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Why Is the Global Supply Chain Breaking Down?

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If you’ve been to a grocery or general merchandise store lately, chances are at least one item on your list was unavailable—all that greeted you was an empty slot on the shelf where it should have been. It’s not your imagination, and it’s not a one-off occurrence—the global supply chain definitely is not functioning as it did before COVID-19. With the holiday shopping season nearly here, annual shopping sprees and expectations of great deals will lead people to expect more and more from already-overburdened supply and shipping channels, and it’s not clear if those systems can handle the additional strain. The reasons are as complex and interconnected as the global economy. To better understand all of this, we turned to SIS professor Daniel Bernhofen, an economist and expert on the effects of containerization on world trade.

What is the connection between current supply chain bottlenecks and the COVID-19 pandemic?
Initially, COVID-19 resulted in shutdowns of face-to-face economic activities here in the US and in the rest of the world. Because production in China is very labor-intensive, quarantine restrictions by the Chinese government have resulted in significant shutdowns in China, including western plants. Now, with economic recovery causing consumer demand to rise, the world supply is struggling to catch up, causing prices to rise almost everywhere. Another effect of COVID-19 is that container ships have been redirected to transport COVID-related items, like personal protective equipment (PPE), to destinations outside the traditional container cargo shipping routes. This has led to some shortages of shipping containers on the regular shipping routes. The hope is that these shortages will only be temporary.
How big a role do container ships play in the global supply chain?
Container shipment technology has caused the emergence of global supply chains and has enabled China—via their investments in container infrastructure—to become the manufacturing workshop of the world economy. Before the container age, US merchandise used to be designed and manufactured from parts produced in the US. Now, often only the design, marketing, and distribution takes place in the US, while the individual parts are produced and manufactured wherever they are cheapest, most often in China.
That’s the basic idea behind global supply chains. One economic rationale behind global supply chains is economies of scale: per unit shipping costs decrease with the volume of shipping. Consequently, we have seen a rise in the size of container ships, as well as efforts to widen both the Suez and the Panama canals to accommodate the passage of these mega-sized ships.
President Biden’s move on October 13 would see the Port of Los Angeles and the Port of Long Beach, both in California, operate 24/7. How does that increase in port labor capacity help alleviate supply chain issues, and what problems does it leave unaddressed?
It is true that the Port of Los Angeles, together with the Port of Long Beach, constitute the biggest US entry points of imports from China and East Asia. While President Biden’s action to extend the port opening hours in LA have been welcomed by industry experts, the effect will be marginal. Moving containers off the ships at the ports is only one component in the supply chain. Other components that still impose restrictions are the store yard capacities for the offloaded containers, the trucking and rail capacities that move containers from ports to in-land warehouses, and the warehouse capacities necessary to store the items before they are shipped to customers. There appear to be labor shortages in all these components, and it will require market incentives, like higher wages, to alleviate these shortages. Over longer time horizons, US worker shortages could also be alleviated by more open migration policies. But this is contrary to the political Zeitgeist.
We hear and read a lot about the impact of the supply chain on the upcoming holiday season. How important is it for businesses, especially small businesses, to have a strong holiday season this year, and is that now in danger?
The holiday season is very important for many businesses, small and large. Because COVID has accelerated the trend towards e-commerce, small businesses without e-commerce options may struggle to survive, especially if their goods are shipped from China. Currently, there are concerns that goods might not arrive in time for the holiday shopping season. A big player like Amazon runs its own warehouses, trucks, and planes and is able to pay reasonably high wages to its workers. It is less vulnerable to supply chain bottlenecks; therefore, it is expected to become even more dominant.
How does the supply chain, with its combination of sovereign nation-states, multinational corporations, and individual workers, illustrate the challenges of global governance or the global economy writ large?
This is a very good question. We discussed the role that containerization has played in the emergence of global supply chains. A second major factor that fueled the growth of global supply chains was government policies favoring free and unrestricted trade. Both Brexit and Trump winning the US presidential election in 2016 signaled a trend away from these policies. COVID has contributed to the acceleration of this trend. “My country first” policies exemplified by migration restrictions and vaccine nationalism seem to be the order now. But this is unfortunate. Problems like COVID and climate change are global, not local, and require global solutions. Our interconnectedness can be reduced, but not eliminated, and demands global governance and leadership.