The Changing Supply Chain - The New York Times

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For decades, major companies have behaved as if geographic distance were almost irrelevant. A factory in China was the same as a factory in Michigan. The internet, container shipping and international trading arrangements had supposedly shrunk the globe.

No longer. The pandemic and geopolitical upheavals have exposed the risks of depending on faraway industry to make critical things like computer chips, protective gear and medicines.

I recently wrote a book on this topic, “How the World Ran Out of Everything.” I’ll use today’s newsletter to help you understand why commerce has changed — and how companies and governments are reacting.

The pandemic shock

The emergence of Covid in China ended the previous version of globalization. Quarantines shut Chinese factories at the same time that Western consumers, stuck in lockdown, ordered more manufactured goods like exercise equipment and electronic gadgets.

This combination of reduced supply and surging demand made other countries realize that they had become heavily dependent on a single nation — China — for many items, including medical supplies. Covid eventually faded from the headlines, but policymakers and business executives in the United States and Europe faced pressure to diminish their reliance on China.

A central reason for concern was the rise of geopolitical tensions. China wasn’t merely the world’s factory; it is also an autocracy that, under President Xi Jinping, has become more aggressive in asserting global influence. Xi, for instance, has been vocal about bringing Taiwan under China’s control, using force if necessary. Taiwan is the dominant manufacturer of the most advanced varieties of computer chips.

China’s allies have also become more assertive in ways that have disrupted global commerce. Vladimir Putin’s invasion of Ukraine triggered sanctions on Russia, which limited Europe’s access to energy. The war reduced the flow of grains and fertilizers to Africa and Asia because Russia and Ukraine are both major sources of these goods.

In the Middle East, Houthi rebels in Yemen are firing missiles on ships headed toward the Suez Canal as an expression of solidarity with Palestinians. In response, many vessels moving between Asia and Europe are traveling the long way around Africa. That has added as much as two weeks to their journeys while lifting shipping prices.

The climate plays a role in the disruption, too. Water levels in the Panama Canal fell during the recent dry season, bringing restrictions on the number of vessels that could pass.

All these developments are forcing companies to reconfigure their supply chains.

Globalization’s next phase

The main strategy would have countries make more goods at home.

President Biden signed a law that allows for the spending of tens of billions of dollars to subsidize computer chips and electric vehicle manufacturers in the United States. Europe has joined the United States in protecting its domestic auto industry against an influx of low-priced, Chinese-made electric vehicles.

Wealthy nations are also sending their orders elsewhere. Vietnam has gained factory orders, and India has emerged as another alternative. As the world’s most populous nation, India might eventually develop a supply chain rivaling China’s. Walmart is now moving some production from China to India.

In the short term, Mexico is a more realistic option for companies that sell many goods in the United States. Mexico has low labor costs plus road and rail connections to American consumers. Asian companies that make parts for U.S. automakers are already setting up factories in Mexico.

The supply chain is like the electrical grid — something we take for granted, as long as the lights turn on when we flip the switch. But now we’ve endured the equivalent of a blackout, forcing us to contemplate what systems we are depending on — and how to make them more reliable.

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