Political changes in China mean the world’s supply chain may never return to ‘pre-pandemic normal’

Jan 25, 2022 | 7 comments

Shipping containers being off-loaded at a dock in Los Angeles.

By Gordon G. Chang

If you are in the habit of celebrating Halloween in the middle of January, you’re in luck this year. American ports, plagued by logistical problems, are now unloading Halloween gear from container ships.

Supply chains, which once delivered goods to American stores cheaply, quickly and at the right moment, are now, as Jonathan Bass tells Newsweek, “not cheap, not quick and not just-in-time.”

Bass, CEO of Whom Home and a nearshoring advocate, also points out that retailers, anticipating long delays, are ordering goods nine to 12 months ahead of time. Shelves at stores both big and small are sometimes empty, and delivery times are no longer predictable.

In 2020, the Financial Times tells us, “a highly synchronized system was spun out of rhythm.”

There’s no mystery why an extraordinarily efficient global mechanism broke down. Draconian Covid-19 lockdowns in China closed factories, and disease stopped trucks and planes in both producing and consuming countries. At the same time, there was a surge in demand for goods from locked down consumers who could not spend their money on services. A logistical supply chain with little resiliency thus collapsed.

There are now about 120 ships waiting off the twin ports of Los Angeles and Long Beach. Off China’s ports, the numbers are far higher. In the beginning of November, for instance, there was a total of 493 ships loitering, waiting to load. The backups are significant: Ships carry about 90 percent of the world’s cargo.

So when does the world get back to normal?

Perhaps never. It is true that these delays are the result of misguided transportation policies in the U.S., especially California, as well as fundamentally flawed policies in China. But countries adjust and, as Covid dissipates, many problems will eventually go away.

These disruptions, however, will have a profound long-term effect on manufacturing. Companies will be forced to adjust. As Scott Price, president of UPS International, told the Financial Times, there will be a “migration to new supply chain models”— in other words, producers will move factories closer to consumers.

Yet there are more than just logistical reasons for companies to shorten the long route between factory floor and store shelf. First, as Washington, D.C. trade expert Alan Tonelson points out, China is shortening supply chains by driving factories out.

“Xi Jinping’s neo-Maoist counterrevolution,” Tonelson tells Newsweek, “has made the People’s Republic of China an increasingly unreliable and unpredictable place to do business.”

As a result, some production has migrated to even lower-cost jurisdictions in Asia, such as Cambodia and Vietnam. But factories have also moved to cheap-labor countries in the Western Hemisphere. In the middle of last year, for instance, American footwear and apparel company Steve Madden announced that, due in part to supply chain problems, it was relocating about half of its women’s production from China to Mexico and Brazil.

Second, as Indian analyst Brahma Chellaney observed in a Project Syndicate piece, “China is turning into a trade tyrant.” The country, from especially the end of the first decade of this century, has tried to use its manufacturing and production clout to obtain geopolitical goals.

Most famously, sometime in the second half of 2010, Chinese customs authorities imposed an embargo on the export of rare-earth metals to Japan in order to force Tokyo to release the captain of a Chinese fishing boat that had encroached on Japanese waters around the Senkaku Islands, which China claims as the Diaoyus.

The action, although unofficial, was a clear violation of Beijing’s World Trade Organization obligations and was lifted after two months. But it was not lifted before Tokyo released the captain, who was part of a Chinese government-directed effort to use force to pry the islands from Japanese control. China has imposed or threatened other rare-earth metal embargoes from time to time.

More recently — March 2020 — China’s official Xinhua News Agency said the regime could throw America into a “mighty sea of coronavirus” by withholding protective gear. That threat was not idle: As Fox Business Network’s Maria Bartiromo reported in February 2020, China turned around a ship carrying medical protective gear heading to New York hospitals.

At the same time, Peter Navarro, President Trump’s director of trade and manufacturing policy, said Beijing had imposed export restrictions on N95 masks and nationalized an American factory producing them there. “How is anybody going to trust China, in terms of keeping up their end of the bargain again in business?” Bartiromo asked.

There is one additional reason factories will move closer to the point of consumption: The world is transitioning from a period of general stability to one of constant instability — and perhaps conflict.

Bad actors — most notably China and Russia —a re becoming bold, and the rest of the world does not look like it is prepared to stop them. How many ships will leave Chinese ports if China, whether intentionally or accidentally, starts a conflict with Taiwan, Japan or the Philippines? In November, the State Department actually had to threaten to use force against China for dangerous activities in the South China Sea, around Second Thomas Shoal.

Long supply chains, stretching halfway around the world, will no longer be viable when navies clash.

The most recent round of globalization started when countries lowered political barriers to trade after the Cold War. Reflecting the general euphoria of that time, almost no one thought that form of governance mattered anymore. Democracies believed they could, without national security repercussions, trade with—and thereby strengthen—authoritarian, dictatorial and totalitarian states. Now, China has proven that pollyannaish theory to be disastrously wrong.

The world looks exceedingly dangerous, and supply chains are already fragile.
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Gordon G. Chang is the author of The Coming Collapse of China.

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