Supply chain | The difficulties will survive the pandemic

The COVID-19 pandemic and its aftermath have challenged supply chains around the world, contributing to shipping delays, product shortages and the highest inflation in decades.

Posted April 15

Ben Casselman and Ana Swanson
The New York Times

But in a report released Thursday, White House economists argue that while the pandemic has exposed supply chain vulnerabilities, it hasn’t created them and warned that the problems won’t go away when the pandemic is complete.

“Although modern supply chains have lowered consumer prices for many goods, they can also break easily,” wrote the Council of Economic Advisers. Climate change and the increasing frequency of natural disasters accompanying it will make future disruptions inevitable, the group says.

White House economists analyzed the supply chain as part of the president’s economic report. The annual document, which covers more than 400 pages this year, typically contains few new policy proposals, but outlines the administration’s thinking on the major economic issues facing the country and how the president hopes to resolve them.

This year’s report focuses on the role of the state in the economy and calls on the government to do more to address slowing productivity growth, declining labor force participation, rising inequalities and other trends that have preceded the pandemic.

“The United States remains one of the strongest economies in the world, but if we look at the trends of the past few decades, some of these trends threaten to undermine that position,” said Cecilia Rouse, president of the Council of Economic Advisers, in an interview. The problem is partly due to the fact that “the public sector has withdrawn from its role”.

Impacts of relocation

The report devotes one of its seven chapters to supply chains, noting that this once esoteric topic “entered everyday conversation” in 2021. According to Mmyself Rouse and the other authors of the report, in recent decades, American manufacturers have increasingly relied on parts produced in low-cost countries, particularly China, a practice known as offshoring. At the same time, companies have adopted just-in-time manufacturing strategies that minimize the parts and materials they keep in stock.

The result, the authors say, are efficient but fragile supply chains that are vulnerable to collapse in the event of a pandemic, war or natural disaster.

“Due to outsourcing, offshoring and insufficient investment in resilience, many supply chains have become complex and fragile,” they write, adding, “This evolution has also been driven by short-sighted cost reduction assumptions that ignored significant costs. which are difficult to transform into financial measures, or which are passed on to others. ”

More expensive solution

But some economists have noted that making supply chains more resilient could come at the cost of making products more expensive when inflation is already a major concern.

Adam S. Posen, president of the Peterson Institute for International Economics in Washington, said the pandemic and the Russian invasion of Ukraine could push companies to establish at least some of their supply chains in more politically stable and less strategically vulnerable places. . But pushing companies to double production could waste taxpayers’ money and introduce inefficiencies, raise prices for consumers and reduce growth.

At best, you pay an insurance premium. At worst, you are doing something for totally political reasons that is very economically inefficient.

Adam S. Posen, President of the Peterson Institute for International Economics

Decentralized solution

Other economists have pointed out that global supply chains aren’t always a source of fragility – they can sometimes even be a source of resilience.

Ngozi Okonjo-Iweala, director general of the World Trade Organization, said in an interview that the world has seen a trend towards decentralization of manufacturing and production, in which supply chains move from China to move to Vietnam. Laos, Cambodia, Bangladesh, Ethiopia and other countries. This is an opportunity to diversify supply chains and bring the poorest countries into the global trading system so they too can reap the rewards of globalization, he said.

Rather than reversing supply chains to concentrate them in developed countries, he added, companies are outsourcing low-cost countries more (nearshoring) but less distant and adopt risk mitigation strategies, such as storage.

No easy fix

M.myself Rouse, a White House business consultant, believes that while it might make sense to promote more in-house manufacturing of some critical components like computer chips, the Biden administration wasn’t trying to reverse outsourcing entirely.

“We don’t need to produce everything here,” he said. We understand that this would be excessively expensive and unnecessary. ”

But despite their emphasis on the role of the public sector in the economy, White House economists have recommended only small steps the federal government could take to strengthen supply chains. They suggested that the government aid in the aggregation and dissemination of data that could allow companies to better understand their supply chains and identify weaknesses. They added that the government could encourage the domestic production of products essential to national security or other essential interests. Independent experts said these measures could help, but are unlikely to solve the problems described in the report.

“The short answer is that there is no easy answer,” said Chad P. Bown, a business economist and researcher at the Peterson Institute.

This article was originally published in New York Times.

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