LOADING

Type to search

Provide chain disaster drives latest retreat from globalization

Financial

Provide chain disaster drives latest retreat from globalization

Share

Nothing embodied the promise of globalization more than the humble supply chain. Thanks to the integration of production across and within borders, consumers expect infinite variety to be available immediately.

That is now under siege. The supply chain crisis of 2021 is fueling the retreat from globalization, much like the global financial crisis of 2008.

Three major forces are driving this latest crisis: Covid-19, climate and geopolitics. All of them have their share in the semiconductor shortages that paralyzed automobile production around the world. Covid-19-fueled consumer electronics demand has diverted chips from automakers and virus-control measures halted production in Malaysia. Extreme weather shut down chip factories in Texas and threatened to do the same in Taiwan. And US tariffs and export bans, according to Chad Bown of the Peterson Institute for International Economics, caused US chip inventories to be depleted while they were being hoarded by Chinese buyers.

These forces also contributed to the UK energy crisis. Covid-19 and Brexit reduced the number of truckers available to deliver fuel, while a lack of wind reduced renewables at a time when natural gas reserves were low. China’s economy has been stumbled by shutdowns designed to eradicate any Covid-19 outbreaks or meet CO2 reduction targets, and coal shortages have been exacerbated by a penal ban on imports from Australia for an investigation into the origins of Covid-19 became.

Two decades ago, investors and bankers assumed that credit was always available at a certain price, and built entire companies on that premise. The result was a tightly knit financial system with no margin for error that got stuck in the face of shock.

Satellite imagery shows the extent of the backlog in California ports as ongoing supply chain problems now threaten the Christmas shopping season. WSJ’s Jennifer Smith explains what is causing the raids on ships and cargo. Photo: Planet Labs Inc

The supply chain crisis was also made possible by integrated and efficient global production. Companies have introduced outsourcing and offshoring, just-in-time inventories and “capital-light” models that separate design from production. The share of global value chains in world trade – in which a product crosses at least two borders – rose from 37% in 1970 to 52% in 2008, where it reached a plateau according to the World Bank.

Today, companies and governments are aware of the risks of reliance on distant suppliers and the lack of shock absorbers on critical links, from ocean freight to power transmission.

Covid-19 is the biggest shock to this system by shutting down production, closing borders and pushing workers out of the job market. A mutating virus, resistance to vaccine mandates, and China’s zero Covid-19 policy mean Covid-19 continues to pose a threat to the supply chain. But it should decline as natural immunity and vaccination reduce the virus’s lethality, and governments outside of China conclude that restrictions and border closings are too costly a response to outbreaks.

The climate risks are likely to increase, both due to more frequent extreme weather conditions and the transition to renewable energies, which lack the capacity buffers of fossil fuels. The oil market is global: supply in one place can meet demand in another. While the price of oil can fluctuate, the supply almost never disappears thanks to OPEC’s spare capacity, private inventory and government-managed emergency reserves. Natural gas is less mobile than oil, but it can still be stored and increasingly exported in liquid form.

Solar and wind energy, on the other hand, are usually consumed when they are generated and can disappear completely if there is no wind or sun. “No clean energy OPEC currently has reserve capacity for renewable energy,” noted Kevin Book, research director of ClearView Energy Partners LLC, in a recent report. This can only be solved by investing in gearboxes and battery storage, which lag far behind investments in generation, as the International Energy Agency announced last week, even if investments in fossil fuels are flattening out. “Something has to change quickly or the global energy markets are in for a turbulent time,” she warned.

Protectionism has been invading supply chains at least since 2008, when the Doha round of global trade talks failed. The US-China trade war has taken these tensions to a new level. In its wake, the US, China and Europe are all striving for self-sufficiency in key sectors such as semiconductors and batteries. Other threats loom, such as green tariffs on high-carbon imports. Arbitrary import bans and imprisonments are now just as much a part of China’s foreign policy instruments as export controls are part of those of the USA. Regular threats of sanctions and tariffs on former President Donald Trump’s other domestic goals ended when he left office, but companies and trading partners must plan for his possible return in a few years.

Not all pressure on supply chains is directed against globalization. The technology continues to increase the potential for outsourcing, especially in services. Nonetheless, companies are likely to rethink practices that they used to take for granted, such as maintaining minimal inventory and sourcing key components from politically risky locations. In a report this week, equity strategists at Bank of America found that companies in the S&P 500 index had 2% more manufacturing locations in the US in 2000 than in 2018, but 5% fewer in Asia.

Just as the financial crisis led banks and regulators to prioritize resilience over efficiency, the supply chain crisis will likely result in manufacturing networks being more resilient to surprise, but less delighting consumers with ever more choice at ever lower cost.

Write to Greg Ip at greg.ip@wsj.com

Copyright © 2021 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

Tags:

You Might also Like

Leave a Comment

Your email address will not be published. Required fields are marked *