Monday, 15 August, 2022

Strained Supply Chain Hurts Economy

Hira Bahadur Thapa

Pre-pandemic “just in time” manufacturing, a model pioneered by Toyota at the end of World War II, has exposed the global economy to inevitable shock. As new variants of COVID-19 emerge every six months, the pandemic is seemingly becoming endemic even though a remarkable progress has been made in vaccination. An unequal allocation of vaccines, however, has undermined global efforts to contain this viral disease.

A series of effects of the pandemic on world economy are already visible. The COVID-induced economic slowdown has triggered events that highlight how vulnerable we are with reliance on global supply chain that focuses on lean production and far-away factories to save costs.

Cascading implication
The disrupted global supply chain last year laid bare how complex it can be to do the seemingly simple job of receiving a product from one place to another. The need to ship surgical masks to West Africa and China can have a cascading implication on Ford’s (US motor company) ability to install backup cameras on cars at factories in Ohio and delay the arrival of Amazon Prime orders in Florida for the holidays.

When the pandemic emerged in February/ March 2020, people and businesses were quick to restrict their activities. As offices closed and factories halted their productions, companies started laying off workers en masse, taking spending power out of people’s hands. With fewer goods being made and fewer people with paychecks to spend, companies assumed that demand would go down sharply. But a far more complicated situation unfolded, putting a challenge to the global supply chain.

In early 2020, the whole world suddenly needed surgical masks and other protective gear. Most of those products were produced in China and they are cheaper compared to other parts of the globe because of low labour costs and mass production. The data of such manufacturing shows that half of all protective masks were made in China. Thus, reliance on China obstructed the global supply of essential products. As factories ramped up their production to meet the new demand that surged dramatically duo to severe pandemic, cargo vessels delivered protective gear around the world. It created opportunities for China to market in regions where its trading was not that significant in the pre-pandemic era.

That was the moment of crisis when most countries irrespective of their development stage or location rushed to buy the medical goods as countries were compelled to prioritise the import from whatever source available. Consequently, empty shipping containers piled up in many parts of the world. The result was a shortage of containers in one country that needed them the most. It was China, where the factories pumped out goods in record volumes, which needed containers to pack and dispatch goods within the shortest possible timeframe.

As demand increased, a wave of goods swiftly overwhelmed US ports. With too many ships arriving at once, boats sometimes had to wait in 100-vessel queues off the ports in Los Angeles and Long Beach. Swelling orders also outstripped the availability of shipping containers, and the cost of sending one from Shanghai to Los Angeles skyrocketed tenfold.

Once unloaded, many containers piled up on docks unclaimed because of a shortage of truck drivers needed to haul cargo to warehouses. Truck drivers had long been scarce before the pandemic, with wages steadily eroding amid grueling working conditions. Businesses across the economy struggled to hire workers: at retailers, at warehouses, at construction companies and for other skilled traders. The situation became so dire that even as employers resorted to lifting wages, labour shortages did not disappear, while even delaying the manufacture of medical devices.

Noticeable change
The most noticeable change the pandemic brought was seen in the increase in online shopping that is why Amazon sales rose up exponentially, resulting in higher profits for the online company. Available data suggests that Amazon sold 57 per cent more items than it had a year earlier. This increase was registered from April to June 2020, a period marked by the first wave of the virus. In one sense, infectiousness of virus was a blessing in disguise for online companies like Amazon.

Crises are typically decisive moments that pass, but the global chain disruptions haven’t yet been over. There is an additional burden on the economy already hit hard by the pandemic. Woefully, the lingering contagion is likely to become a part of daily life forcing us to adhere to the World Health Organisation (WHO)’s health safety protocols for a long time to come to help stem the changing forms of virus.

Against this backdrop, the US administration has been following the footsteps of the previous administration in continuing with tariff on Chinese imports, especially in the products that have critical implications. The global supply chain obstruction should not be the excuse to decouple the US economy from that of China as both are world’s largest economies. They should acknowledge each other’s contributions. Global supply chain crisis will be tackled by US-China cooperative attitude recognising the importance of their interdependence.

(Thapa was Foreign Relations Advisor to the Prime Minister from 2008-09.