Don’t Ask Politicians To Fix a Supply Chain Crisis They Created

October 6, 2021   |   Tags:
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In recent weeks, multiple trade associations have asked the Biden administration to provide some relief regarding supply-chain issues that create shortages and push prices up around the world. Some of their requests (relief from tariffs, in particular) are good policy at any time, since barriers to trade hamper prosperity and innovation. The fact, though, that industry representatives see partial solutions to current economic problems in the federal government undoing its earlier interventions is a glimpse at the bad policies that brought us a world of empty shelves and clogged ports—and which may continue to plague us in the future.

"Tariffs on raw materials, low tech/cost components, equipment, and finished goods which are not adequately produced in the U.S., are causing delivery delays of critical products and/or higher consumer costs," the Association of Home Appliance Manufacturers, the Air-Conditioning, Heating, and Refrigeration Institute, the North American Association of Food Equipment Manufacturers and the National Electrical Manufacturers Association point out in a white paper sent to the Biden administration last week. "Plant shutdowns and/or slowdowns caused by the COVID-19 pandemic, including current difficulties attracting new employees despite competitive pay and benefits, have reduced manufacturing productivity," they added.

Separately, the American Apparel & Footwear Association also asked for tariff relief to ease "the chaos and cost increases caused by the shipping crisis."

The trade associations fret over serious worldwide supply chain issues often represented by backlogs at ports, but also involving the inability to source both components needed for production and finished goods. Some of the international disconnect between supply and demand can be attributed to specific policies, such as lockdowns that make it difficult for factories to satisfy customers.

"Governments have struggled to secure doses [of vaccine] and have imposed costly lockdowns that have left many factories without workers," Reuters reported in August of manufacturing woes in Asia.

Likewise, Britain's dearth of truck drivers has been laid at the feet of the border barriers imposed by Brexit, which certainly didn't help. But neither did the suspension of the approval process for commercial drivers or lockdowns that idled workers.

"Covid has had an impact and the most obvious Covid impact is that normally about 35,000—40,000 tests are done a year for HGV [heavy goods vehicle] drivers and had to be suspended quite rightly for Covid, and there's a backlog of tests," the head of a dairy co-op told the Yorkshire Post.

"Foreign labour was not scared out of Britain due to an abstract legal change; it was driven out by the Government's lockdown policies in response to the pandemic, which shuffled many from their jobs onto a souped-up dole," charges British economist Philip Pilkington, who points out that Ireland, which remains in the EU, also has a driver shortage. "Many realised that the dole is better where they came from on the continent, especially relative to the cost of living, and so they left." Pilkington also points to the delay in testing drivers as contributing to the shortage.

Lockdowns also changed people's lives, closing offices and factories and confining people at home. That resulted in massive and unpredictable shifts in demand and unreliable supply. Do you remember the disappearance from supermarkets of flour and yeast early in the pandemic? Who knew that people with time on their hands would discover their inner bakers (at least for the time being)?

"The period of contagion, self-isolation and economic uncertainty will change the way consumers behave, in some cases for years to come," observes the consulting firm McKinsey & Company. "The new consumer behaviors span all areas of life, from how we work to how we shop to how we entertain ourselves. These rapid shifts have important implications for retailers and consumer-packaged-goods companies."

How many of these changes will be permanent, and which will revert to old patterns after restrictions on normal life disappear? Businesses planning for the future have to guess, with their survival at stake.

"The idea that an economy could be indiscriminately shut down and turned back on without far-reaching consequences, as if a light switch or lawn mower, is utterly damnable," charges economist Peter C. Earle. "It could only come from the mind of an individual, or body of individuals, with no understanding of or consideration for the extraordinary interdependence of the productive sector."

"Market economies tend to be pretty good at getting food on the supermarket shelves and fuel in petrol stations, if left to themselves," agrees Pilkington. "That last part is key: if left to themselves. Heavy-handed interference in market economies tends to produce the same pathologies we see in socialist economies, including shortages and inflation. That has been the unintended consequence of lockdown."

Unfortunately, there's almost certainly more pain on the way. Electricity is now in short supply in China, partially because a drought has hobbled hydropower, but also because the government makes it impossible for electricity producers to compensate for rising coal prices.

"Power plants buy coal at market price but are not allowed to raise electricity rates on customers beyond small margins set by national planners," notes the Los Angeles Times. "When coal is expensive, many plants report 'maintenance outages' and reduce or stop operation rather than suffer losses."

That may ease the shipping logjam, but only because there will be fewer goods produced by factories shuttered by blackouts. Europe, too, suffers soaring energy prices as demand recovers from pandemic lockdowns even as prices rise for fossil fuels and governments' planned transition to renewable energy proves vulnerable to nature's whims. That also leads to manufacturing slowdowns. You can expect the consequences to cascade around the world, with yet more empty shelves.

The danger is that people see economic problems caused by earlier fiddling and then demand even more government intervention. The semiconductor shortage, for instance, can be attributed to production curtailed by lockdowns as demand for computers soared among populations compelled to work and study from home. But the trade-group white paper that asked the Biden administration for tariff relief also begged it to "Ensure that semiconductor supply is fairly and transparently allocated across industry sectors and that the Administration does not—explicitly or implicitly—favor any one sector."

The groups don't elaborate on what a semiconductor policy should look like. But if the government were to further meddle in the market to allocate products made scarce by earlier actions, it's hard to see how the result wouldn't be anything other than increased supply chain chaos.


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