Supply Chain Problems
The phrase is used often to explain shortages in the U.S. It sounds as though there is some sort of administrative wrinkle that’s caused a minor problem in paperwork, but we’ll get it sorted out quickly. Unfortunately, that is not the case. We have policy problems, some going back decades, enacted by both Republicans and Democrats who took short-term views. It will take many years to develop and implement new policies that encourage solutions.
President Biden was correct in pointing to Asian shipping companies raising rates as one of the drivers of inflation. Apple, of IPhone fame, is emblematic of the problem. Apple designs products in the US, it markets and sells them, but it does not manufacture them. That takes place in Asia. Manufactured goods are generally shipped in containers, which come in standard dimensions. Multiple new industries have proliferated from this practice. Containers are off-loaded by very expensive cranes and assigned to a specific position in one of many container lots. An astounding amount of information is contained in the record of the location.
The Simple Case
The simplest case is when Amazon orders 1,000 widgets, which fill the container. The container is off-loaded by a crane. It is placed in a specific location. If the crane places the container on a train car, the number of the train car and all information about its destination and route are included in the record. Precision is critical. If, as has been recently seen, the train is pursued by robbers and the container breached, there are no goods.
If the container is placed on a truck, there must be a truck to carry it. California is so openly hostile to small businesses that truckers refuse to cross the state line; nearly all are independent business owners and, due to shortages growing for years, do not need to do business in California to make a good living. Also, gasoline is quite expensive in California, which has the second-highest gas tax in the country at slightly more than 53 cents per gallon. This is then extended to over 60 cents by a state sales tax totaling about 10 cents per gallon.
California
Firms can hire their own truck drivers, and many do. The cost of employing someone in California is astronomical compared to the rest of the country. That is a policy problem. As with Uber and Lyft, California protects independent workers by requiring that they be treated as employees by their organization. The differences between being an employee and a contractor have enormous consequences. Employers have the right to dictate time and location of the employee while performing services. This prevents ride-sharing drivers from setting their own schedules and determining when and where they will work, destroying the incentives for taking on the work. The “gig” economy is effectively strangled in California.
It gets much worse. Vehicle emissions standards in California are, let’s call them, enthusiastic. There are inspection stations throughout the state to ensure that obscure endangered species are neither smuggled into nor out of the state, along with agricultural inspections to be sure no dangerous pests are introduced.
An average of twelve species per day go extinct as of 2022. It is a natural process and will eventually happen to humans as well.
If the yards hire truckers directly, they’re OK, although the cost of required benefits for employees exacerbate costs, and restrictions on their activities and hours mean that most are low-productivity. Both of those are policy decisions.
The containers must eventually leave the yards, which in the Los Angeles/Long Beach combined capacity is vast, and typically only about 40% is utilized. Again, that is a result of policy decisions, and part of the supply chain problems.
Heavily blue states, such as Massachusetts, New York, New Jersey, Maryland and Delaware limit routings and require escorts into and out of cities and ports. These are policy decisions, and add time and cost to the supply chain. Fortunately, due to the near-destruction of both Immigration and Customs Enforcement (ICE) and the Border Patrol, few of the inspections otherwise required are rarely performed. Unfortunately, criminals know this, and so human and drug smuggling both occur with impunity. We are “protecting” women and minors right into prostitution and drug smuggling.
Shipping From Asia
Container ships are used to transport manufactured goods to the U.S. from Asia. The containers themselves are both heavy and valuable, but we have given away much of our manufacturing capability, refuse to enforce our own laws, and have little to return inside the containers. To prevent running out of containers, shipping companies from Asia have to charge double to bring in full containers and ship back empty ones.
What we do ship to Asia are commodities such as crops, some live animals, minerals and other items. They typically are delivered in ships that are purpose-built for those shipments and must also charge double because we send raw materials to Asia in return for manufactured goods, just as most colonies do with their masters. These are the results of policy decisions. I point to Ross Perot’s comment during the 1992 Presidential election campaign about “that giant sucking sound you hear is jobs being shipped off to Mexico.”
No Green Ships
Ocean-going ships are not powered with green technology. Most are powered by engines burning bunker fuel, the remains at the bottom of the fractionating tower after all other useful fuels have been separated. Bunker fuel is increasing in price faster than other refined products because it is rare. It is also inefficient and emits many pollutants. The ships do not sail past Energy Secretary Granholm’s house, so she is unaware of them. She is aware of refining processes and fractionating towers (I assume, since she is supposed to oversee them). Which brings us to another “supply chain problem.”
No new refineries have been approved for construction in the US in at least 27 years; the dirty business of refining is kept elsewhere, out of sight – and out of mind. Were we magically to open up all oil production capability in the U.S. it would make little difference. We do not have the refining capacity to use it. The Biden administration has refused all applications from refineries to upgrade equipment and increase output. Without additional fuel we cannot straighten out the complexity of the supply chain. d another policy problem contributing to “supply chain problems.”
Refineries’ Role
Refining petroleum is a dirty business, and most of it takes place in the South and Southwest, typically Republican areas. The ignorant Republicans are blamed for pollution by the electric car drivers who use energy created by burning petroleum products and coal. This fits a convenient narrative but does nothing for “supply chain problems.”
When the cargo is delivered in the port to the proper location, it is typically transferred into the custody of a freight agent on behalf of the BCO (Beneficial Cargo Owner, the individual or company that ordered the goods). If all of the goods are owned by Amazon, then Amazon’s agent takes possession. He/she may inspect the physical invoice and a sample of the goods, enters the data into Amazon’s electronic order system, and arranges for their further delivery to one or more Amazon warehouses. They may be transferred directly to trucks driven by Amazon employees, or sent to an airport for loading on a plane.
It’s Really Complicated, but ran well before Biden
If the container’s contents are shared by multiple BCOs, this gets enormously more complex. I seriously doubt anyone in the US Department of Transportation has much understanding of this. If the goods have been shipped under refrigeration, the container has been plugged into power on board the container ship since departure, and must have power restored as soon as possible after arrival. All medications and several other categories of goods have expiration dates, and either the goods are examined inside the port or later. The later they are inspected, the greater the risk that an expiration date will have come and gone, and the items must be destroyed.
It is possible to avoid the Los Angeles/Long Beach curse by changing the destination to San Francisco, but that is not particularly wise. The local Deputy District Attorney (who was recently recalled) has eliminated cash bail and refused to prosecute the majority of crimes. Property theft of up to $950 is considered a misdemeanor that will not be prosecuted, and goods arriving in San Francisco, Oakland and/or San Jose are subject to theft. The same has occurred in Los Angeles. One can ship to Portland or Seattle, but we saw the mostly-peaceful protests there and witnessed trashing of retail and wholesale establishments while law enforcement looked on, barred from interfering. Again, policy problems, not supply chain problems.
Divert to Another Country?
One may also sail to Victoria/Vancouver and trust that no one has a cold. If someone has cold symptoms, the ship, entire ship’s crew and the ship’s contents are subject to being seized by the Trudeau government without compensation. That again is a policy problem.
One can also sail to a few ports in Mexico, where the most efficient supply chain operation is located. The drug cartels can move anything into the US through the open US border, although their transport fees are very high.
In nearly all cases, “supply chain problems” turn out to be policy problems. We’ll never fix them until we acknowledge them.
Banks and Escrow
Typically, goods are not released until paid for. The arrangement that facilitates that is an escrow account. Banks in California are more heavily regulated than in other states, and under California law only a bank can offer escrow services. This can slow delivery and certainly increases prices. To call this a supply chain problem is ludicrous. It is a policy problem.
CAFTA-DR
I could go on for another hundred pages on the policy problems that contribute to “supply chain problems,” but I expect you’ve already imagined them. What strikes me as most ludicrous is our failure to use CAFTA-DR. This free trade agreement has been in place since 2006, and allows rapid low- or no-tariff trade in good between the U.S. and most Central American countries plus the Dominican Republic. I attempted to use the agreement to source leather hides for a client in 2017; neither the U.S. State Department nor the governments of any of the Central American countries were aware of the agreement, let alone how to use it.
In nearly all cases, “supply chain problems” turn out to be policy problems. We’ll never fix them until we acknowledge them.
I learned more from this succinct presentation than years of reading WSJ.
The disruptions were a result of pandemic policy changes. Pre-pandemic the chains had evolved to deal with the myriad of inefficiencies of system rules (policies). Each player in an incredibly complex logistics dance knew their task and while there were daily challenges to that dance, overall it functioned well. The efficiencies were reflected in remarkably low costs in moving goods around the globe. Notice a single ship stuck in a canal had huge implications to portions of the chain, like a ripple in the water that took time to resolve.
The pandemic restrictions threw a thousand wrenches in the system. The first line of managers along with their backups went missing for a time. Their tasks simply were picked up by less skilled people and the system ground to a halt. While we can have all the data at our fingertips, the decisions were by people. More of interest, the various impediments to efficiency were laid bare as Bill has documented. They had been managed around somewhat in the past.
A new system is evolving to move the goods. In the development, costs are certain to rise adding another item in inflation. Trying to minimize those costs involves even more changes to the system as it responds.
Perhaps we shall see in a perverse way, the tragic errors of pandemic policy were amplified by new policy mandates (created in spite) that arrived with many unanticipated consequences. I can't fathom that a group thought they could force a green economy overnight. While the transition was happening as technology arrived, it apparently was too slow to suit advocates. The abject ignorance of those advocates seems stunning particularly at those levels of power.