Supply Chain | 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.

But in a report released Thursday, White House economists argue that while the pandemic has exposed supply chain vulnerabilities, it has not created them – and they have warned that the problems will not go away when the pandemic will be completed.

“While modern supply chains have lowered consumer prices for many goods, they can also easily break,” wrote the Council of Economic Advisers. Climate change, and the increasing frequency of natural disasters that accompany 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 this year runs to more than 400 pages, typically features few new policy proposals, but it does outline the administration’s thinking on the major economic issues facing the country and how the president hopes to achieve them. to resolve.

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 inequality and other trends that long predated the pandemic.

“The United States remains one of the strongest economies in the world, but if we look at trends over 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 The problem is partly due to the fact that “the public sector has withdrawn from its role”.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 offshoring

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

The result, the authors say, is 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 assumptions to short-sighted cost reductions that have ignored significant costs that are difficult to turn into financial measures, or that have trickled down to others. »

More expensive solution

But some economists have noted that making supply chains more resilient could come with its own costs, 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 Russia’s invasion of Ukraine could prompt companies to establish at least some of their supply chains in places more politically stable and less strategically vulnerable. But pushing companies to duplicate production could waste taxpayers’ money and introduce inefficiencies, raising prices for consumers and reducing growth.

Decentralized solution

Other economists have pointed out that global supply chains are not always a source of fragility – sometimes they can also 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 poorer countries into the global trading system, so they too can reap the benefits of globalization, she said.

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

No easy solution

M^me Rouse, a White House economic adviser, believes that while it might make sense to promote increased domestic production of some critical components such as computer chips, the Biden administration was not looking to reverse outsourcing altogether.

“We don’t need to manufacture everything here,” she 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 modest steps the federal government could take to strengthen supply chains. They suggested that the government help 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 domestic production of products essential to national security or other fundamental interests. Independent experts said these measures could help, but were unlikely to solve the problems described in the report.

“The short answer is that there is no easy answer,” said Chad P. Bown, trade economist and senior fellow at the Peterson Institute.

This article was originally published in the New York Times.