This humoristic interchange of our last article: ”A PYRAMID BLOCKING THE CANAL” represented the dilemma of the Suez Canal Authority: How to refloat the ship and pivot it back in the axis of the channel without sinking it in the channel and then pull it back to the main sea, south of Suez.
After 6 breath taking days, the ship was finally refloated but over 300 ships have accumulated and that will take at least a week to clear before normal traffic can resume. This will amount to effective total breakdown of operations of about half a month a lot less than the worse anticipated case. However, as MSC, one of the largest liner company said: this incident is to have a very significant impact on the movement of containerized goods, disrupting supply chains beyond the existing challenges posed by the COVID-19 pandemic.” It also exposes many of the vulnerabilities of a modern world pursuing the chimera of minimum cost for maximum profit at the price of severe self-inflicted wounds and dangerous geopolitical vulnerability.
It all started in Wall Street: the profit at each quarter must be larger than at the previous one. This means more sales and less unit costs. So, sales are increased mainly by making the product cheaper which can be achieved by displacing the production to a cheaper location without incurring excessive import duties. This is the process of globalisation. This was not possible after World War II as transportation was very expensive and high import tariffs prevailed. Enters in 1956 an invention as world changing as the Penicillin or the atomic bomb were: the container. Little known by the public, the inventor was a trucking entrepreneur named Malcom Mc Lean. He had the idea of directly loading on a ship the whole contents of his truck that would remain in a standard box which would be removed from his truck chassis. Inaddition, the General Agreement on Tariffs and Trade (GATT), which commenced in 1948 slowly brought down the trade barriers and in 1994 was replaced by the WTO, the World Trade Organisation which accelerated the process. With the progress of shipbuilding technology, the size of container ships quickly leapfrogged from around1000 TEUs in the early 70s to well over 10,000 in the first decade of the third millennium to reach over 20,000 at the end of the second decade and the costs dropped by 80%. With hardly any duties and cheap transportation costs, world trade exploded. Note that between 1955 and 1970, the trade volume went up over 5 times a step mirrored between 1970 and 1980.Today world trade is over 300 times higher in today’s dollars as in 1950.
Have we gone too far? At the beginning of the pandemic the world experienced a shortage of masks and other PPE. It was discovered that all the production had been concentrated in China even for masks that could be made in the most primitive workshops. To avoid a shortage of masks for front medical workers, certain leading personalities such as Dr Fauci were forced to state that masks were not crucial to prevent contamination, which may have protected the hospital workers but certainly provoked additional deaths. The shortage in masks and PPE in the US had been cased by the inability of HHS to replenish its inventories due to lack of credits from Congress and Government.” Inventories were a dead investment”. What if the US had been involved in a biochemical War?
The pandemic has provoked a surge in demand for consumer items because of a switch from consumption in services to goods. It has been particularly pronounced in certain industries like smartphones and PC and has caused a near-term supply shock triggering an unprecedented global shortage of electronic chips that chokes output of many other manufacturers that rely on chips for some of their subcomponents. Their subcontractors whose names like Continental AG, Innolux Corp. or Renesas Electronics Corp are unknown to the public are major industrial players that supply major auto makers such as General Motors and Volkswagen whose engines rely each year on more electronic micro-device components. When analyzing the sources of production of contract chipmaking, 91% is located in Asia and over 70% of the business is controlled by Taiwan’ TSMC and South Korea’s Samsung. The only US player is Global Foundries Inc., controlled by Abu Dhabi’s investment arm and its share is a mere 8%. If China were to control Taiwan, it would control at least 70% of the world chip production. Is that a wise strategic position for the nation that invented the transistor and whose whole tech industry depends on chips?
There is no doubt many other sectors that are affected by the pandemic induced slowdown in the supply chain. It is an opportunity for companies that have relied on the just-in-time inventory techniques to rethink and revise their criteria and establish a minimum inventory level to act as a buffer in case of trade disruptions.
It is also time for countries to do their own rethink and establish what is the minimum strategic level of industry concentration to maintain a safe level of production or supply source from unlikely foes. At a time of increasing tensions between the west and China it is imperative that governments establish policies and incentives to reshore some of the production sources for the critical constituents of its economy. President Trump was intuitively correct in promoting American products. Unfortunately, he was only thinking of jobs and not the resilience of the economy. One can ask how much more an 800 USD Apple phone would cost if the chips were made and installed in America.
One is not talking of making protectionist legislation like the Jones Act that was designed to protect the US shipbuilding industry. Instead, it reduced it to an expensive minor player in the word shipbuilding industry depleted the US flag fleet and, because of prohibitive building and operating costs, cabotage was stifled and the interstate shipping coastal commerce became inexistant.
The globalisation has been a push to reduce costs and improve the position of shareholders. Although this has reduced consumer goods and increased sales, it has prejudicial to certain sectors of the economy and the strategic interests of the country. The government is very attentive at certain sectors like the aeronautical or defense industry but has neglected the importance of some critical components to the strategic survival of the country. Should thy introduce a value added tax on products containing critical components made abroad?
The US is not alone in succumbing to unbridled economic efficiency. One can ask what are the strategic benefits of the Nordstream pipeline that will make Europe even more dependant on Russia? Today, there is abundant gas production in the US, and it is only the transportation element that is more expensive than the pipeline carrying costs. Should the S US consider subsidising the transport leg to level the costs and reduce the dependence of its strategic allies on Russian gas.
These are probably naïve solutions but at least they expose the problem. The politicians rarely think of the overall economic and strategic interests of their country as they are too focused on their local political base interests. It is time to revise one’s priorities.
16 April 2021
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