Thursday, June 20, 2024

Sadler: Global supply-chain woes may imperil more than Christmas shopping

by BIZ Magazine

A global shipping crisis has been quietly brewing for months. Soon it will lead to layoffs, higher prices and fewer options at the grocery store. In time, it could threaten our nation’s security.

Vice President Kamala Harris caught a glimpse of the unfolding problem during her recent swing through Asia. In Singapore, a global hub for maritime trade, she learned that congestion at its piers was causing shipping companies to bypass the port.

What the vice president saw in Singapore and other ports in Vietnam and China critical to global supply chains is a product of COVID-19. The Chinese port of Ningbo, the world’s third-largest, was closed for two weeks in August by authorities over a single COVID case.

In Singapore, Harris commented that the shipping backlogs might make it hard for Christmas shoppers to have gifts on time. But the challenges are weightier than that. Our national security apparatus maintains lean inventories and relies on just-in-time manufacturing and delivery – often from overseas suppliers – to replenish their stocks. Shipping delays can create serious vulnerabilities.

The slowdown is already hitting home. In Los Angles, a key port for U.S. trade with Asia, historic shipping backlogs have resulted in a horizon full of ships at anchor waiting to enter port. The backlog is even impacting Midwest rail service and causing delays in air freight at major air hubs. For trade in perishables like fruit, delays are a deal killer; as winter approaches, consumers will find less fruit at the grocers.

The COVID-19 pandemic has hit global shipping and manufacturers with labor shortages for 20 months now. This problem was compounded when a large container ship grounded in the Suez Canal, blocking the waterway for six days. The cascading effects of these misadventures have created delays that will take months, if not longer, to resolve.

These delays are compounding the backlogs by driving a shortage of shipping containers as ships wait at anchor to offload and reload. Container ships carry 13% of global trade by volume, accounting for 11% of global trade value. Shippers want cargo in standard containers, driving producers to look for replacements as too many are held up at sea, driving a surge in demand for shipping containers. Yet container production is located overwhelmingly in China, and supply is not likely to meet demand anytime soon.

Another problem is rising container shipping costs. On Asia-West Coast U.S. routes, they have soared from $1,485 per 40-foot equivalent unit in 2017 to rates ranging from $18,000 to $25,000 per FEU. With options limited by the container shortage, exporters-importers are over a barrel. Some shippers break contracted fees even after cargo is loaded, and this adds not only cost but new uncertainty to global trade.

The global shipping backlog, combined with a COVID-related dearth of truck drivers, is already disrupting U.S. assembly lines. Inventory-to-sales rates are at the lowest-ever levels. Ordinarily, supply and demand would result in more shipping companies and truck drivers entering the market, but that hasn’t happened for several reasons, including delayed re-entry into the workforce given generous unemployment benefits.

The foremost challenge in this quiet crisis is inflation – driven in part by higher shipping, labor and limited availability of resources and parts. However, the more insidious impact could be in the area of national security.

As The Heritage Foundation’s Maiya Clark points out, U.S. defense supply chains rely on a global network of manufacturers – access to which is being complicated by the shipping crisis. For years manufacturers have relied on lean inventories or just-in-time manufacturing, leaving little surge capacity for increased production or to mitigate disruptions such as a Suez Canal grounding.

Consider how a shortage of microchips slowed U.S. car manufacturing early in the pandemic. Now consider the impact supply disruptions could have on the nation’s next Columbia-class nuclear ballistic missile submarine. Supply delays among any of the sub’s 5,000 suppliers could imperil delivery, which must occur before 2028 to ensure the nation’s strategic deterrence.

No reports of production delays have been reported as yet. But no one in or outside of the Pentagon fully understands the extent to which Navy suppliers rely on overseas sources – a truly troubling knowledge gap.

Events of the past six months offer some important lessons for the military. First, it needs to have a more complete understanding of its supply chains and actively diversify production as appropriate. Second, today’s limited port infrastructure and transportation workforce create bottlenecks that could impair wartime and crisis logistics. Three, given recent supply disruptions, the military needs to assure Congress that ‘lean inventories’ and ‘just in time’ manufacturing will not imperil success in a future war.

While no one looks forward to depleted store shelves during the Christmas shopping season, the bigger concern for Americans should be higher fuel bills, lack of fruit in the winter, and whether our military can keep us safe while they wait for parts.

Brent D. Sadler is the senior fellow for naval warfare and advanced technology at The Heritage Foundation’s Center for National Defense.

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