Supply chain lessons from Long Beach

I know you’re hearing a lot about something called ‘supply chains’,” said US president Joe Biden last week, in a speech explaining to Americans why their sneakers, toasters, bicycles and bedroom furniture were taking so much longer to get to them these days.

It is highly unusual for the leader of the free world to spend so much time talking about logistics and value chains to the general public. But this is an unusual moment, in which supply-chain snags and labour squeezes have resulted in port backups for weeks or even months not only in the US, but the UK, Europe and many other places around the world.

Much of it is down to the Covid-19 pandemic, of course, and the asynchronous national recovery cycles that have led to a mismatch between supply and demand for various products. Those cycles should eventually smooth out as the virus abates. But port disruptions have shed light on bigger problems in the global economy, from incompatibilities of skills and jobs, to an over-reliance on China as the provider of any number of crucial goods.

The Los Angeles and Long Beach port backups have quickly become a major political issue in the US, given that they represent 40 per cent of the country’s entire cargo shipping imports. But many people are taking the wrong lessons — that dock workers cannot be found because of government stimulus cheques providing a disincentive to work, or that we are headed back to a decade of stagflation, or that the trade landscape will end up looking either like the laissez-faire 1990s or the beggar-thy-neighbour 1930s. I doubt any of that will turn out to be true, but there are several different, better lessons to be learnt from the current troubles.

First, supply-chain glitches are not solely responsible for the problems finding labour in some sectors. Technology disruption and policy choices have also played a role. Jobs such as dock work and truck driving, for example, were in short supply in the US well before Covid, in part because many training programmes had been shuttered in recent years, and people were moving away from these positions after being long warned that automation and self-driving cars would take their jobs.

Despite the slower-than-expected rollout of autonomous vehicles, they are right to think that their jobs will be disrupted by technology. Many tough, physical jobs have been filled by machines and robots in recent years, and many more still will be. The economic and political fallout of the pandemic only fuels the trend. Witness Italian winemakers, who can no longer find immigrants to work their fields, buying automated grape pickers, or French farmers investing in agri-bots to harvest crops. Other white-collar work won’t be immune from automation either, as countries and companies hit by the pandemic look for ways to save costs.

Indeed, with the exception of very high-end knowledge work and lower-end, close-contact care work, it’s hard to see where long-lasting labour leverage lies unless there are bigger structural shifts in the US economy.

While some market watchers fret about a small amount of wage inflation, a new Cornell study argues that, in the US, underemployment is likely to continue to pose challenges in years to come. Its author, Daniel Alpert, reasons that unless more goods production for the country is done locally, having humans at the high and low end of the market, and software in between, is the new normal.

Of course, if US policymakers and businesses had been smarter, they’d have set up German-style work councils and a furlough system so the public and private sectors and labour could work together to share the benefits of the recovery, but also to deal more quickly with the downside risks of Covid-related disruptions. Germany hasn’t been immune to port disruption, but its Kurzarbeit short-time working scheme has done better at smoothing the ups and downs of recession and recovery over the past couple of decades than the US model. As it is, the Anglo-American labour model of quick hiring and firing has led to a situation in which the president has to mitigate fights between business and unions to get ports running 24/7. This model clearly fails the post-pandemic resiliency test.

So do highly complex global supply chains, which had been pushed to their obvious limits even before Covid. Years before Biden’s “Buy America” or Donald Trump’s tariff wars, a number of big multinationals were scaling down complex global supply chains and restructuring production to be “increasingly concentrated in regional and local hubs closer to end markets”, as a 2016 OECD report put it. This was for many reasons, from changing emerging-market cost structures, to the growing digitalisation of manufacturing to the innovation benefits found in co-locating research and development within factories, and a realisation of the former underestimation of the costs of globalisation.

One of those costs stems, of course, from too few countries and companies controlling too much value. One of the best things that we could do to avoid port pile-ups in the future is to institute what anti-monopoly advocate and Open Markets Institute founder Barry Lynn has dubbed a “rule of four” — that no more than 25 per cent of any crucial supply should be sourced from one place, or come into one port.

It’s an easy-to-understand rule free from any nationalism. And it might help us get our Christmas presents on time in the future.

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