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Disruptions to the global supply chain are continuing with extreme port congestion, a lack of truck drivers and a microchip shortage.
Justin Sullivan/Getty Images
About the author: Christopher S. Tang is a University Distinguished Professor and Edward W. Carter chair in business administration at the UCLA Anderson School of Management.
Americans can now breathe a sigh of relief as U.S. cities and states are easing Covid-19 restrictions. But the prolonged shortages and high prices caused by a new wave of global supply chain disruptions are another matter.
Like our normal life in the post-pandemic era, normal supply chain operations will take at least a couple of years to restore.
The Biden administration announced dozens of measures last week that the federal government can take to strengthen freight transportation and infrastructure. These measures will help with some long-term issues, but there are other problems that need immediate attention.
Currently, there are supply chain disruptions ranging from interrupted supply of basic materials from Ukraine to factory and port closures in China, as well as congested port operations and labor contract negotiations in the United States.
First, there are shortages of basic materials due to geopolitical issues. There is an international cotton shortage after major international brands refused to use cotton from Xinjiang, China for production due to suspected forced labor practices there. The Russian invasion of Ukraine will certainly disrupt the worldwide supply of wheat and corn because Russia and Ukraine supply 29% of worldwide exports of wheat and 17% of worldwide exports of corn. Even crude oil is in limited supply. In 2021, the U.S. imported 7% of its crude oil from Russia after Venezuelan crude imports were blocked in 2020. If President Biden were to block Russian oil, oil prices would increase even further.
Cotton and wheat are essential for garment and food production, while crude oil is critical for plastic and gasoline production.
The ongoing semiconductor shortages is likely to drag on for two more years as Intel, TSMC, and Global Foundries work to expand their production in the United States. In the meantime, semiconductor shortages are hurting the sales of home appliance manufacturers such as Whirlpool and car manufacturers such as Tesla.
Making things worse, the new conflict between Russia and Ukraine may disrupt semiconductor production in the United States even further. This is because Ukraine supplies more than 90% of the U.S.’s semiconductor-grade neon, a gas integral to the lasers used in the chip-making process. Russia supplies 35% of the U.S.’s palladium, a rare metal that can be used to create semiconductors. Finding alternative suppliers will also take time.
Ultimately, these material supply disruptions will prolong the shortages of many products, creating a perfect storm for escalating inflation.
Second, some ongoing supply chain disruptions continue, while new disruptions are on the horizon. China’s “zero Covid” policy is disrupting manufacturing and port operations. Specifically, lockdowns at some factories and at major port cities such as Shenzhen, Tianjin and Ningbo have disrupted the flows of goods from China to the U.S. Because the Omicron variant is highly transmissible, this strict policy will continue to cause disruptions, especially if the BA.2 subtype of the Omicron variant becomes a problem.
Supply chain disruptions in China will affect the U.S. economy significantly. This is because the U.S. will continue to rely on products imported from China in the foreseeable future. Case in point: Despite higher import tariffs imposed by the ongoing trade war against China, the U.S. trade deficit with China rose 25% in 2021 over a year earlier to $396.6 billion. Making things worse, as U.S. firms offset the increased tariffs on products imported from China, U.S. companies have raised their prices, causing price inflation.
I hope these geopolitical conflicts will be resolved soon, but various U.S. supply chain operations must be dealt with now.
The unprecedented port congestion on the West Coast appeared to be easing as of late February. But there are 30 ships waiting for berths at the Port of Charleston in South Carolina after some shippers diverted their West Coast traffic to the East Coast. Rerouting ships like this creates new congestion, especially—again—when the Omicron variant is factored in. At one point it affected 10% of Charleston’s lift operators. Coordinated plans would be useful.
Various ports in the United States are also likely to encounter labor disruption soon. After an initial attempt in November, the International Longshore and Warehouse Union rejected an offer by port terminal operators to delay negotiations until 2023. This union will be representing 22,400 dockworkers in talks over a labor contract that expires in July. As such, 70 privately owned terminal operators at 29 West Coast ports will be negotiating a multiyear agreement with the union in 2022.
Previous contract negotiations have been contentious, and union officials often oppose expanded use of automation. In the last round of negotiations, talks began in 2014 and weren’t resolved until the following year. Previous contract negotiations often led to severe labor disruptions and shipping delays. The 2022 contract negotiation process is likely to be a long-drawn-out war.
All this adds up to a complicated outlook for American consumers who’ve become frustrated with supply-chain problems. Restoring global supply chain operations will take time, and there are no quick fixes.
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