I wanted to draw your attention to an article by James Clad in The National Interest striving to make a case for “American-based supply chains”:
The drive for efficiency initially took shape in the time-and-motion productivity studies of the late Forties. By the 1980s, it had led to the tyranny of “just-in-time†inventory management. Now, under pandemic conditions, the resulting supply chains have been stretched to their breaking point. Does a simple resumption of a tireless pursuit of cheap/cheaper/cheapest really offer the best hope for a durable recovery?
If reducing consumers’ retail costs has become the all-defining metric, then the maintenance of product and service quality has taken secondary importance in our manufacturing economy. Post-pandemic vulnerabilities have become so apparent in critical supply chains that we cannot evade a comprehensive re-think.
I’m not particularly sanguine about “American-based supply chains” but I think it’s a practical necessity that we draw our supply chains, particularly for strategically important materials, closer to home. This, for example, is unconscionable:
For over fifteen years, China has made mining and mineral processing a strategic priority; meanwhile, a broken U.S. mining regime has crippled a once-dominant industry. The figures say it all: U.S. mineral import reliance has more than doubled over the past twenty-five years. China now controls the supply of twenty-three of thirty-five minerals deemed “critical†by the U.S. departments of defense and interior.
These minerals—cobalt, graphite, lithium and various rare earths—comprise the building blocks of renewable energy technology. Recent World Bank analysis shows how demand for minerals essential to wind and solar power (as well as for lithium-ion batteries and electric vehicles) will increase by at least 500 percent by midcentury. Our national decarbonization effort, as well as more global ambitions, depend on a global production ramp-up of key minerals over which China has asserted monopoly control.
and not only eminently doable but should be able to draw bipartisan support. Cobalt is one thing but rare earths another. Not too long ago the U. S. was the world’s greatest producer of rare earth elements. That has changed not because we no longer have any (everybody has them) but because they’re dirty and an ill-considered environmental policy has driven them to China where they are tidily out of sight. They’re not any cleaner or more efficient for being there but they have removed to a place where they are beyond our ability to control or reform.
A few thoughts.
Mr. clad apparently is unaware that JIT was based on the concepts of avoiding recession producing periodic excesses in inventory stocks, and the Japanese concept of not masking process faults with excess inventory. (A sort of a shallow river exposes the rocks concept). He conflates that with outsourcing.
Outsourcing was really a byproduct of overreaching union work rules that caused alternative arrangements to be sought for labor, consumers who answered surveys in the affirmative about buying American but who bought on price, the environmentalists as you point out, and a slavish devotion by economists to free trade notion in a non-textbook world, supported by globalist politicians. I can’t think of a more bizarre policy from a strategic or JIT perspective than getting your stuff, especially really important stuff, from half way around the world from a bad actor.
I think the real debate is whether this country has the will to make the changes on a significant scale. Each product or component will have a debate surrounding it. Politicians need to understand that the inexorable siphoning off of resources from consumers and the private sector in general cannot be accommodated by ever cheaper goods from foreign lands. Liberals need to get real on icky industries and NIMBY views. Corporations need to commit to US based production and on it goes.
Free trade and best product available will always dictate import/export activity. But the process was bastardized in reality, unlike the textbooks.
A last thought. Show of hands. How many think Joe Biden and his oh-so-talented Chinese PE dealmeister son will be good for the China problem.
I am a firm believer that supply chains must come home, not closer to home, not Mexico or Canada (unless we actually merge with them), but home, Ohio, Massachusetts, Texas…
The current system does leave us at the mercies of China and even Russia. But there is another reason other than homeland security, and that is social collapse. The loss of industry and the creation of the Rust Belt (now 50 years old) has devastated the lives of millions of working class Americans. It is the prime driver of the meth/opioid epidemic, and a main reason that suicides are up among White working class people. Life expectancies have actually gone down for them.
Bringing supply chains home will increase costs. The whole point of open borders and free trade is to reduce American prices and wages to the world average. But those policies have benefited only the financiers.
Of course, the financiers are still in control, and will remain so after the November election. In fact, the Democrats are a totally owned subsidiary of the financiers, and if Biden wins (seems likely) Wall Street will have even more control over our trade and immigration policies.
Turchin is the prophet of our times.
I think that another factor was relying on claims made by producers in faraway countries for which the cost of verification far exceeds imagined savings.
They also need to get away from the “lump of labor” fallacy. The category “service jobs” covers everything from minimum (even sub-minimum) wage jobs to people earning a couple of mil a year. Creating more jobs that pay minimum wage actually hurts the society as a whole; creating more jobs that pay more than median income does.
Last I checked import/expect ratios have not changed over the last few years. A little better with China, but worse elsewhere. I think our goal should be to get supply chains and better jobs back to the US, not just hurt China.
The problem wont just be because the consumer wants the cheapest price, but also because of the desire for the highest profits, which would include paying less in taxes. Those relatively few rich people who can move and take their tax money with them? They are going to be in control of deciding whether or not they bring work back here. Given that they were willing to move to China and then give up corporate trade secrets as part of the price for working in China I think the evidence points to their not coming back to the US willingly.
Steve
For me hurting China is just an avoidable consequence of our pursuing our own national interest. China’s zero-sum approach has pretty much ensured that.
The issue is almost entirely not providing lower prices for consumers. I’ve posted on this subject before. Sellers are capturing nearly all of the economic surplus (something like 98%) realized by procuring from China. Buyers only about 2%. That should be obvious from a couple of factors (wage stagnation, prices not falling).
My personal experience is that even very large companies have been very naive about China. They didn’t really believe they’d need to give up trade secrets or intellectual property. Again my experience is that most wanted to get access to the Chinese market, again an extremely naive view.
“My personal experience is that even very large companies have been very naive about China. They didn’t really believe they’d need to give up trade secrets or intellectual property.”
Yet they gave up their intellectual property and then stayed there. I just dont see them leaving unless pretty much forced to do so.
Steve
bob – its simply not true that trade has only benefitted financiers. (BTW – explain how they have benefitted, or is that just a throw away line. International letters of credit? Transport insurance?) Consumers have also benefitted. However, consumers are also US producers. So its very situational. Its the ultimate tension between interests. Pure free trade does not exist; but I would pursue rational free trade with a nod towards strategic interests.
I just bought a new car Friday. Yet another Porsche, made 100% in Germany. I buy them because in my opinion there simply is not a better engineered car in the world, in all respects. I should be able to do that. American carmakers need to up their game. The Corvette has its place, and fans. Cadillac makes a nice sporty car. There is the Mustang crowd. All fine cars. Just not up to Germany’s best. Its just consumer choice, and that competition is good. (No competition?, and you get the Dodge Dart.) But can anyone say the same about, say, consumer electronics? Appliances? Tee-shirts? But more importantly, chasing away industries like rare earths is just pandering to environmentalists for political gain. Terrible policy.
Dave – I think both of your augmentations are correct.
Remember, anyone who bothers to read this, I’ve spent my whole PE career fostering the prosperity of US based manufacturing companies. Its tough. I’ll say it once again, although everyone, when asked, will say they will buy American all other things equal. Some features are more equal than others: um, price. Meeting the consumer value equation while remaining competitive and in the US is tough.