The coronavirus epidemic and its ripple effects have disrupted supply chains around the world, contributing to shipping backlogs, product shortages and the fastest inflation in decades.
But in a report released Thursday, White House economists argued that the epidemic showed weaknesses in the supply chain but did not create them – and warned that problems would not go away once the epidemic was over.
“While modern supply chains have lowered consumer prices for many products, they could easily break down,” the Economic Advisory Council wrote. Climate change, and the increasing frequency of accompanying natural disasters, will make future disruptions inevitable, the group said.
White House economists have analyzed the supply chain as part of the president’s economic report. The annual document, which runs to more than 400 pages this year, typically proposes some new policies, but it also outlines the administration’s thinking on the major economic problems facing the country and how the president hopes to address them.
This year’s report focuses on the government’s role in the economy, and calls on the government to do more to combat slowing productivity growth, declining labor force participation, growing inequality and other pre-epidemic trends.
Understand inflation in the United States
“The United States is and remains one of the strongest economies in the world, but if we look at the trends of the last few decades, some of those trends threaten to weaken that position,” Cecilia Raus, chair of the Economic Advisory Council, said in an interview. The problem is, in part, that the “public sector has lagged behind.”
The report dedicates one of its seven chapters to the supply chain, noting that the once-mysterious subject “entered the dinner-table conversation” in 2021. In recent decades, Ms. Rouse and other authors of the report have written, U.S. manufacturers are increasingly relying on low-cost products produced in low-cost countries, especially China, a practice known as offshoring. At the same time, companies have adopted timely production strategies that minimize the parts and materials they stockpile.
The results, the authors argue, are supply chains that are efficient but fragile – at risk of collapsing in the face of epidemics, wars or natural disasters.
“Due to inadequate investment in outsourcing, offshoring and resilience, many supply chains have become complex and fragile,” they wrote, adding: Or spread to influence others. “
But some economists point out that making the supply chain more resilient can bear its own costs, making inflation more expensive when inflation has already become a major concern.
Adam S. Posen, president of the Peterson Institute for International Economics in Washington, D.C., says the epidemic and Russia’s aggression in Ukraine could allow companies to find at least some of their supply chain in places that are politically stable and less strategically weak. But pushing companies into counterfeit production could waste taxpayers’ dollars and introduce inefficiency, raise prices for consumers and slow growth.
“At best you’re paying an insurance premium,” he said. “Worst of all you are doing something for purely political reasons that is economically inefficient.”
Other economists have emphasized that global supply chains are not always a source of fragility – they can sometimes be a source of resilience.
What is inflation? Inflation is a loss of purchasing power over time, which means your dollar will not go as far tomorrow as it does today. It is usually expressed as an annual change in the prices of everyday goods and services such as food, furniture, clothing, transportation and toys.
The director general of the World Trade Organization, Engoji Okonzo-iwala, said in an interview that the world is seeing a trend towards production and decentralization of production, with supply chains shifting from China to Vietnam, Laos and Cambodia. Bangladesh, Ethiopia and other countries. He said it was an opportunity to diversify the supply chain and bring poor countries into the global trade system, allowing them to reap the benefits of globalization.
Instead of relaying supply chains to concentrate them in developed countries, he said businesses are moving closer to the “near shore” – moving to lower-cost but less-distant lands – as well as pursuing risk-mitigation strategies such as inventory creation.
White House economic adviser Mrs Raus said it would make sense to boost increased domestic production of some key components, such as computer chips, but the Biden administration was not pushing for a complete reversal of offshoring.
“We don’t have to make everything here,” he said. “We understand that this would be too expensive and unnecessary.”
But despite their emphasis on the role of the public sector in the economy, White House economists have recommended only modest measures that could lead the federal government to strengthen the supply chain. They suggested that the government help collect and disseminate data that could make it easier for companies to understand their supply chains and identify vulnerabilities. And they say the government can encourage domestic production of products essential to national security or other key interests. Independent experts say the measures may be effective, but are unlikely to address the issues described in the report.
“The short answer is no easy answer,” said Chad P. Baun, a trade economist and senior fellow at the Peterson Institute.