Why Global Supply Chains May Never Be the Same

Wall Street Journal Mar 23, 2022. Why Global Supply Chains May Never Be the Same. A WSJ Documentary

The pandemic exposed breaking points in the system that would fundamentally alter consumer expectations of getting anything we want whenever we want it.

Every day, millions of sailors, truck drivers, longshoremen, warehouse workers and delivery drivers keep mountains of goods moving into stores and homes to meet consumers’ increasing expectations of convenience. But this complex movement of goods underpinning the global economy is far more vulnerable than many imagined. Photo illustration: Adele Morgan

Five years ago, I wrote of a need to capture externalities, to raise tax revenues to fund prosocial projects, and to reduce our carbon emissions. See the article in the following link. This past September, I reviewed the importance of this 'carbon tariff,' more important than ever with the burgeoning, short-term supply-chain crisis that was quickly evolving to be a permanent problem, unless we take steps to fix the causes of the problem.

A different carbon tax 2017.pdf

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Put in simplest terms, rather than patching up the supply chain, be it in container ships, commercial truckers, warehousing, or last mile deliveries, the solution is likely to be in changing the chain rather than just accept chaos, uncertainty and rising costs for the hundreds of billions of dollars of goods being delivered to our door.

When I wrote of the carbon tariff, I took the ability of and the need for the global supply chain, the chain that shifted massively, first with the containerization of global shipping more than fifty years ago, and then in the last twenty-five years with the e-commerce, home-delivery, Amazon-centered model for the last mile. Between those two seismic shifts has been the deregulation and fragmentation of domestic long-haul trucking, introducing more freedom yet also more chaos into our system.

The primary problem is that each step in the journey of a product to the consumer, just as each step in a traveler's foreign trip, from home to destination and back, adds a service subject to inefficiency and -- in a free market -- to pressures to reduce costs, continuously. The more steps, the more pressure and the more opportunities for a bottleneck, some of which can be disastrous, not just an inconvenient delay, especially as the cost-cutting pressures mount.

Amazon's primary success came from eliminating a step in the consumption process, by cutting out the wholesaler-retailer, warehouse to retail outlet relationship which in itself was a major cost reduction, with much of that cost saving captured by Amazon as revenue and, eventually, profit. At the same time, consumption of inexpensive (moving overseas was the first step in the global supply chain in cutting costs fro manufacturers), foreign-produced products started to grow -- quickly -- and much to the surprise of economists, politicians and pundits, this demand only increased with pandemic policies that discouraged in-person shopping. Instead, the demand for delivery-to-the-door services of all sorts increased markedly, rather than declining as per the academic predictions. No surprise, as much of the pandemic modeling and predictions have been atrociously bad while also destroying mental health, jobs, and small businesses.

At the current stage and rate of the crisis, the trucker shortage will soon make the priest shortage look more manageable. And there is little hope of restoring order to the blocked supply chain over time, or with overtime, or with adding another competitor in the last mile step of the chain.

The solution? Here are three practical steps.

1. Tax excessive (global) transportation to reflect its externalities, especially pollution and carbon. To have the Pacific transit of a pair of $150, cheap labor athletic shoes cost about a nickel makes no sense in any sense of the word, with foreign labor and global shipping so negligible. This leads to second step.

2. Bring more manufacturing onshore, despite likely to be higher labor costs, to create jobs (and tax revenue) for those sitting out the economy now and to eliminate twenty to thirty days of delay in the supply chain.

3. Encourage and direct more people -- starting with otherwise college-bound yet unprepared-for-college high school graduates -- to taking practical and well-paid service jobs, such as port facility or UPS employees, while also increasing the compensation (and reducing expensive turnover) for those workers in the lower-paid part of the supply chain, starting with long-haul truckers who pay the price of delays in the supply chain. The Biden idea of subsidies, stimuli, "build back better," and immigration policies makes it very attractive for American citizens to withdraw from work and for poorly educated and low-skilled immigrants to come to America; the clear solution is more Americans working and more reasons for immigrants to apply their motivation to creating wealth in their home economy, rather than to make remittances from the USA one of the largest parts of some Latin American economies.

I am a proponent of the free market and competition, yet I know and I have seen the chaos and destruction that comes from completely unfettered actions by some actors in the market and the supply chain. No one wins with a cost or price war. Prices need to reflect the costs to reach the customer, just as wages need to reflect the cost of turnover. If jobs are so simple that they can be automated, then do that. Yet, if skilled workers are valuable, then turnover has to be reduced. If work conditions are such that people can't take on the job for long, then the work conditions have to be improved; churning employees is a losing proposition.