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A policeman and a worker talk at a container port in Qingdao in east China's Shandong province during the coronavirus pandemic, March 2020.
The greatest economic impact from the novel coronavirus (COVID-19) can be seen in empty container ships and quiet ports around the world. China’s dramatic response to the outbreak put the country on lockdown for weeks, slashing manufacturing production. With China serving as the world’s manufacturing hub, the slowdown rippled out, denying finished goods and component parts that snarled other global factory output. The lack of sailings from China has created a container buildup there; even if shippers have goods to move, they don’t even have the repositories to put them in. Combine this with a lack of inventory buildup, and you have a supply chain shock.
This was predictable, and predicted. Thirteen years ago in the Prospect, Barry Lynn, then a freelance writer, wrote a feature called “Why Economists Can’t See the Economy,” where he warned of the dangers of concentrating manufacturing in one region. “Our brand-new global factory does look awfully efficient,” he wrote.
But it is an efficiency purchased through the destruction of all flexibility, and hence sustainability. What we should be fretting about now is what happens when, one day soon, we awake to find that war, revolution, disease, or natural disaster has cut us off from some one of the increasingly scattered pockets of workers we rely on to produce keystone industrial components or to process vital back-office information; what happens when, for want of access to one or a few of the links that make up the global assembly line as a whole, our entire industrial system breaks—pins, electronics, pharmaceuticals, food, and all.
We are seeing today these very consequences. I talked to Lynn, now executive director of the Open Markets Institute, about how he recognized supply chain fragility two decades ago, and what we can do about it now.
David Dayen: What piqued your interest in this circumstance with supply chains in the beginning?
Barry Lynn: I first approached it after this earthquake that happened in Taiwan, in September 1999. I was running a magazine called Global Business. We wrote about how large businesses were moving things around the world. Within a few days, all these factories in the U.S. shut down, in California and Texas, because the supply chains, the supply of semiconductors from Taiwan, were broken. They couldn’t fly them out because there was no power at the airport, so the shipments couldn’t get out.
It showed me that we took this really important set of eggs and put them all in the same basket. At the time, I became really quite curious why these really smart people running these corporations would do that, and why the really smart people running government would allow that to happen.
Dayen: So why did these smart people allow it to happen?
Lynn: It took me a long time to figure that out. I was a crazy reporter with an idea. Every door I knocked on, every economist I spoke to, every international-relations expert, either told me this could not be a problem, or that they didn’t know it happened. I was left on my own, so I used my reporter skills. I found people in the semiconductor industry, people who were CEOs, who knew what was going on. Over time, I came to understand that it had to do with this radical change in how we do competition policy, pushed by the Chicago school in the early 1980s. It used to be that when we saw monopoly, we saw danger. After Chicago, we only saw efficiency.
Dayen: Obviously the coronavirus outbreak is an economic and public-health tragedy. But do you in any way feel vindicated that you were on target with understanding this problem over 20 years ago?
Lynn: I don’t like saying I told you so and I’m not going to say it. People have to learn. This is something where people were indoctrinated for decades to a very different way of seeing the world. It’s not their fault. The fact that they were made blind is a little disturbing, but people are now waking up. This is an exciting moment intellectually, as terrifying as so much of what we see around us is, as terrifying as coronavirus is, as terrifying as the power of Facebook and Google is. People are seeing things differently than they ever saw before in their own lives. That’s a really cool thing. That’s a real opportunity now to take this crisis and make the best use of it. So we can restructure the political economy in ways that make it work for us. So we can use common sense and facts to understand the world.
Dayen: I’ve heard stories that manufacturers don’t even know the source of all the components in their goods. It seems that the complexity of the supply chains has become just as big a barrier as the centralization of supply.
Lynn: The complexity is a huge problem. But we have the capacity to trace every one of these components at every part of the supply chain. We have rule of origin standards in NAFTA, we can trace to the nut and bolt what’s North America–based. We can do that if we choose. It’s a cost to the companies. And if the government is not there forcing industry to bear that cost, we’re not able to do it. The complexity itself looks worse than it actually is. This is good, as we turn eventually to restructure the system so we don’t have these problems. The other thing people have to understand is, these are machines. These are not pockets of ore under the ground. These are machines, you can put them all in one factory in one place, or you can put ten factories in ten places. That’s up to us. We let the monopolists put the machines in one place, because they can charge more and control the choke points.
Dayen: So what’s the solution here? Most of the companies that have left China have found some other low-cost country like Vietnam, and maybe production will concentrate there. Do we need to make the supply chain more redundant, or are there certain goods that need to be produced domestically, in the name of self-sufficiency or national security?
Lynn: There are certain things that we should have the capacity to serve our entire population in a time of crisis. That would be things like respirators and masks. We should not be worrying about not having sufficient supply when the capacity is all in China, and they’re hoarding the supplies because they need them. It’s also true for pharmaceuticals. Fact that 80 percent of our active pharmaceutical ingredients for domestic production come from places like China, that’s insane. A large part of that needs to be moved back to the United States. Also, vaccine capacity. In 2004, we saw the whole system for the flu break down, because monopolies took control of the system and one plant was contaminated.
So there are ways to do this. It’s really not expensive in the overall scheme. What’s expensive is when you don’t have it, because you end up with dead people and a crashed economy. For the lack of really prudent, modest investments, we are now facing a massive sell-off of stocks, and there’s going to be a lot of people who die who did not need to die.
