Supply chains were once studied only by worthy nerds with an interest in esoteric subjects, such as the computerisation of bills of lading. Or they were opined on by commentators in expansive takes on the march of globalisation at places like the World Economic Forum in Davos.
Last year, though, the subject went mainstream, as dozens of ships were backed up outside the ports of Los Angeles and Long Beach, and the car industry ran short of semiconductors.
The fact that these supply chain snarl-ups came during the coronavirus pandemic — and after years of trade tensions, particularly between the US and China — encouraged a belief in the vulnerability of globalisation to external shocks. It looked like the rupture in our global trading system that so many people had predicted, for so long.
Politicians who had always been suspicious of globalisation sensed an opportunity, and leapt in with various plans to encourage reshoring, nearshoring and “friendshoring” (building supply chains only with political allies).
But, look at it more closely, and the causes of 2021’s (still continuing) supply chain problems — and the policy lessons to be drawn from them — appear different. Far from being the result of pandemic-related supply shocks what we have seen so far looks a lot more like a massive resurgence of demand as the global economy recovers from the Covid shock of 2020.
Specifically, there has been a big shift towards buying consumer durables as the pent-up demand for these goods after a year or more of lockdown came to the fore — and sent trade surging.
What’s the evidence either way? Well, if the snarl-ups were all about supply-side shocks. then we might have expected to see a big drop-off in trade itself. We would also have expected some plausible cause-and-effect, such as cargo shipping or ports themselves seizing up, because of a Covid-driven lack of workers. In fact, we haven’t really seen much of that at all.
The much-maligned west coast ports in the US have been handling record amounts of cargo. Shipping lines and manufacturers have complained of some problems — and there have undoubtedly been issues with factories shutting down in Asia because of outbreaks of Covid among the workforce. But, in general, the ports and the international trading system haven’t collapsed from a shortage of staff.
Towards the end of 2021, there was some evidence starting to emerge that freight rates were peaking — although the Omicron variant of Covid kept uncertainty levels, and those rates, high.
As the shipping expert, economist and author Marc Levinson points out, the maritime industry before the Covid crisis was running at well below capacity — so much so that some companies involved were forced into consolidating mergers.
It is somewhat implausible, therefore, that a sudden shortage of staff crunched all that handling capacity. And it is quite possible that a massive shipbuilding and infrastructure programme now will merely result in a glut in a year or 18 months’ time. The same may be true of one of the most obvious products caught in the supply chain crunch: semiconductors, which have caused shutdowns in car production across the world. The US has since earmarked $52bn to increase semiconductor production, and the EU is scrambling to come up with its own subsidy programme.
For the moment, the jury remains out on whether the demand-side or supply-side thesis is the more accurate with regard to the cause of the supply-chain crunch. But if it is the former, it seems likely that a lot of the measures being taken, or at least proposed, are going to end up doing more harm than good.
Written by FT trade specialist Alan Beattie and delivered to your inbox on Mondays, Trade Secrets is the FT’s must-read briefing on the changing face of international trade and globalisation. Sign up here
Creating a subsidy-laden semiconductor industry that ends up permanently dependent on the state is not a recipe for an efficient global economy. Neither is a series of half-thought-through government interventions to encourage reshoring, such as those currently being contemplated — and indeed implemented — by Joe Biden’s US administration.
Right now, there doesn’t seem to be much evidence that companies are reshoring of their own volition. Surveys show that businesses are continuing to trade globally and to invest in China (not least to access the huge Chinese market) and are planning to continue to do so.
So, if anything, the biggest threat to the globalised economy is political, not economic. China has been pursuing a “dual circulation” strategy, with a rapidly growing domestic economy increasingly insulated from a traded sector: it doesn’t mean an end to globalisation, but it is certainly a brake on it.
The US has selected certain sectors including semiconductors and electric vehicles in which it wants to encourage domestic production. So far, such efforts have been overcome by the commercial logic of trade. But, even if the supply chain problems resolve themselves, the threat of political interference will remain present.
Alan Beattie writes the FT’s Trade Secrets newsletter