3 min read.Updated: 12 Oct 2021, 10:15 PM ISTTyler Cowen
Disruptions amid rising demand are only part of a complex story
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The bad news is that the world’s supply chain problems are more persistent and more severe than earlier realized. The worse news is that there is no single reason why, and therefore no straightforward fix. And the even worse news is that no one really knows when it will improve. As for the good news? It is becoming possible to piece together how all this has come to pass.
Key nerve centres of the world economy have been hit by a mix of covid and bad luck, especially in the latter part of this year. Transport, energy and high-quality semiconductor chips all are experiencing big problems at the same time, for reasons which are distinct yet broadly related.
Start with transportation. While some Chinese ports have been dormant or operating at reduced capacity because of covid, that is hardly the only issue. Robust trade in durable goods has strained containers, ships and port operations around the world. The price of containers has skyrocketed, and can be more than 10 times higher than it was just two years ago. A lot of global trade has slowed, with some of it no longer profitable.
In some cases, transport-related services are being rationed, as prices are being kept down—maybe not to alienate loyal buyers, or maybe because sellers are not sure if the current demand shocks are permanent. Again, the net result is that a lot of trade simply isn’t happening in a timely manner.
Many suppliers require internationally traded components to finish the production and distribution of their goods and services. They are now stuck.
Furthermore, a lot of port activity and related local transportation is labour-intensive. Many parts of the world are facing labour shortages, as people are not sure how to re-configure their post-covid work futures, or in some cases government benefits may be keeping them from working. That adds further delays to trade networks.
A typical market response might be to produce more containers (it’s harder and slower to increase the number of ships or ports). But that would require precisely the trade and transport networks that are currently malfunctioning.
As this entire process has proceeded, inventories have been run down, meaning the global economy has far less slack.
Then there are the world’s energy problems, which have deeper roots. Many countries have sought to move to greener energy supplies, but without first having sufficient alternatives in place. Japan and Germany decided to abandon their previous nuclear power commitments and more recently China has seen power shortages.
Global energy networks seemed to be working okay a year ago, but as recovery has proceeded the supply of natural gas has not been sufficient to meet new demand. Gas production and exploration were turned down in the earlier stages of the pandemic, and the recovery has been stronger and more rapid than the energy sector had anticipated. In the UK, natural gas prices have surged 700% over the last year, while Europe faces the broad risk of not having enough energy supplies for the coming winter.
Of course, energy is a significant input for the production of many other goods and services. So this creates another set of ripple effects. And if networks for energy and international trade are not working well, many other parts of the economy will be malfunctioning.
A further problem area is high-quality computer chips. The global economy was already far too dependent upon two countries for supply—Taiwan and South Korea. Then three things happened: Chip factories closed during covid lockdowns, a series of unlucky natural disasters hurt chip supply, and chip demand surged with increased consumer demand for durable goods such as cars and appliances. At current margins, automobile production is seriously constrained by available chip supply, which is one reason new and used-car prices [in the West] remain so high.
So, on one side of the equation are trade delays, input delays, higher trade and transport costs, much higher energy prices and chip shortages. On the other side are American and European consumers, who saved enormous amounts of money during 2020 and early 2021 and are now spending it.
This combination has fuelled inflation. Demand is hitting the market and supply can’t keep up. And it’s not just one problem that has an easy, direct fix, but rather a series of interlocking paths of economic chaos and delay.
These problems with global supply chains will eventually straighten themselves out, even if no one can say when. In the meantime, suppliers and distributers— as well as consumers—can perhaps take some small consolation that they are navigating (and hopefully persevering) through a complex mess that has no close parallel in recent history.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution.
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