Two Steps Forward, One Step Back

That trend was noticeable not only before Covid but before Trump. Companies were shortening supply chains in order to be closer to their customers and less exposed to the vagaries of shipping costs, increasingly uncertain weather, and political disturbances, among others. It is also likely to continue, at least for a time. Port backlogs have dramatically illustrated the problems associated with trans-oceanic supply chains, and uncertainties in doing business with China have continued to grow.

Perhaps more important for the long term, company supply chain managers have learned that in addition to price, quality, and delivery—their usual staples—they now have to consider resiliency, and that increasingly means redundancy. Simply put, we ran out of things at the height of Covid and don’t want that to happen again, and we have also witnessed China’s “weaponization” of trade—cutting off imports from countries that have upset them for unrelated reasons. Australia has been the most recent victim, but it is not the only one, and U.S. companies do not want to be next in line if they make a comment about Hong Kong or Xinjiang that Beijing finds objectionable. Throw in the Biden administration’s concerns about supply chain security in critical technology sectors—see its four sectoral studies published last June—and you can see the handwriting on the wall. Companies are under pressure to shorten their supply chains, move them out of China, and develop redundant sources of supply, with at least one of them preferably in the United States.

Economists will say, correctly, that this is not economically optimal. Changes cost time and money, and the new supply chains will probably be less efficient and productive than the old ones. The U.S. government will point out, also correctly, that there are other factors to consider besides cost, and for the time being, the pendulum is swinging in the government’s direction.

Despite all that, it’s not time to write globalization’s obituary. The main reason is that the tools that enabled it have not changed. In a nutshell, enormous reductions in transportation and communication costs over the past 50 years as well as the dramatic growth of digitization in the economy have made it both possible and profitable to disaggregate the production process into its many pieces and search out the best producers for each piece, regardless of where in the world they are, and construct a product globally. This is why, for example, it is quicker and cheaper to move car parts like axle assemblies or engines around to multiple locations, adding something at each stop, than it is to ship all the parts to Detroit and assemble the entire car there.

These developments have, to use Richard Baldwin’s term, “unbundled” technology, or know-how, from production, enabling the development of supply chains that mesh high technology (U.S. intellectual property, for example) with low-wage economies to produce an unbeatable combination. This is not an unalloyed good thing, as progressives have complained, and I will no doubt talk about that in a future column. Today, however, the issue is not whether it is good or bad but whether it is going away. And the answer to that is no, it is not. The enabling tools remain and the economic logic remains. We cannot “uninvent” them.

Still, that calls to mind the popular cliché: “two steps forward, one step back.” We are in the middle of taking one step back, and the questions are how big a step it will be and how long it will last. This doesn’t happen very often. The last time began in 1913 when global trade peaked, and that level was not reached again until 1970, thanks to two world wars and a depression. If we can avoid disasters like those, then perhaps this time the step backward will be smaller and shorter.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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