How to fix supply chains? Break the chain.
Open Markets Institute responds to the Biden administration’s directive for a 100-day review of the country’s supply chain.
We’re going to make life easier for the Biden administration: Concentration of industrial capacity makes our supply chains vulnerable. And it is concentration of power - by monopolistic corporations and nations - that is largely responsible for concentration of capacity.
For 20-plus years, Open Markets Institute and our allies have closely studied the world’s production systems. We have found that as our systems currently exist, a disruption anywhere can result in a disruption everywhere. But we have also identified a way for making the entire system far more resilient: de-concentrating power and distributing capacity more widely.
The problem is anything but new; indeed monopolistic chokepoints in our markets have time and time again caused severe breakdowns of our supply chains.
Let’s Take a Closer Look at Supply Chain Issues Over the Years
1999: Taiwan experiences a 7.6 severe earthquake that paralyzes commerce across the country. Within days, factories across Asia and the U.S. shut down due to a break in the flow of semiconductors out of Hsinchu, an industrial city south of Taipei. The result is the world’s first extreme “industrial crash.”
2000: A semiconductor plant catches fire in New Mexico, causing a a shortage of mobile-handset parts so serious that it drives Ericsson, one of the market leaders, to quit the business.
2001: U.S. government shuts borders and grounds airliners after the September 11 terrorist attacks. Close to every major industrial system in North America shuts down almost immediately.
2003: SARS epidemic disrupts trans-Pacific air travel and drastically stymies the production of facemasks and other devices needed to fight the pandemic.
2008: The Lehman Brothers collapse sets off demand shock and a production slowdown that cascades around the world. Eventually the entire U.S. automotive production system faces collapse and the sector requests Congressional bailouts.
2011: A massive earthquake and tsunamis smash Japan’s north coast. Within two months, the world experiences a “remarkably synchronized worldwide economic slowdown.” Much of the problem is caused by the loss of a single semiconductor factory.
2020: The COVID-19 pandemic helps reveal that the U.S. lacks the capacity to manufacture sufficient face masks, COVID-19 tests, or drugs to protect even the most essential front-line workers from disease. Border closures then trigger a cascading shutdown of industrial activity across the world.
All these events share three basic characteristics: a large portion of the capacity to produce some “keystone” industrial component is located in one region or even one factory; some natural or political disaster cuts off that region or factory from a larger production system; and there are no readily available substitutes. In some cases— especially with products like semiconductors, chemicals, and certain forms of information—a single keystone region or factory may prop up multiple industries simultaneously.
Two Revolutions Are to Blame for Supply Chain Concentration
Two revolutions in industrial and political organization drove the concentration of capacity that is the root cause of all of these crashes.
The first is consolidation or “rationalization” of production by private industrial corporations. This was the Reagan administration’s baby.
The Reagan administration radically remade anti-monopoly law to allow industrial corporations to freely consolidate, often to the point of complete monopoly, as long as they were “serving the welfare of the consumer.” Individual investors and fund managers, though, used these radical changes in antitrust as a de facto license to monopolize the supply base under the guise of “efficiency” for the “consumer.”
The second act that revolutionized the organization of industrial capacity was the blending together of international production systems, otherwise known as “globalization.”
This one was the Clinton administration.
In erecting the World Trade Organization and almost completely liberalizing trade between the U.S. and China, the Clinton administration gave foreign mercantilists a de facto license to capture and command as much industrial capacity as they could.
Production Bottlenecks Trigger Supply Chain Shutdowns
The upshot? Through all of these events, Open Markets Institute and our allies have highlighted the same simple lesson: Production bottlenecks trigger shutdowns. Concentration is dangerous. It threatens the security of our nation, and of our families.
The problem lies in the structure of the system, not the shock. Accidents are normal, so we need systems designed to absorb any disturbance. And that’s not super hard to do: Systems become almost perfectly resilient when they are not dependent on any one point.
When there are always many sources for any particular component, be it a piston ring or a semiconductor, it means that a shock in any one place might disrupt a single lead firm, but the effects rarely spread beyond that particular firm into any larger system.
While there is no one cure for creating a stronger, more resilient, supply chain that protects all people at every level of the economy, stopping monopolies is a crucial part of the puzzle.
A Syllabus on U.S. Supply Chains
And just in case anybody happens to be tasked with doing a 100-day review of potential vulnerabilities in U.S. supply chains, here is a handy reading list of vulnerabilities facing U.S. supply chains:
On the Magnitude of the Threat and the Origins of the Problem:
“The Open Markets Primer on Economic Interdependence, Industrial Supply Chains, and Shocks” March 15, 2020
“Built to Break: The International System of Bottlenecks in the New Era of Monopoly” by Barry Lynn, Challenge Magazine, March 2012
On the Intersection of Monopoly and International Relations:
“Step or Stumble: The Obama Administration’s Pivot to Asia” statement by Barry Lynn, Hearing Before the Subcommittee on Asia and the Pacific of the Committee on Foreign Affairs of the House of Representatives, December 6, 2016
“To Fix Supply Shortages, Change the Rules of Globalization” by Beth Baltzan, Barron’s Magazine, March 17, 2020
“A Plan to Fix the US Bike Shortage” by Garphil Julien, Wired, October 12, 2020
On Fragility at the Regional and Local Levels:
“New York’s Looming Food Disaster” by Sidhartha Mahanta, Atlantic City Lab, October 21, 2013
“A Year After Sandy, Food and Fuel Supplies are as Vulnerable as Ever” by Sidhartha Mahanta, Reuters, October 28, 2013
On the Systemic Nature of the Problem:
“Systemic Supply Chain Risk” by Barry Lynn and Yossi Sheffi, The Bridge, January 1, 2014
“The Man Who Knew” by David Dayen, The American Prospect, March 16, 2020
On the Intersection of Trade Policy and Competition Policy:
“The Old-School Answer to Global Trade” by Beth Baltzan, The Washington Monthly, April 2019
On the Role of Financialization in Creating the Problem:
“‘You’re Cornered if You’re a City.’ How Concentration in the Municipal Bond Market Is Raising Borrowing Costs” by Garphil Julien, Barron’s Magazine, Sept 22 2020
Stopping Monopolies to Fix Supply Chains
Saying “we told you so” and “you should listen to us this time” is not cute. So instead, below, we provide a list of quoteable insights from our executive director, Barry Lynn, over the past 20 years:
2002: “Such concentration—the growing reliance by entire industries on single sources of supply—violates one of the most basic rules of manufacturing, which is always to have an alternative at the ready.”
2005: “It is time for governments to adjust the rules that shape how the private sector runs the production infrastructures on which all countries depend, to ensure that compartments are built back into these systems.”
2012: “Given the multiplicity of bottlenecks, and the almost infinite variety of conceivable threats, it is also probably reasonable to conclude that it is only a matter of time before we experience such a truly catastrophic event.”
2014: “Shock after shock, and political showdown after political showdown, threaten to trigger wide if not global-scale catastrophe.”
2016: “Considering how trade structures affect national security, has the time come for the United States to reexamine our national trade strategy to be less fragile?”
2020: “Every one of us knows not to put all our eggs in one basket. Yet when it comes to many of the products and foods and drugs that keep us alive, monopolists have put most or even all the machines that produce these goods in a single city, often in a single factory, often on the other side of the world.”