An Explanation: The Supply Chain Crisis

By Eliana Svilik

Dominating the news for the past several months has been “the supply chain crisis.” Unfortunately, I have found that it is difficult to locate a holistic summary of supply chain issues, both globally and as they pertain to the U.S. economy. Due to the intricate nature of supply chains, the major issues are both multifaceted and complicated, so many articles explain only one part of the situation. In response to this lack of holistic summaries, I have written this article as an easy-to-understand, comprehensive explanation of the mess that is currently the global supply chain.

The global supply chain is the product of an interdependent global economy, which was created on the backbone of uneven global economic development since the Industrial Revolution. One framework for understanding the modern world economy divides the globe into three classes of countries. European, North American, and certain East Asian nations (e.g. Japan and South Korea) are the core countries - they provide the major markets for goods produced globally and generally have the greatest economic activity. They have service or skills-based economies. Next, there are the semi-peripheral countries, mostly located in parts of Latin America, Asia, Eastern Europe/Western Asia, North Africa and the Middle East, as well as some parts of the African continent. These are manufacturing economies, chiefly responsible for producing the billions of goods that humans buy every year. Last are the peripheral countries in Asia, Africa, and Latin America. Generally, these countries have raw-material based industries and play the role of suppliers to the world economy by extracting the materials needed for production. Together, these three classes of countries all depend on each other and are part of a cycle of production and consumption known as the global supply chain.

Over the past two years, COVID-19 has altered traditional supply routes and reliable market patterns, throwing the supply chain into chaos. Prior to the pandemic, the global supply chain could be simplified to a relatively dependable cycle: raw materials were extracted and sent to Asia and those goods were then transported at high rates from manufacturers to developed economies, mostly in North America and Europe. Shipping containers were emptied in the developed world, refilled and returned with a specific export, sometimes stopping in other developed countries, before traveling back to Asia.

When the pandemic initially began, in the early months of 2020, China was the epicenter of the disease. China was - and still is - the biggest manufacturing hub in the world, responsible for producing 28.7% of global manufacturing output. When China began to close factories in order to contain the spread of COVID-19, the global supply chain was immediately affected. Other manufacturing hubs in the surrounding countries soon followed suit. As the virus spread, economies around the world shut down to weather the pandemic and countries found themselves in desperate need of personal protective equipment, commonly referred to as “PPE.” The factories in Asia, and particularly China, that were allowed to reopen shifted to supply the global need for PPE.

In response to widespread factory closures and economic shut downs occurring in the first half of 2020, shipping companies slashed their traditional shipping routes between Asia, North America, and Europe. Rather than send ships half full sailing around the world, they just reduced the total number of ships in service and made sure that those fewer ships were actually full. According to a report by the United Nations Conference on Trade and Development (UNCTAD), the first two quarters of 2020 saw an 8.7% decrease in port calls (ships entering port) globally when compared with 2019. The second quarter of 2020, which was from April 1 - June 30, saw an even more significant decrease of 17%.

However, as the COVID-19 pandemic spread further throughout the world and people found their daily lives indefinitely altered, consumer spending on goods increased. As the largest consumer market, Americans in particular began spending more on manufactured products (and less on most services) as they supplemented entertainment for travel and dining, created home offices, and attempted to homeschool their children. According to the Brookings Institute, compared to 2019, Americans spent $19B more on consumer durables in 2020. Meanwhile, spending fell significantly for service sectors such as food (for on-premises consumption), transportation, health, and recreation.

The uptick in spending on consumer goods created a backlog of orders when factories finally reopened in China and other Asian manufacturing hubs. The supply chain is quite similar to an enormous ecosystem, so this snag created a ripple effect throughout the entire web. When production and transportation ramped back up, ports in the U.S. (among other countries) were not prepared to handle the sudden and massive influx of ships. On October 13, 2021, President Biden announced that the Port of Los Angeles and the Port of Long Beach, the largest ports in North America, were to begin running twenty-four hours a day, seven days a week to try to mitigate the backlog. November 16, 2021, saw a record 179 ships waiting to be processed at the Port of Los Angeles.

Further exacerbating the backlog facing ports across the U.S. is a lack of labor and an increase in the quantity of containers that a ship can carry. The Los Angeles Times reports that the Ports of LA and Long Beach saw a 25% increase in containers in September 2021 compared to September 2020. According to the executive director of the Port of Long Beach, Mario Cordero, the size of ships has grown, allowing them to transport more containers. There is also a shortage of port workers and truck drivers, both of which are crucial to the supply chain. As I discussed in my previous article, “An Economic Enigma: A Shortage of Jobs and Labor,” the pandemic has created a labor shortage in less-skilled, lower-paying jobs. In addition, due to the lack of truck drivers, products are piling up in ports and contributing to the upheaval.

Amidst the chaos, shipping conglomerates have seized the opportunity to profit from the lucrative and congested routes between Asia, the U.S., and Europe. According to reports from Bloomberg News, the rate for a 40 foot container on a ship traveling from Asia to the U.S. hit $20,000 USD in 2021, a tenfold increase from a fee of under $2,000 merely a few years before. Though rates have decreased slightly to around $14,000, they still remain extremely elevated. Analyses by Bloomberg also suggest that today, long-term rates secured in contracts between shippers and carriers are double 2020’s prices. Naturally, this takes a toll on smaller businesses and contributes to the inflation caused by the supply chain crisis. Aside from the more obvious impacts, however, the increased profitability of marine transportation has created a situation that was unthinkable pre-pandemic: today shipping companies are willing to depart ports in the U.S. and Europe with empty containers rather than waiting for them to be filled. There is just too much money to be made hauling goods from Asia to the U.S. and Europe, eliminating the need to wait to get those containers refilled so that they can be paid to haul goods back to Asia. They are making more than enough money hauling one way.

In addition, the global supply chain is experiencing a container shortage whose origins can be traced back to the very beginning of the COVID-19 pandemic. When shipping companies reduced the number of ships on their traditional routes, some ships were redirected to distribute PPE exports to other places around the world, including countries in Latin America and Africa that usually conduct limited trade with major Asian manufacturing hubs. Since these countries lack goods to send back to China, which produces the vast majority of PPE globally, empty containers remain in ports scattered around the world.

Unfortunately, the practice of shipping empty containers from the U.S. to Asia has the potential to increase prices for consumers of American products in Asia and hurts producers in the U.S. who are struggling to find ships to transport their goods abroad. It also drives shipping prices up further and increases the record backlog in Asia ports, such as those in the Chinese cities of Shenzhen and Shanghai.

As the supply chain flounders, large companies are unable to fall back on product reserves because of the widely-employed just-in-time method of manufacturing, which depends upon accurate estimations of consumer demand. Most publicly-traded suppliers and producers rely on just-in-time to increase profit by decreasing extra supply and the costs that come with physically storing and financially carrying that supply. Companies that use the just-in-time method produce supply based on anticipated demand, which allows them to decrease storage costs and quickly make a return on the money they invested in producing their products. It also permits lower prices for consumers, since less money is being spent producing, storing, and carrying products. Due to the uncertainty of the pandemic and the subsequent supply chain challenges, just-in-time has backfired for consumers and corporations. There are no significant stores of products to counterbalance the shortages. Products made in the U.S. are also in short supply because they often contain a component or part supplied from overseas manufacturers.

The massive supply chain disruption that I have just detailed is causing prices to rise due to scarcity of inputs and finished products, contributing to high rates of inflation globally. Unfortunately, there is no easy fix for these widespread issues. As new waves of SARS-CoV-2 sweep the world and restrictions come and go, the global economy is forced to adapt each time, stretching out the supply chain crisis. Are these changes permanent, part of a new post COVID reality? Or will things settle back into their old patterns? Ultimately, only time will tell the future of the global supply chain.