Inclusive and transparent dialogue can fix fragile US supply chains
2020 will be remembered as the year of the pandemic. But it was also a year of reckoning for globalization writ large, and, in particular, the mechanisms of a highly interdependent and integrated global economy. Long heralded as a strength of the U.S. economy, American manufacturing’s extended and extensive supply chains were suddenly exposed as a vulnerability.
Supply chain weaknesses exposed by COVID-19 led President Biden to announce a comprehensive evaluation of America’s supply chain vulnerabilities in January 2021. This review is both fundamentally important and long overdue. But it will only be successful if the administration engages stakeholders effectively and works towards creating more transparent supply chains.
The pandemic’s onset threw supply chain vulnerabilities into high relief. The medical supply chain, particularly for PPE, medical devices, and of course, the pharmaceutical industry, suffered immediate interruptions. And as authorities struggled to supply hospitals and clinics with basic necessities, the shortages also stirred nationalistic objections to the export of key intermediate and finished goods.
But vulnerabilities in the supply chain went far beyond narrowly-defined shortfalls in the health sector. The pandemic forced policymakers to redefine broadly what goods and services should be deemed essential.
For instance, policymakers suddenly discovered that components used by the auto industry served multiple purposes, including essential uses in ventilator production. So the closure of auto parts factories also interrupted the flow of key components to the medical device sector.
Continuing shutdowns in other nations hampered U.S. recovery efforts, even after the economy began to reopen after its initial shutdown. Key components were trapped in the supply chain as other nations struggled. For example, the American government engaged in intensive negotiations with Mexican authorities to reopen factories in our southern neighbor and allow a renewed flow of intermediate components urgently needed by U.S. manufacturers.
Public awareness of U.S. supply chain vulnerabilities provided a powerful argument in support of the Trump administration’s “America First” approach to foreign economic relations. When the pandemic hit, President Trump had already embarked upon a three-year effort to reshore manufacturing.
Yet the imperatives of battling the health crisis and restarting the U.S. economy left the reshoring impulse with little meaningful policy attention throughout 2020.
Thus, a review of supply chains has fallen to Biden administration, which is focusing on four key sectors:
- Active Pharmaceutical Ingredients (APIs)
- Critical materials
- Semiconductors and advanced packaging
- Large capacity batteries for electric vehicles
When the 100-day review concludes on June 4th, it surely will highlight the profound complexity of critical supply chains. The evaluation will also catalogue their most glaring vulnerabilities, and suggest initial pathways to reforge weak links in the chain. But lasting solutions to this policy challenge demand that the Biden administration take a number of key factors into account.
First, supply chains are intimately connected to the dependence of U.S. firms on global business relationships that have developed since the end of World War II. In fact, economic globalization and the development of an international trade regime would have been unthinkable without the vertical integration of manufacturing processes across borders, involving trade in primary and intermediate goods as well as finished products. U.S. firms led this process and have derived much of their global competitiveness from the resulting cost-cutting and efficiencies of this trade.
In 2015, for instance, the United Nations Conference on Trade and Development (UNCTAD) estimated that around one third of global trade involved intra-firm transactions. This is not surprising. The same report estimated sales from multinational companies accounted for approximately 50 percent of global GDP. Of course, not all the inputs for the production of finished goods come from within the same company or firm. So we can find a more accurate representation of the importance of supply chains by comparing the trade in consumer goods with trade in both primary commodities and intermediate goods. In 2014, the trade in primary and intermediate goods was almost triple that of consumer goods.
The Biden team also must recognize how global trade’s lack of transparency prevents us from obtaining broader insights about supply chains. Companies themselves have detailed information about their own supply chains, of course. But when we abstract to the level of an industrial sector, the picture becomes less clear. Thus, we do not have a macro-picture of supply chain dependence. And firms themselves have a micro-level understanding of their businesses. In between, however, reality is hard to capture.
Two things must happen for the Biden administration to successfully address the challenge of strengthening supply chains. First, we need better and more precise analytical tools to understand how supply chains are structured. Second, getting these tools requires ongoing — and meaningful — engagement with stakeholders in the private sector.
Biden’s executive order calls for precisely this kind of broad stakeholder engagement, encouraging involvement and collaboration between public and private sectors. Yet because governments are notoriously bad at listening to the private sector when it comes to understanding the operations of the real world economy, the challenge of informing the policy process will fall to think tanks, universities, and research centers.
Meaningful dialogue between these players and the private sector will produce a more complete picture of both the complexities of America’s supply chains and the vulnerabilities that plague them. And the insights gleaned from these conversations must be incorporated into any effective overall U.S. government strategy to expose existing and potential vulnerabilities in supply chains — and to strengthen them.
Duncan Wood is vice president of Strategy and New Initiatives at the Woodrow Wilson International Center for Scholars. Alexandra Helfgott works in the Office of Strategy and New Initiatives at Wilson and is also a Fulbright grantee to Mexico.