal, to sacrifice employment for price stability.
While cooling off the economy is often a difficult trade-off, in this case it's particularly absurd, because it would do nothing to solve the problem, something central bankers in their more candid moments fully realize. Andrew Bailey, governor of the Bank of England, told a European Central Bank panel in September that "monetary policy can't solve supply-side shocks." Tossing people out of work to try to get ships out of San Pedro Bay is absurd, especially because even if you get the ships out, you won't sustain the demand to sell the goods.
Worse, weakening the economy would take away potential investment right when it's needed the most. Businesses need and want to expand capacity right now, and making both credit and customers harder to obtain will lead to retrenchment. It would be fatal to fixing the supply chain problem once and for all. Plus, higher interest rates will flow to consumer goods anyway, offering little relief for inflation.
The economy has not overheated; a few oligarchs got their hands on the supply chain and drove it into a ditch. Recent polling from Data for Progress shows that the public understands how offshoring and monopolistic profit-taking have driven inflation, and how reshoring manufacturing and re-regulating the price-gougers will beat it back. The public has better instincts than elite economists who were cheerleaders for the creation of a fragile supply chain system that broke with the slightest stiff wind.
We built this system, and we have the power to fix it.
Juan
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