A former adviser to President Ronald Reagan has warned that global supply chain problems could roil the world economy for the next two years.
“Mostly, you produce more slowly, and that’s what hits GDP. If you can’t get the materials you need, you have to slow down production,” said John Rutledge, the chief investment strategist for investment company Safanad, on CNBC in early September.
Rutledge pointed out that a COVID-19 spike had shut down China’s Port of Ningbo-Zhoushan in August, the world’s third-busiest port.
“Seamen have not been inoculated around the world. So, some port, somewhere, is going to close again, and it’ll hit semis, but other things as well,” Rutledge said.
The Washington Examiner reached out to several professors who study global supply chains. Those who responded said Rutledge’s warning is well founded.
Asked by the Washington Examiner how global supply chains are faring, Arizona State University’s Hitendra Chaturvedi said they are “not well” and warned, “The problems are getting worse before getting better.”
Chaturvedi said existing supply chains are having a huge problem dealing with the spike in demand from Americans.
“We are trying to push a pig through a python rather than a bird, and that is causing unnatural reactions. A case in point is the recent story about over 40 container ships anchored outside the Port of [Los Angeles] not having space to unload their goods. Transpacific capacity remains ‘oversubscribed,’ with shortages in virtually every ‘handoff’ from Asian factory to U.S. store shelf,” Chaturvedi said.
“Not only are there container, chassis, and vessel shortages, but also deficits in marine terminal, warehousing, trucking, and rail capacity. One way to think about the problem is that we have seen a roughly 30% increase in demand coupled with a 10-15% decrease in effective carrying capacity. This is further compounded by labor shortages in receiving [stations] throughout the USA,” he added.
Chaturvedi also agreed with Rutledge that “sporadic spikes in COVID in some Asian countries and subsequent lockdown of the ports … are also causing intense pain.”
However, Michigan State University professor Tobias Schoenherr said, “Many companies and their supply chains have proven to be very resilient and were able to adapt quickly to the new realities.”
Schoenherr touted as an example the quick move to Zoom meetings with suppliers and virtual inspections of factories, and he argued that this innovation “has made many companies more resilient,” setting them up to prosper in the future. Still, he conceded that they are, essentially, making the best of a bad situation.
In some cases, demand has not recovered. And where it has recovered, Schoenherr said, “Some of these suppliers are hit twice since they are also faced by significant supply shortages for certain parts. So even if there weren’t any issues on the demand side, there would still be challenges on the supply side. Many companies continue to have to manage challenges on both of these fronts.”
Chaturvedi and Schoenherr also said the supply chain problems contribute to another recent situation in the economy: the nearly across-the-board spike in prices.
“Cost to ship a container across the transpacific shipping corridor pre-COVID was sub $2,000. As per the world container index, the cost is 10 times that of pre-COVID days in some instances. This price increase is diluting all profits of the buyer. Not only rise in price, the time to get the product has increased (delays) by 3-4X. Sea-intelligence report states that global schedule reliability that used to be in the 90% before COVID is now in the 30% range,” Chaturvedi said.
Faced with such a problem, he explained that “businesses can do three things when that happens — absorb the loss, increase price, or decrease size (shrinkflation). What do you think has happened? Naturally, price increase combined with reduced product size.”
Schoenherr added, “Capacity is very constrained, also driving logistics costs higher and higher. This is yet another factor contributing to higher consumer prices and thus inflation. So yes, in my view, supply chain challenges are one contributing factor to the recent spike in inflation.”
