Biden’s Myopic Supply Chain Resilience Initiative

President Biden’s inauguration of a White House Council on Supply Chain Resilience is welcome news, especially to those of us who have toiled on the operations of the global logistic sector for years.

However, as heartening as Biden’s initiative is, it is predicated on a myopic framework that public policy should focus exclusively on steps to alter the supply-side of markets.

There was scant, if any, attention paid by Mr. Biden in his remarks announcing the initiative on the need for fundamental policy modifications to strengthen the dynamics of market demand, especially through embracing innovations in the pricing of supply chain services such as speed and quality of delivery, mode of transport, inventory management, employment policies, automation, and sustainability.

While you cannot take out “supply” from “supply chains,” the fact of the matter these networks encapsulate the mechanisms that reflect and transmit both the supply and demand signals that lie at the heart of the workings of the market allocation process across the globe.

How Did We Get Here?

Who would have thought that “supply chain” would so prominently—and quickly—enter the popular lexicon and become headline news around the world?

Of course, such a turn of events has not been driven benignly. Rather it was propelled, in part, by the outbreak in late 2019 of the Covid virus in Wuhan, China. The virus spread quickly to China’s other provinces and, not long after, to other countries. In due course, the World Health Organization (WHO) classified the spread of the virus as a pandemic.

In the first quarter of 2020, Beijing shut down much of the nation’s economy and mandated lockdowns of a vast swath of the population. With the “world’s factory” offline, it did not take long for much of the rest of the globe’s economies to realize the magnitude of their dependence on supply chains emanating from China.

Throughout the rest of 2020, 2021 and 2022, into 2023, the world lived through a global “supply chain crisis” depicted by massive shortages of products and congestion throughout all transport modes of the logistics industry—both within and across countries, from China, to the U.S. to the U.K. and Europe and beyond. News stories often led with vivid scenes of gridlock: cargo ships moored offshore waiting to berth; empty containers piled up at ports; undriven trucks parked at depots; and some warehouses filled to the brim while others were barely filled.

Like a number of other countries, in the U.S., policymakers focused on trying to alleviate the problems at the nation’s largest ports and worked with industry to get cargo ships to re-route to less congested ports. In time, however, the back-up destinations overflowed. For example, goods transported from Asia to the U.S. that would have been unloaded in ports in the Los Angeles made their way to Oakland, where the scale of port facilities are far more modest. Like a “Whack-A-Mole” game, that reaction engendered new patterns of congestion in inland shipping routes and warehouses. In addition to generating transport delays, storage fees, and worker layoffs, ships moored offshore increased consumption of fossil fuels, leading to greater greenhouse gas emissions and degradation of the environmental quality and sustainability challenges.

While it is true that the Covid pandemic and China’s shutdown played a role here, in fact, the problems in supply change management and logistics started before Covid, as I’ve argued in this space earlier. A litany of factors were already threatening trade: a mismatch between the schedule of transport pricing charged by shippers and “just-in-time” or “just-in-case” (or as logistics professionals say, “safety stock’’) demand expectations by recipients and final consumers; underinvestment in modernized port facilities and warehousing operations, such as provision of deep-water harbors, utilization of digitalization and automation, and the spatial location of such facilities relative to the different stages of production and location of end-users; and inadequate understanding of how the state-of-the-art global tiered supply chains are structured and operate.

Prior to the outbreak of the Covid pandemic, few people outside the logistics sector thought much about global supply chains. Such concerns were limited to firms in packaging and shipping, people working in port management or dockworkers, those in air cargo, railways, freight forwarding, and trucking or professionals in warehousing, inventory control and informatics. And then there were people like me who had responsibility for negotiating the international rules and policies that discipline how businesses in the sector operate. To the rest of the world, “logistics” was something the military did.

Ways Forward

In the U.S., at least, as reflected in President Biden’s supply chain initiative, these policy themes are becoming front and center in the economic agenda, though it remains to be seen how much fundamental progress will be made.

In part, the key to remediation is to distinguish between cyclical and secular (or structural) factors, as well as shocks.

Too much commentary, especially with respect to the current state of congestion and shipping delays, focuses on cyclical issues. To be sure, they are more visible, easier to understand and address. But it is the structural factors – the secular ones – that are the bigger problem, compounded by unforeseen shocks.

Take cargo freight rates—whether by sea, air, rail or truck. Increases or decreases in these rates serve to re-equilibrate visible distortions and dislocations in markets. They are often the focus of the media. Such it is that when cargo rates at specific seaports, say those in Southern California, rise significantly because of congestion (or other factors), vessels coming from Asia may well try to sail to other ports where rates are lower, for example Oakland.

What most commentators miss is that while such rate differentials may well reduce congestion in the LA Basin, the question remains as to the whether or not alternative port facilities, including their inland infrastructure, can provide the same quality of service, competitive rates, speed of transfer as those at the Ports of Los Angeles or Long Beach.

These latter features are key secular or structural factors. They are the harder nuts to crack, and often require substantial investment commitments, upkeep, and oversight. Yet these are the ones that if efficiently provided and modernized, will yield greater returns to improve supply chain management than attempting to modify cyclical features.

Another crucial secular dimension of supply chain management and logistics that’s rapidly changing the face of such operations is digitalization. This is driven by the increasing complexity of such networks. Incorporation of end-to-end digitalization, including back-end processes, will be crucial to maximize value added to logistics firms’ customers on both ends of a transaction. The diminished competitive edge of traditional versus digitalized logistics networks means the latter are slated to become a permanent fixture of the global economy. Logistics firms who fail to digitalize system-wide or do so only partially, rather than throughout their entire network, risk becoming relics.

The industry’s customers – both senders and receivers – demand transformation toward a global system of digitalized logistics networks. They want instantaneous information on their shipments, greater speed of sending and delivery, as well as lower costs of shipping. This is a hallmark of the economy’s drive for “just-in-time” supply chain operations.

Does embracing digitalization in logistics necessarily amount to a wholesale threat to incumbent workers? Not necessarily. Is some retraining needed? Most likely yes. But it will also mean higher wages. Why? Because digitalized processes not only economize on time but also generate added value. Think of utilizing a travel software program at home that allows one within the space of several minutes to build and compare various itineraries with different flight times and air fares, hotel options, car rentals etc. without utilizing a travel agent or calling the airline.

Indeed, the competitive structure of the logistics industry is another obvious secular issue. Here there are several initiatives afoot in various jurisdictions around the world—with the United States in the lead. Two deserve mention.

In June 2022, President Biden signed into law the bipartisan Ocean Shipping Reform Act, which expands the authority of The Federal Maritime Commission to protect US business from unfair shipping rates and unreasonable denial of shipping U.S. exports. More recently, based on antitrust concerns expressed by the U.S. Department of Justice, A.P. Moller-Maersk dropped a $1 billion sale of its refrigerated container manufacturing business to China International Marne Containers Ltd.

While in the past, the bargaining power of labor unions at ports was often seen as challenging firms’ market power, the strength of union leverage may well be diminishing, especially as the cost of introducing automation into logistics operations decreases. But it would be a mistake to conclude there is uniformity in this regard across ports around the world.

In India, for example, unions at some ports seem to have staying power, if for no other reason that their interests are fully aligned with local politicians. By contrast, the 2022 termination of the dockworkers’ strike at Felixstowe, the U.K.’s busiest port, yielded no worker wage increases. In the U.S., all eyes were on dockworkers at the Ports of Los Angeles and Long Beach. They continued to work even though their contract expired on July 1, 2022. Almost exactly one year later, a new contract, which runs until 2028, was ratified.

Logistics providers, businesses who utilize them, and the end-users and consumers who buy products and services from those businesses, must adjust to the new regime of market dynamics that characterizes the fundamentals of today’s global economy. We all have little choice but to become more economically agile and to adopt new pricing and delivery schemes that match “willingness to pay” on the demand-side with “ability to deliver” on the supply-side.

This is why greater free play of competition in the structure of the logistics industry is also called for, as is more innovation, including systemic adoption of artificial intelligence and other elements of advanced technology. Indeed, competition and innovation are the key drivers for the sector’s growth, and in turn, that of other domestic and international firms.

An increasingly common feature of the modern economy’s on-line shopping experience is rapid delivery of ordered merchandise. In just a decade’s time, it has become routine for consumers—at least in many advanced countries—to receive products within 2-3 days.

But what few consumers realize is fulfilling such “just-in-time” deadlines requires a spatially sophisticated, diverse network of warehousing, inventory management, and transport facilities—a network that until now did not exist.

This convenience has spawned customer demand and employment, though the question of whether workers’ pay, and conditions are fair and satisfactory is sensitive and politically charged.

It has also introduced interesting pricing strategy questions around delivery times. Specifically, are there deep enough discounts in prices if consumers were willing to accept a slower delivery speed? Conversely, is there a sufficient premium charged for such just-in-time service? These are the types of demand-side tools that are missing in the Biden supply chain initiative.

It is complicated enough when supply chains are confined to a single geographic market. It is even more complex when supply chains span different markets geographically dispersed. Still more complicated are supply chains that are not bilateral but tiered.

As an example, manufacturing a washing machine is the process of melding multiple supply chains with respect to its different components. While its core may be produced in China, that core could well be shipped to Thailand where another part is added. In turn, that assembly is then transported to Mexico where further components are added and the product is finally suitable for delivery to the destination market.

Presidential Messaging

No-one should believe even if it were possible to wave a magic wand to end the prospects for shipping delays and congestion—whether due to cyclical fluctuations in economic activity, secular changes arising from the introduction of new technologies, or shocks driven by weather conditions or pirates—that the configuration of global supply chains and the challenges of logistics management would return to their status quo ante before the onset of the Covid pandemic. Commentators in the media who continue to forecast—or express hope—of a “return to normal” are misinformed or worse, naive.

As a White House veteran, I understand well the politics behind Mr. Biden’s interpretation of enhancing supply chain “resilience” as a supply-side matter. After all, that perspective is readily understood by voters. But by failing to also focus on policies that strengthen the demand-side of supply chain operations, including educating the public that situations do arise necessitating economic tradeoffs in service delivery to be considered, Mr. Biden risks failure meeting the challenges on which he has rightly brought to the nation’s attention.