Global Supply Chain at Risk of Another COVID-Like Meltdown, Says Author

In his new book, How the World Ran Out of Everything, global economics correspondent for the New York Times, Peter S. Goodman investigated the worldwide shortages during COVID-19 and determined that the root causes started well before the pandemic. More resilience is needed in the global supply chain to prevent similar breakdowns in the future. In this Q&A, Goodman discusses the drawbacks of efficiency, whether reshoring is the answer, why he thinks we're still at risk for chaos, what we can do about it and more.

Newsweek _ Why did you write this book?

Goodman _ I was living in London and had written a lot of Brexit stories and decided to do a story about the actual manifestations of Brexit. Once the deal came into being and there were trade barriers, I started to call around to importers throughout the U.K. and heard lots of now familiar stories of horrendous barriers, but also I heard that shipping was in crisis and this I didn't understand through the lens of Brexit. Why was it that suddenly the cost of moving electronics or components for pharmaceuticals multiplied literally tenfold from Asia to Ireland to Northern Ireland in the space of less than a year? As I started to dig into that, I realized this was actually a different story, and that the chaos of the pandemic had upended shipping. I got to understand just-in-time [manufacturing], because I quickly figured out that a lot of the reasons why products were scarce was because businesses had been going super lean with inventories for years as a way to essentially give corporate executives more money and give less resilience to the supply chain.

Is this a political failure or regulatory failure, or just one of the ways capitalism can fail?

It's a failure of the kind of capitalism we've had. I'm for capitalism. We like the growth. We like the dynamism. We like the innovation, but we certainly need regulators to play a much greater role than they have in recent decades. We've essentially handed our fate over to a bunch of profit-maximizing corporations that generally do a pretty good job of lowering prices on consumer goods. And they do a pretty good job of delivering a certain kind of efficiency, but that efficiency leaves us vulnerable to any kind of shock, and that's what happened here. We ran out of personal protective gear in the middle of a pandemic. We ran out of ventilators. We ran out of medical devices. Parents couldn't get baby formula. Hospitals couldn't get medicines they needed. That is a failure of our democratic system. Simply handing our fate over to corporate executives who answer to their shareholders—and they've done very well by their shareholders—but the shareholder interest is not always the societal interest. So this system in which the corporations win and everybody else loses, that is certainly a regulatory failure.

There is a certain amount of reshoring going on now. If everything gets reshored, everything's more expensive. How is this going to reconcile in the long term?

We're not going to reshore everything. That's a kind of Luddite fantasy. But what will happen and what is happening is companies are diminishing what had been almost exclusive reliance on factories in China. They'll spread their production around to other places, and they will put an emphasis on moving production closer to where customers live. So, if you're an American company, you'll still draw on China, the Chinese supply chain will, for as far as we can see into the future, be a significant center of global manufacturing. But you'll move what you can to Mexico, to Central America. European companies will be attracted to India. They'll be attracted to Turkey and North Africa; companies that are in Asia and serving Asian consumers will draw on Southeast Asia also, again drawing on the Chinese supply chain for components for raw materials. So, it's sort of a reapportionment. It's not a wholesale, "Let's stop globalization and let's go back to making everything in our village." That would be incredibly disruptive and incredibly expensive, and that's not happening.

How successful do you think China will be at regaining some of the market share it's lost since the pandemic?

Pretty successful. Chinese industry still offers this unbeatable combination of very developed and reliable infrastructure. It's pretty easy to move stuff from factories to ports and then on to ships. One thing that probably will not be controlled is labor costs are higher and there's uncertainty about the policies' trajectory going forward because the zero-COVID policies in the middle of the pandemic, followed by a kind of abrupt lifting of those policies and a free-for-all, has left multinational businesses kind of confused about what's happening in China, and that's driving this. There's a fervent desire to make sure that there's some insurance. But the one thing I think we can count on is that Chinese industry is going to be at the center of global manufacturing, maybe in a diminished role, but still at the center.

Despite all that happened during the pandemic, we appear to be back to business as usual. Are we still at risk of a similar shock happening again?

That's a crucial question. The short answer is yes, I do think we're at risk of a similar shock and the history on this front is not encouraging. I wrote my first story about a supply chain disruption back in 1999 when there was a big earthquake in Taiwan that knocked out a lot of the semiconductor fabs [fabrication plants] and there was a chip shortage. There was talk that we'd overdone it with just-in-time [manufacturing] and lean inventory and we needed to maybe think more about resilience, and then the world got back to what it does, which is essentially run giant corporations for the benefit of shareholders and not consumers or society in general. Then we have the tsunami that swamps the Fukushima nuclear reactor [in Japan in 2011]. We have massive disruption to the Japanese economy and to the global supply chain, and we see persistent shortages in all kinds of computer chips and other electronics. Japan is a major manufacturer of advanced electronic components, and at that point there's a lot of talk, books are written. We've really overdone it with just-in-time. We've got to think about more inventory. We've got to think about not putting all of our eggs in one basket. You know that kind of metaphor. And that concept was just completely ignored.

global supply chain at risk of another covid-like meltdown, says author

Workers (C) monitor the process as a container (L) is transferred from a truck to an awaiting cargo ship, at the Aomi Container Terminal in the port of Tokyo on May 22, 2024. Japanese imports rebounded in April by 8.3 percent (year on year), weighed down by the weakness of the yen, pushing the trade balance into the negative according to official data published on May 22. RICHARD A. BROOKS/AFP/Getty

So now we're in this moment where clearly businesses are taking this latest disruption much more seriously than any before. As I've wandered around the world, I have encountered people working for large multinational companies like Walmart, Target, IKEA, pharmaceutical companies, medical device manufacturers, who are seeking out alternative places to make their goods. In the book, I tell the story of Columbia Sportswear. [I] accompany them as they went to Central America to visit factories in Guatemala to see if they can build again a little more redundancy into the system so that a problem in one place doesn't knock the supply out.

Now, are these companies outliers? Are they governed by a slightly different ethos than the rest of business writ large? We're going to find out. But at the end of the day, there are reasons to worry that so long as the incentives that have been in place all along remain. Those incentives are—if you're the CEO of a publicly traded company and you say, "Hey, I'd like to build up more inventory," and, "I'd like to set up a factory in a place that might be a little more expensive than China or wherever we've got our existing plants, that's going to be good insurance against the next problem"—the result of that is you have damaged your next quarterly earnings, and that's an invitation to go and work somewhere else.

Whereas the CEO who says, "I'm going to slash inventory to the bone, I'm not going to pay to put goods in warehouses, I'm not going to pay to build extra factories or spread my sourcing to factories in other places because that's expensive, and instead I'm immediately going to gratify the shareholder with better earnings than ever and dividends, and I'm going to buy back my shares, which makes stock prices go up," well, that CEO is rewarded with more money and greater job security. So, until we address those incentives, we will certainly be at risk of the next shock.

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