Broken Supply Chains

The last year has forced the nation and world to deal with its supply chain issues, at least to the point of not having access to what we want to buy (we obviously don’t care if workers die making our stuff). Lean supply chains were great for corporate profits. But they assume that the entire world is working properly, with free and easy transportation, no natural disasters, no wars, no closure of borders. The pandemic has shown just how incredibly vulnerable we are. That’s true as well as the pandemic eases, at least in the U.S., around the issue of semiconductors. Our industrial policy has been to not have an industrial policy and not make anything in the U.S. that could be made cheaper elsewhere. There’s a price we are now paying for that.

How did we get here? Decades of underinvestment.

Semiconductors are a roughly half-trillion-dollar industry, with opaque, byzantine supply chains. A widespread shortage makes it exceedingly difficult to buy a PlayStation 5 or the latest Nvidia graphics card. But it could also disrupt production of everything from 18-wheelers to medical equipment. Though there may be only one or two semiconductors in a given product, without them goods sit unfinished on the factory floor. Even worse, one chip often can’t be easily substituted for another.

At the moment, the exact impact of the shortage on consumers is difficult to assess. That’s because reliable data is difficult to come by. Given the ubiquity of these chips, it’s shocking that even major companies may not know how vulnerable they are to disruptions in just a single factory.

It’s encouraging, then, that in recent weeks the Biden administration has held at least one high-level meeting with executives from companies like Ford Motor and Google to discuss the resilience of supply chains — a critical piece of economic infrastructure often ignored by politicians. While executives from Intel, Nvidia, Qualcomm, Verizon and others have formed a coalition calling for federal funding to address the problem, there is no guarantee that businesses will invest in resilience of their own accord. So the Biden administration must be prepared to actively monitor existing supply chains, while making direct targeted investments to ensure they are strong. The risks to global economic stability are simply too great.

To solve the problem, Washington first needs to understand the frightening precarity of the modern global supply chain. From the last decades of the 20th century on, U.S. firms embraced “just in time” production tactics, created “lean” supply chains, and outsourced production to foreign factories. In concrete terms, this means they cut inventories of critical inputs to the bone — think microcontrollers and printed circuit boards — for a cheaper system of shipments between foreign factories that must arrive just in time. In this system, even slightly delayed deliveries of critical inputs from Taiwan-based Foxconn Technology Group or Taiwan Semiconductor Manufacturing Company can mean shortages that grind global production to a halt.

Again, this is all a very intentional set of policy decisions created by corporate leaders and backed by the federal government.

Part of the solution has to be making stuff in the United States. This isn’t a nationalist thing. I’m not a supporter of
“Buy American” campaigns because they don’t work and are political dead-ends. But if you are completely reliant on imports for a particular product, especially if that product is mostly made in just a couple of countries, they you are completely at the whim of any number of potential disasters. The top way to make sure this never happens is to actually make some semiconductors in the United States. And for other nations to invest in those plants as well. It doesn’t mean cutting China out of the semiconductor business. It does mean diversification that may reduce profits at times because of higher prices but that also allow for disasters such as the present to not take place. I recognize that cuts against the short-term quarterly report culture of global capitalism and the fealty of American politicians to those companies. But this is just one example of how we desperately need a real industrial policy that serves to both ensure the nation has access to key materials and puts working class Americans to work in good-paying jobs.