Is America facing a supply chain crisis?

Is America facing a supply chain crisis?

According to a report by the Census Bureau at the end of December, the U.S. goods and services gap rose by $13 billion to $80.2 billion from October to November, mainly due to more goods imports ahead of the holiday season. The latest figures, along with a record deficit increase in September, are part of a worrying trend which saw the three-month moving average trade gap rise to $76.3 billion, $11.7 billion higher than it was in the three-month period that ended November 2020.

The goods deficit—which excludes services— is now running at $99.0 billion after goods imports increased by $12.0 billion and exports of material goods dropped by $2.9 billion. In total, the U.S. exported $155.9 billion of goods while importing $254.9 billion.

All this comes as the country faces an ongoing supply chain crisis for manufacturers, with industrial supplies and materials driving about half of the increase in new goods imports. Of the $12.0 billion new goods imports in November, $5.9 billion of that was spent on supplies for businesses alone. Finished metal shapes and crude oil imports rose by $1.5 billion and $1.3 billion, respectively while consumer goods were responsible for $3.0 billion in new goods imports and imports of trucks and cars from other countries rose $1.2 billion.

Internationally, the U.S. recorded higher deficits with Europe and Canada on substantial import increases. $2.2 billion more in imports from the European Union were responsible for driving the U.S.-E.U. trade gap to $19.4 billion, while $2.8 billion more in Canadian imports drove the United States’ deficit with its northern neighbor to $5.4 billion.

Meanwhile, the U.S.-China trade gap, the country’s largest, remained stable at $28.4 billion while in more positive news, the U.S.-South Korea trade gap fell slightly.

 

Amidst all the worrying economic data there have also been serious logistical and supply chain problems at the L.A. ports which are hugely congested due to record volumes of containers. The resulting shortages have had an impact on just about every area of commerce and the lives of ordinary Americans. 

Backlog of containers at LA ports

Eamon McKinney, an expert on China-related business issues, has suggested that the current woes are rooted in American businesses’ failure to correctly adopt Asian business models. McKinney states that American OEMs were much impressed by the Japanese Toyota model and the efficiency of its supply chain which enabled the Japanese to produce cars in the U.S. at similar costs to those produced in Japan, despite the higher labor costs. The American automotive giants were particularly impressed by Just in Time (JIT) since it involves no inventory costs , warehousing or tied-up capital. 

The essence of the Japanese model was the relationship with its suppliers where their supply chain was considered to be an ecosystem, rather than the predatory feudal system which was the norm in the Western model. Toyota’s suppliers had an open and honest relationship with their customer, and the model was local with Toyota preferring to use suppliers who were within 200 miles of their plant.

Unfortunately the US automotive industry decided to cherry-pick the parts of the Toyota model they liked, and shun those they didn’t, embracing JIT, but neglecting to improve their relationships with suppliers. This initial error was compounded in the early 2000s when OEMs decided that they now wanted JIT with “China prices.” This was problematic since the reason that the JIT model was secure was because it was highly localized; any risks of disruption were minimal. However, that subtlety was lost on the U.S.-based OEMs who pressured their suppliers to assume the risk for them and develop relationships with Chinese suppliers. 

OEMs are not generally run by engineers or supply-chain specialists but tend to be run by accountants and financiers. who work in a system that incentivizes all the wrong things. If a public company announces it is outsourcing to China, the stock goes up whereas if it plans to reshore production, the stock goes down. Similarly, if a company plans to invest in research and development, this leads to a negative impact on its stock. So while JIT was good for stock prices, it was, however, bad in the long term for American industry.