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  • Resource Disruption Reshapes the World’s Industrial Trajectory
     
    Since the beginning of the 21st century, the Long Beach and Los Angeles harbors in California have handled more than 40 percent of all container cargo headed into the US and epitomized the power of globalization. Today, the ships must wait in a seemingly endless conga line of as many as 60 vessels, sometimes for as long as three weeks. These are the worst delays in modern history, and the price per container has risen to as much as 10 times its cost before the pandemic. Worse yet, this shipping crisis could last through 2023.

    As the world has attempted to recover from the pandemic, shortages of parts and labor have combined with a congested transport system to create an inflationary spike, with shipping rates doubling on some routes. Prices for everything from soybeans to natural gas have soared as supplies take longer to produce and arrive, and this high inflation is wiping out wage gains in the U.S., the UK, and Germany. And, while this chaos on the ground may not disturb the lifestyles of the tech and financial elites, it is hurting the middle and working classes, the groups most threatened by surging inflation. 
     
    The supply chain disaster has also highlighted the crippling economic dependence of high-income countries on tenuous global relationships, particularly with China. Today, entire industries in the West - from medical equipment to car makers to food - rely on China for finished goods and key components. When China cannot or will not supply these items, whole industries suffer debilitating supply chain shortages. As a result, the notion of a rational, self-regulating market system is unraveling, and this could presage the demise of the prevailing “neoliberal order.”
     
    For three generations, management consultants persuaded businesses large and small to move their production to China in search of cheaper costs. This has had a devastating effect, particularly in the United States, where between 2004 and 2017, America’s share of world manufacturing shrank from 15 percent to 10 percent while reliance on Chinese inputs doubled. According to the Economic Policy Institute, the resulting trade deficit with China, has cost as many as 3.7 million American jobs since 2000. In the UK, globalization coupled with climate policies that threaten the last vestiges of heavy industry in the country which invented it, cost 1.5 million job losses in manufacturing between 1997 and 2009.

    In the face of these trends, the general response of the Western elites has been “Why worry?” Reflecting the ideological leanings of the American establishment, Christina D. Romer, the former head of the Council of Economic Advisers in the Obama administration, dismissed concerns about manufacturing policy as nostalgic “sentiment,” declaring, “American consumers value health care and haircuts as much as washing machines and hair dryers.”

    But unlike the local hair salon, the market for washing machines is global and these goods have to be transported, often over great distances. A factory that makes parts for washing machines in a city, state, or region draws economic activity to the local community. Moreover, manufacturing has one of the highest multiplier effects of any sector - one manufacturing job in a community is likely to generate numerous other direct, indirect, and induced jobs, both locally and elsewhere.

    The ominous writing appeared on the wall as early as the 2nd quarter of 2020, but few could read it: In the midst of the pandemic, even the world’s richest regions - the European Union, the United Kingdom, and North America - found themselves without basic medical equipment and critical chemical compounds needed to make indispensable treatments. In the critical early months of the pandemic, “China’s decision to block exports of these goods led to widespread shortages,” observes Richard Haass, President of the Council on Foreign Relations. And there is a growing “concern that an increasingly assertive China might seek to exploit the world’s dependence on it for political purposes.”

    The multi-dimensional disaster, now playing out across the industrial landscape, was enabled by the atrophy of resilient supply chains which occurred over several decades. A generation of politicians, economists, and pundits, particularly in Anglo-Saxon countries like the United States and Australia, paid little attention to nurturing their nation’s “industrial commons,” which encompass production, research and development, supply chains, embedded process development, and engineering capacity.

    This pattern affects a wide array of industries far beyond medical equipment and pharmaceuticals. In 2021, auto production was curtailed due to a worldwide shortage of semiconductors exacerbated by a recent drought in Taiwan. Similarly, America’s push into renewables threatens to further bolster China’s dominance of the solar panel industry and extraction of the essential elements needed to produce electric cars and so-called “clean” energy. The West’s trade deficit now extends to high-tech products and even includes sources of critical components for military goods, many of which are now produced in China. Furthermore, when companies moved production abroad, they often shifted research and development as well.

    Fortunately, today’s post-pandemic crisis is exactly the sort of shock to the system needed to convince business leaders and policymakers to stop “destroying the supply ecosystem” that makes production possible and to begin rebuilding it. To make the system resilient industry and government must do contingency planning; that means restoring our network of suppliers and producers including surplus capacity.

    There are signs that policymakers are heeding this advice. Japan, France, the UK, and the European Union all seem to recognize that dependence, especially on China, carries enormous political and economic risks. Japan is already offering special loan deals intended to lure companies back home from China.

    There are also signs of change in corporate circles as well. McKinsey and Company surveyed supply chain executives last year and found that nearly all respondents believe their supply chains are too vulnerable. According to the March 2020 Thomas Industrial Survey, COVID-19 supply chain disruptions increased the appetite for locally sourced materials and services; up to 70 percent of firms surveyed said they were “likely” or “extremely likely” to re-shore in the coming years. Similarly, a UBS study revealed that as many as 50 or 60 percent of firms now producing in China have moved or are planning to move.

    This shift includes some major companies, like Black and Decker, which has moved production to a new facility in Fort Worth, Texas, as part of its reshoring strategy. Appliance giant Whirlpool reshored 400 jobs. General Electric, Apple, Caterpillar, Goodyear, General Motors, and Polaris are all working on re-shoring some production.

    Little Tikes, a major American toy maker, has started shifting production out of China and back to Ohio. When Little Tikes started out more than 40 years ago, everything was made in the United States, but most production moved to China in the 1980s and ‘90s, when the Chinese manufacturing sector began to take off. Now, “the wheel is kind of coming full circle,” according to Executive Vice President and worldwide general manager Thomas Richmond.

    Of course, such moves will be very difficult for companies that have grown hopelessly dependent on outsourced supply chains and no longer possess the skills to make their own products. Some analysts suggest that large-scale reshoring to North America will require strong government action. Yet there are reasons for optimism. President Trump’s tariffs may not have done much to revive U.S. manufacturing, but according to Harry Moser of the Reshoring Initiative the annual number of jobs returning from offshore increased from 6,000 in 2010 to over 400,000 in 2019. Cumulative jobs brought back represent about five percent of the United States’ total industrial employment. And according to a recent Kearny study, for the first time in a decade, the percentage of manufacturing goods imported to the U.S. dropped in 2019. Not surprisingly, much of that shift is coming from east Asia.

    The supply chain crisis we see in 2021 has made plain the West’s vulnerability and the grave threat posed by China’s increasing belligerence. In the early stages of China’s embrace of capitalism, that country’s industrial push was widely welcomed as a triumph of liberal globalization. China, it was believed, simply wanted to succeed, and would do so in a manner at least somewhat congruent with Western values. Its trajectory was expected to follow that of Japan, Singapore, or South Korea, all of which lack China’s military power, as well as its population and natural resources.

    As we discuss in trend #4, China under the leadership of Xi Jinping, has nurtured an economy that now works in a profoundly different way than those of capitalist countries. In the West, profits and individual wealth accumulation drive economic progress. Although China’s people may also want to get rich, the primary goal of the CCP is to bolster China’s global power and influence. In China, the regime employs its power to restrain and even imprison the country’s entrepreneurs if they defy its authority. And social media is used as a political tool to promote China’s ascendency, even on ostensibly frivolous sites like Tik Tok.

    China’s agenda has stretched beyond consolidating its hold on existing industries. Now it seeks to dominate strategic fields such as artificial intelligence , bio-medicine, and spaceflight which are expected to shape the world’s future economy. Economist Yi Zheng Lian observes that stealing technology is now encouraged, with China becoming a “nation of patriotic thieves.” As big time investors now lament, the basic rules that underpin capitalist economies simply do not matter much in today’s China.

    China is also determined to spread its alternative authoritarian model of governance, particularly to developing countries. This drive could accelerate with China’s military expansion, and may yet include the conquest of Taiwan, which is now the world’s leader in semiconductor production technology. The feisty island nation is now subject to aerial incursions from the mainland and could be blockaded. The Taiwan Semiconductor Manufacturing Company’s decision to build its new $12 billion fab in Arizona could prove critical for assuring secure supplies for America’s manufacturers.

    What’s the bottom line?

    Labor, energy, and semiconductor shortages have combined with logistical bottlenecks to make it nearly impossible for the recovering global economy to effectively make use of the life-saving transfusion of cheap capital and technological innovation. But more importantly, this crisis is revealing the self-defeating implications of unquestioned reliance on globalized, just-in-time supply chains.

    Given this trend, we offer the following forecasts for your consideration.

    First, shocked by this crisis, the government will proactively create incentives for revitalizing America’s “industrial commons.”

    This will involve bold initiatives and measures updated from our economic past. These will build on our most successful efforts to spark industrial growth during World War Two and the Cold War. The need for coordination between free markets and national priorities is nothing new. For two decades the Trends editors have warned about hollowing out the U.S. industrial core. And a decade ago, Gary Pisano and Willy Shih of Harvard Business School observed, “Believing in the power of markets does not preclude the judicious use of appropriate government policies.” Recognizing this, the Biden administration has continued to pursue many Trump-era themes, including proposals to boost the domestic semiconductor and steel industries. The Biden plan would spend $300 billion on R&D intended to revitalize American industrial competitiveness and invest in alternatives to fouryear colleges including trade schools, apprenticeships, and community colleges. A more ambitious part of the plan involves the use of taxes, subsidies, and public-private partnerships to encourage companies to retain the capacity to make critical supplies during a national emergency.

    Second, revitalizing America’s “industrial commons” will involve a multi-faceted mix of policies that can be shaped to appeal to both MAGA and Green New Deal sensibilities.

    Reshoring will certainly involve tariffs and bans, but also incentives, including tax policies that encourage industrial investments, loans and loan guarantees, grants, public-private partnerships, and supportive educational and physical infrastructure. Additionally, steps should be taken to promote the sourcing of critical rare earth metals outside of China. At the same time, Western countries could also justify reshoring and shifts away from China on environmental grounds. For businesses and consumers, moving out of China could cost as much as $1 trillion in higher prices and capital investments of the next 20 years. However, doing so would detach firms from China’s notoriously high-carbon supply chains, which emit more greenhouse gasses than the United States and the European Union combined. Indeed, according to one recent study, China is home to 23 of the 25 largest cities in terms of greenhouse gas emissions. Meanwhile, the United States has already passed the “dematerialization frontier,” meaning that each wave up in affluence and economic activity actually results in consuming less total matter and energy. It only gets better from here.

    Third, addressing America’s supply chain vulnerabilities will turn out to be good politics as well as good policy.

    A recent survey by the left-leaning Center for American Progress found that far more Americans prioritize protecting U.S. jobs and reducing illegal immigration than progressive goals like combatting climate change and improving relations with allies. And despite the much-ballyhooed consumer benefits of low-cost imports, the vast majority of Americans seem to be willing to pay higher prices that would come from moving production out of China - a fact that has encouraged retailers such as Walmart to seek out more domestic suppliers. The current supply chain crisis can only reinforce these trends. Economic boycotts of Chinese goods and firms - a successful example of which is the U.S. attempt to thwart telecommunications giant Huawe - may be a harbinger of things to come, at least in strategically critical areas. Not surprisingly, robust efforts to counter China’s mounting challenge in science and technology, such as the U.S. Innovation and Competitiveness Act, passed the Senate by a wide margin.

    Fourth, China’s 21st century strangle-hold on Wall Street decision makers will loosen as China undermines its own competitiveness.

    Until recently, initiatives aimed at decoupling from China and rebuilding America’s industrial base seemed doomed, due to Wall Street’s pro-China sentiment. But as we explain in trend #4, China and the CCP are far more vulnerable than widely perceived. China’s financial system is finally feeling the full impact of massive but unwise investments in unneeded highrise offices and residential towers, epitomized by Evergrande’s pending bankruptcy. A rapid decline in the workforce by over 200 million by 2050, a stubbornly low birth rate, and a growing class conflict will also pose challenges and provide opportunities for global competitors. More critically, the CCPs controls on every aspect of life will derail innovation. For instance, blocking data and analysis from the rest of the world will certainly handicap any efforts to achieve information-era dominance.

    Fifth, the world’s democracies will become more selective in who they depend on for strategically important resources.

    Decision-makers in the public and private sector increasingly recognize that putting our industrial and technological future in the hands of authoritarian states is undermining our own democracy. Obviously, free countries will still trade with autocracies, but we will increasingly strive to strengthen critical supply chain relationships with partners who reliably conform to the rule of law and are not seeking global hegemony. That means establishing a series of alliances with like-minded countries which embrace liberal capitalist values and Western legal norms. This can already be seen in the new defense pact between the U.S., the UK, and Australia, as well as our growing ties to Japan, South Korea, and India. And,

    Sixth, the disruption caused by the current supply chain shock will reenforce and accelerate many other important trends.

    In addition to reshoring, consider just six of the most important forecasts highlighted in prior issues and how they will be impacted by the supply-chain disruption:

    1. Nationalism beats globalism. - Globalism as an ideology peaked at the beginning of the Great Financial Crisis. That shock awakened the long-dormant realization that interdependence increases vulnerability.

    The events of 2021 have made it difficult for even the most committed globalists to defend a system which puts a nation’s survival at risk for the sake of short-term economic gains.

    2. AI-based productivity surge. - Extended global supply chains became the “go to solution” in the 90s because low labor costs, proximity to raw materials, economies of scale and weak regulation created an enormous economic advantage. In the 2020s, AI and robotics will make smallscale, localized production far more reliable and potentially cheaper, while maximizing control of strategic intellectual capital.

    3. Capital spending boom. - The worldwide capital glut has dropped the weighted average cost of capital for businesses easing investment in productivity-enhancing technology. This is particularly true for the United States, which is seen as a safe haven for capital from around the world.

    4. Revitalization of vocational education - For three decades the Trends editors warned of the dangers of insisting upon four-year degrees for everyone. The result is a surplus of “indebted baristas with degrees in victim studies” and “a serious deficit of truck drivers, welders, hardware technicians, heavy-equipment operators, plumbers and carpenters.” Today’s crisis represents a once-in-a-lifetime chance to adjust our outmoded thinking about education and leverage technology to retool America’s human capital.

    5. Inflationary Surge Mitigated by Technology - Even though today’s inflationary surge will prove transitory, it will last longer than originally expected. If enacted, the so-called Build Back Better and Bipartisan Infrastructure bills will only make this worse by enhancing demand while doing little to help short-term supply. Worse yet, the related tax increases will undermine investment in supply-side innovations which lack an established political constituency. And

    6. Quantum-Based Cybersecurity Boom - Tensions unmasked by this crisis will play out increasingly in cyber-space. A new generation of defense is needed to counter a new generation of threats.

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