The global economy’s uneven recovery is raising new challenges, including congested ports in the United States, challenged supply chains and slow deliveries to consumers and retailers. In late May 2021, the Executive Director of the Port of Los Angeles stated, “We are in the seventh month of an unparalleled import surge, driven by unprecedented demands by American consumers.” Los Angeles is the largest port in the United States and, together with Long Beach a bit further south, account for around 30 percent of trade entering and exiting the United States. Although the situation at West Coast ports is slowly improving, it is raising concerns about the potential for price increases (read inflation) and pointing to the fragile nature of global supply chains. Add in U.S.-China tensions global supply chains have become a critical issue not only for U.S. economic growth but the world’s economic growth.
What is causing the pressure on U.S. ports? On the economic front, China bounced back first, followed by the United States, while Europe and Japan have lagged. This was driven by two factors: Asian factories resumed their production and the U.S. consumer, stuck at home during the pandemic, decided to buy lots of consumer goods. The surge in ships arriving from Asia put West Coast ports (already hit by the coronavirus pandemic) under stress, which started in November and thus far has continued through into June.
The port situation has been further complicated by the lack of goods heading back to Asia due to the lag in U.S. economic activity. The knock-on effect has shown up in higher prices for various products and left companies scrambling for imported inputs, including semiconductors (other factors are also at work in this sector). Although port congestion is easing, for now, big changes loom for the just-in-time-production model (JIT) and global supply chains upon which it rests.
In the late twentieth century companies in advanced economies adopted a “just-in-time” production model. JIT was attractive as it addressed the challenge of overstocking of warehouses with resources in case customer demand suddenly developed. The downside of this was that companies often kept large inventories, which required space and additional workers. JIT removed the need for large inventories and the staff needed to maintain them.
What was to help make JIT work was the development of global supply chains that met the need for rapid and reliable sourcing of inputs. Ultimately what developed was a system of flexible and secure input sources throughout a trans-national company’s global network to maximize profit and minimize waste. At the same time, global supply chains allowed American companies to establish production facilities in countries where the cost of labor was cheaper and work regulations were often lax compared to the United States. The advent of e-commerce and digitalization only heightened the attraction of a rapidly functioning supply chain.
To read more, visit The National Interest.