What Happened to Supply Chains in 2021?
from Renewing America
Pandemic-related disruptions threw a wrench into global supply chains this year, causing shortages of goods. Here's how it happened.
Article by Anshu Siripurapu
Like global supply chains themselves, the story of their disruptions in 2021 is complex. As COVID-19 vaccines became widely available in the United States and the economy reopened, consumer demand recovered strongly. Significantly, the pandemic-induced increase in demand for goods persisted even as demand for services (such as dining out, entertainment, and travel) largely returned to pre-pandemic levels. Companies—which for decades had been disciplined by the market into creating "just-in-time" supply chains and holding little inventory—scrambled to keep up.
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At the same time, companies in critical sectors such as warehousing struggled to attract and retain workers. These factors, combined with years of underinvestment in U.S. infrastructure, saw goods-laden containers piling up at major ports and ships waiting for weeks to dock. As a result, shoppers around the country saw sparse shelves and higher prices. At year's end, there are signs that some of these strains are easing.
What Is a Supply Chain?
The explosion of international trade in the wake of World War II fueled the rise of global supply chains: the intricate, international sequence of steps to make and sell products. This trend was accelerated in the 1980s by the proliferation of global trade agreements, which were designed to smooth cross-border trade. Today, it's not unusual for a product to cross dozens of borders before reaching a consumer, with each link in the chain highly specialized in a specific production step. This has allowed companies to source production where it is cheapest and deliver a wider range of goods at lower costs to consumers. But it can also create problems.
Despite their efficiency, supply chains have long proven difficult to manage. Because each point in the chain receives limited information about a product, small changes in perceived consumer demand at one end can cause big changes in production at the other—a phenomenon known as the bullwhip effect. For example, a retail store, seeing a bump in weekly purchases of a particular item, ups its order from a wholesaler, which in turn orders even more from the manufacturer. Experts say this effect helps explain why shortages of critical goods such as semiconductors, also known as microchips or chips, persisted throughout the year.
Pent-Up Demand
The pandemic triggered a dramatic shift in consumer behavior. Almost overnight, an economy defined by going out became one defined by staying in. Instead of going to the movies, the gym, or a concert, people bought electronics, home workout gear, and musical instruments. This increased demand for goods has persisted even as businesses have largely reopened and spending on services has recovered. CFR's A. Michael Spence writes that this "pent-up demand was unleashed before the pandemic was actually over. So, as demand increased, pandemic-related disruptions continued to affect major ports and manufacturing facilities, dampening the supply response."
Soaring Shipping Costs
Higher demand for goods combined with the lingering effects of pandemic restrictions saw ocean shipping costs skyrocket for much of 2021. Some experts say consolidation in the shipping industry also contributed to these price hikes. China's "zero-COVID" policy created further shipping strains as pandemic measures continued to affect its ports, many of which are among the world's busiest. The cost of sending a container from China to the United States reached a record high of more than $20,000. The United States imports nearly half a trillion dollars worth of goods from China annually.
Growing Cargo Wait Times
Soaring demand for goods led to record cargo volumes at major U.S. ports; the Port of Los Angeles, the nation's largest, reported the busiest September in its 114-year history. Total cargo at the port is up nearly 25 percent from 2020.
The flood of goods coincided with a shortage of workers to move it. Containers piled up on the docks, and ships waited at sea for weeks. The average wait time for goods from China increased by nearly a month. Experts say the dearth of truck drivers in particular is due to long-standing issues with wages and working conditions in the industry. "Many of these drivers simply prefer jobs at factories, construction sites, and warehouses that offer similar wages without the long hours and harsh working conditions," CFR's Roger W. Ferguson Jr. and Upamanyu Lahiri write.
Critical Chip Shortages
Semiconductor manufacturing was one of the industries most affected by the 2021 supply crunch. Increased demand for electronics during the initial months of the pandemic coupled with a resurgence in demand for cars to create a huge backlog of chip orders. Companies began stockpiling supplies in response, compounding the crisis. Because chips are a critical component in a vast array of products, there were significant downstream effects: automakers had to idle plants because of the supply crunch, and Apple Inc. said it lost $6 billion in potential sales of its iPhone and other products.
The Policy Response
The Joe Biden administration has put forward several proposals to address the supply-chain disruptions. Some are immediate measures aimed at alleviating the current pressures, while others are intended to improve supply-chain resilience in the future and will take years to implement.
In June, the administration announced a supply-chain "disruptions task force" led by the secretaries of the Departments of Agriculture, Commerce, and Transportation. The administration brokered an agreement to operate the Port of Los Angeles 24/7 and enlisted freight companies and retailers to help move goods off the docks. The Transportation Department also provided a $5 billion loan to modernize California ports. Ultimately, the administration aims to boost domestic manufacturing of critical products, including semiconductors, advanced batteries, and medicines, to reduce the reliance on imports. Meanwhile, Congress approved a massive infrastructure bill in November that will allocate tens of billions of dollars to upgrade U.S. ports, roads, and railways.
Reshoring supply chains has support in both major parties. Senator Josh Hawley (R-MO) has called for an even more extreme approach and proposed requiring that at least half the value of designated critical products originates in the United States. Critics of these plans, such as Scott Lincicome of the libertarian Cato Institute, argue that efforts to onshore supply chains will make them less resilient to future shocks. Lincicome points to regulatory bottlenecks—including the Jones Act, which requires cargo moving between U.S. ports be carried on U.S. ships, and restrictions on Mexican truck drivers working in the United States—that could be addressed in lieu of increasing federal spending.
CFR's Ferguson and Lahiri and other experts have proposed additional strategies that businesses could adopt to better weather future disruptions. These include moving away from the just-in-time model and increasing inventories, even if doing so temporarily reduces profits; diversifying supply chains away from China; and improving analysis of supply-chain vulnerabilities.
Will Merrow helped create the graphics for this article.
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