The pandemic has negatively impacted numerous aspects of supply chains. Its effects can be seen in the inflation of production and shipping costs, labour shortages, the role of China in the global economy, and the automobile industry, among others. High inflation and a decrease in economic growth are strictly related to supply chain disruptions. This piece reflects on what appear to be the main causes of global supply chain disorder, and it argues that international free trade and the self-regulating market are insufficient to alleviate the crisis.
Overcoming these difficulties will require a transnational perspective that envisages the coordination of socio-legal, economic, and political interventions along all phases of the supply chain. Doing so means paying due consideration to the different interests of stakeholders interacting at a domestic and transnational level. Although the international exchange of goods will remain a defining element of the global economy in the immediate future, a lesson that arises out of the current crisis is that each state must rethink and redesign their main economic processes and industries to cover the most basic needs of their population and to mitigate instability.
The last three decades of global economic activity are characterized by the transnational integration of markets for the production, commercialization, and consumption of industrial and agricultural goods, which has increased the complexity of global supply chains. In this system, developed economies are the primary beneficiaries, relying on imports of raw materials or intermediate goods from developing economies to produce manufactured goods. It is assumed that relying on international free trade to provide factory inputs and consumer goods is the best way to achieve economic development. However, the current supply chains disruptions, coupled with increasing climate vulnerabilities, are increasingly calling this assumption into question.
The surge in shipping cost
As shipping freight accounts for the transportation of at least 90 per cent of goods around the world, any sudden alteration in the costs of shipping will impact supply chains. According to the Global Container Freight Index, the average global value of transporting a container went from $1,362 USD in November 2019, to $9,628 in February 2022. According to this Index the most expensive routes are from China/East Asia to the North American East Coast ($16,893 USD) and from China/East Asia to the North American West Coast ($15,218 USD). Therefore, producers and consumers that rely on China and are based in Canada, the United States, and Mexico may be experiencing some of the greatest financial strains. Small businesses and farms can no longer keep pace with increasingly elevated shipping costs. This situation concentrates shipping transportation in the hands of the biggest retailers like Walmart, Amazon, Kroger, and Home Depot among others.
This surge in freight rates benefited the largest shipping companies associated with the World Shipping Council. On January 23, 2021, Alphaliner’s top 100 showed that seven transnational corporations controlled 76.9 per cent of the share of the shipping market. Swiss-Italian company, Mediterranean, and its Danish counterpart Maersk, own the largest pieces of the pie, controlling 17.1 per cent and 16.9 per cent respectively. A major increase in the cost of shipping has resulted in increased profits for the multinational actors that control the market. For instance, the surging cost of shipping boosted Maersk’s gross profits in the third quarter of 2021 to USD $5.9 billion and sales to USD $16.6 billion, its best performance since founding in 1904.
The weight of China in the crisis, as a producer and exporter
Furthermore, particular attention must be paid to China when assessing supply chain disruptions. As the largest exporter of goods in the world, and Canada's second-biggest trading partner, any meaningful alteration in China’s patterns of production, distribution or consumption of goods has global consequences. Unsurprisingly, this was the case when the ‘Zero-Covid Policy’ was implemented. New lockdowns were declared and the workforce in ports was halved to ensure that an outbreak would not infect all workers. This has increased delays at ports. A recent outbreak of COVID-19 in Zhejiang, which is a manufacturing hub and home to the world’s largest cargo port, Ningbo-Zhoushan, caused new quarantine and mobility restrictions for thousands of workers on site. Consequently, “average shipping times from China doubled, and the price of moving a typical container rose from 4 per cent of its value to nearly 20 per cent.”
Additionally, there is more pressure on the Chinese economy because of its dominance in the production of Personal Protective Equipment (PPE), such as face masks, surgical masks, and surgical gowns—products that are essential in combatting the pandemic. Hence, the demand for Chinese PPE has also augmented the number of shipping routes that depart from China to untraditional destinations such as West and East Africa, South Asia, and Latin America. As there are not enough workers or trucks to load, unload, and distribute the contents of containers, shipping companies prefer to return empty containers to China, and navigate through the routes that depart to the US, which have the highest fare on the market.
Crisis in the North American labour market
Added to the rising costs of shipping is a crisis in the North American labour market that is causing significant problems in the normal operations of supply chains, particularly in strategic sectors like transportation. When containers arrive at the ports of Southern California, Vancouver, or Georgia, there are not enough workers to unload and distribute the containers throughout the North American territory, creating bottlenecks (points of congestion) in supply chains. This situation is exacerbated during the storm season, which brings high winds, snow, and choppy seas in ports. To quantify this disruption, “the number of ships waiting to unload at any given time raised from one or two in the summer of 2020 to a high of 82 this past November.” According to Maersk, “the worst delays were still on the US West Coast where ships were waiting four weeks to unload due to the lack of workers on land.”
Given the truck driver shortage and the elevated freight rates, many shipping companies are choosing to return their transport containers back to Asia without filling them in North America first, resulting in losses for North American exporters. Previously, American farmers and smaller companies could fill the containers to ship items such as soybeans or wheat back to Asia. However, transport containers are in such high demand that it is up to eight times more profitable to return containers empty rather than wait for North American exporters to fill them. At the Port of Los Angeles, “more than 80 per cent of the 434,000 20ft containers exported” in September were empty, leaving American exporters unable to get their products to market.
The available data on the shortage of truck drivers in Canada suggests there were 20,000 vacant truck driver positions in 2021. Likewise, there is a shortage of 80,000 truck drivers in the US, according to the President and CEO of the American Trucking Associations. For the United States—a country where truck drivers move 71 per cent of the economy’s goods—this number represents a 30 per cent increase compared to pre-pandemic vacancies.
30,000 trucks move between the Canada-US border each day, carrying nearly $850 million in freight. Although a new Canada-United States-Mexico Free Trade Agreement (CUSMA) entered into force on July 1, 2020, the crisis in the transportation sector has been exacerbated by COVID-19 and the regulations that have been issued to prevent the spread of the virus. Quarantines, lockdowns, and mobility restrictions have limited the regular operation of transportation, particularly in transboundary operations. Further, a conflict has emerged between some unvaccinated truck drivers that have protested the measure issued by the US on January 15, 2022, which requires drivers to be fully vaccinated before crossing the border. The Canadian Trucking Alliance believes around 26,000 of the 160,000 drivers who cross this border could be impacted. However, the association condemns the ongoing protests, which block public roadways, highways, and bridges.
The truck driver protest converges with structural problems already present in the labour market in Canada. For instance, recent studies show that labour shortage problems existed prior to the pandemic, and they will likely be here to stay. The problem is “the result of the aging population and related declining labour force participation, which started over 20 years ago.” The United States must contend with a pre-existing labour shortage and an increasing disinterest of its population in re-entering the labour force. There are currently more than 10 million available jobs, which is three million more than in the pre-pandemic period. However, 5,7 millions Americans are actively seeking employment. Among the working-age population, the people that are looking for a job and the people currently working -known as the labour participation rate- although has presented a signs of recovery in January 2022, it has not reached 63 per cent which was the pre-pandemic rate.
Shortages of semiconductors and microchips
The semiconductor and microchip sectors can serve as a microcosm of state responses to supply chain disruptions. These devices play a critical role in the automobile industry and their shortage has had severe impacts. South Korea and Taiwan are two of the world’s most important producers of semi-conductors, with Taiwan alone producing 20 per cent of the world’s supply. Both countries have faced serious challenges dealing with COVID-19, and Taiwan has experienced droughts which have placed an additional strain on its energy sector. Consequently, the United States and the European Union are trying to respond by adjusting their internal and international policies in their supply chain governance and operation.
The report named Building Resilient Supply Chains, Revitalizing American Manufacturing, And Fostering Broad-Based Growth, commissioned by President Biden to ascertain supply chains vulnerabilities in the US, recommends direct intervention in four core sectors: “semiconductors and advanced packaging, large-capacity batteries of the sort used in electric vehicles, critical minerals and materials, and pharmaceuticals and advanced pharmaceutical ingredients.” Similarly, the EU has allocated a portion of its USD $884 billion to fund Europe’s semiconductor design and manufacturing capabilities. Other countries could adopt similar policies, to cover the most basic needs of their population and to compensate for industries currently affected by supply chain disruptions.
New production and consumption patterns
As some reports have shown, shareholder pressure on publicly traded companies to shift production towards lean manufacturing is also placing strain on the traditional operation of supply chains. Companies have been reducing their investment in warehousing and the costs associated with it, instead relying on global shipping, mainly originating from China, to store their goods. This change in the patterns of production and distribution is made possible thanks to sophisticated algorithms which estimate the trends of consumption for each product, as well as their delivery times. By using such algorithms, publicly traded companies are saving money that can be used, among other purposes, to pay out dividends to shareholders.
Changing patterns of consumption are also causing supply chains disorders. The growth in consumer demand due to increased fiscal stimulus and tax returns, mainly in developed countries, means certain sectors of the population have accumulated money due to the disruption of spending habits. Given that consumers have more money to spare because they have not spent it in their habitual expenses and want to avoid getting infected by COVID-19, there is an augmented reliance on e-commerce. As the United Nations Conference on Trade and Development (UNCTAD) has revealed, global e-commerce has jumped to USD $26.7 trillion because of a sharp rise in home delivery due to the pandemic. Further, US online revenue increased by USD $105 billion in 2020, resulting in USD $791.70 billion in online sales, the highest increase in any year according to the available data.
Economic implications of supply chains disruptions
The surge in freight rates, labour shortages in strategic parts of supply chains, the stockpile of containers in ports, COVID-19 and its regulations, and climate vulnerabilities, are all causing inflation and affecting the growth of the Canadian and global economies At the global level, the FAO Food Price Index—a measure of the monthly change in international prices of five commodity groups—reached a 10-year high in 2021. This increase could create complications for lower income populations in purchasing food. For instance, coffee prices have doubled, as has the price of oats. Similar augmentation of prices can be seen in lumber, cotton, palm oil, and wheat.
A forecast from the International Monetary Fund (IMF) suggests the disruptions in the United States and China—the world’s two largest economies—will result in moderated global growth compared to previous years. 2021 experienced 5.9 per cent growth, whereas 2022 is projected to experience 4.4 per cent growth. Additionally, the IMF predicts inflation will continue to rise, “averaging 3.9 per cent in advanced economies and 5.9 per cent in emerging market and developing economies in 2022.”
With regard to the Canadian economy, the OECD states that “supply-chain disruptions have slowed but not arrested Canada’s economic recovery…, output is projected to surpass pre-pandemic levels by the end of 2021 and grow faster than trend at 3.9 per cent in 2022.” Furthermore, it states that high inflation is strictly related to supply chain disruptions; “[m]ore persistent supply constraints could, however, mean that inflation stays higher for longer and delays a projected acceleration in trade and consumer spending.”
As states are increasingly exposed to vulnerabilities such as food and energy insecurities, climate crises, and a global health pandemic, states may wish to reduce this exposure by redesigning the weakest parts of their supply chain, either by changing their suppliers, or by situating production in their own territories. This change is reflected in the 2021 Thomas State of North American Manufacturing Report, which states that ’83 per cent of manufacturers are planning to add North American suppliers to their supply chains within a year’.
Final comment
Supply chain disruptions go hand-in-hand with the COVID-19 crisis. As new variants emerge and restrictions are put in place to contend with the spread of the virus, resulting supply chain disruptions will continue to pose a major obstacle to economic recovery. The purpose of this paper is to illustrate the precarious position of the supply chain in light of COVID-19, climate disasters, and general labour shortages and to suggest that the atomized responses of states, as well as the reliance on international free trade, and market self-regulation will not be sufficient to address this crisis. Moving forward, transnational policy and local economic development will be critical in restoring standard supply chain operations.