Globalization is not the problem.
Globalization is not the problem.
T he supply chain for an Apple iPhone crosses an international border more than 600 times, and if it didn’t, you probably wouldn’t have one — it would be too expensive. Globalization has come under renewed assault from both parties, and the supply-chain crisis has led to a renewed “Made in America” push. But, like the problem of jobs going offshore, the supply-chain crisis is not caused by globalization. The culprit is an uncompetitive level of regulation and taxation, and protectionism only makes that problem infinitely worse.
Many Americans are infuriated when they hear that 3.7 million American jobs have been lost because of the trade deficit with China since the year 2000. But many millions more of jobs have been created by international trade. Protectionist tariffs will not make globalization go away, given that America still has to compete globally. Protectionism only makes America’s economy even more uncompetitive.
A successful nation helps its companies succeed. But in their own country, American companies are often treated like enemies of the state, chiefly because of a childish anti-capitalism that only hurts American workers in the end. The “Made in America” push seeks to help American companies, but what they propose would only further suffocate American companies. They are making the very type of a progressive policy mistake, which is to think that good intentions obviate the need to worry about real-world results.
For all the job losses of recent decades, the hallmark of the current supply-chain crisis is not unemployment but the opposite: a historic labor shortage fueled by the lowest rate of labor-force participation in decades. Chiefly as a result of a critical shortage of truck drivers, scores of container ships bearing hundreds of thousands of 20-foot containers are now stranded off the coast of Los Angeles, whose ports handle 40 percent of America’s container traffic.
Shippers have explored the possibility of alternative ports, to no avail. Most of the alternatives are too small for the mega ships loitering offshore. That is one consequence of the Jones Act, which requires any ship transiting between American ports to be made in America, owned by Americans, and crewed by Americans. As a result of the exorbitant costs imposed by the law, America’s coast-wise trade is frightfully tiny, one reason that most American ports are too small to handle large container ships. The World Economic Forum rates America’s shipping-industry regulations as the most restrictive in the world, chiefly because of the Jones Act.
Stifling regulations have left America with the most inefficient ports in the world. A recent review of container-port efficiency ranked the ports of Los Angeles and Long Beach below ports in Tanzania and Kenya, near the bottom of the list of 351 top ports. America’s ports are effectively third-world. The 50 most efficient ports in the world are mostly in Asia and the Middle East; none are in America.
As a result of the shipping logjam, shipping costs have skyrocketed, with the price to ship a container from China rising by a factor of ten in recent weeks. The combination of labor shortage and shipping-price spikes is already fueling a level of inflation that most Americans have never seen and can hardly imagine. The Atlanta Federal Reserve recently downgraded its GDP growth estimate for the third quarter to 1.3 percent from its earlier forecast of 6.1 percent, raising the specter of a ruinous stagflation-style recession.
The immediate cause of the supply-chain crisis is what the Cato Institute’s Scott Lincicome calls a “serious mismatch” between supply and demand. With the COVID-19 pandemic largely over around the world, the demand for goods of all kinds has soared, while supply-chain capacity reduced by the lockdowns has struggled to adjust. Some are now slamming the vulnerability of our global supply chain, but what has made supply chains inflexible and brittle is stifling government regulations.
Simply put, all the things now standing in the way of a rapid adjustment of supply chains are government policies.
Paying workers to take a long COVID-19 leave of absence was a major mistake, and those benefits ended only in September of this year. One firm estimates that in the retail sector, some 350,000 unfilled openings will cost companies $223 billion by the holiday season. The labor-force participation rate has recovered only half of its steep COVID-19 losses, but thanks chiefly to Obama-era policies, America’s labor-force participation rate was already the lowest it had been since the 1970s. A record 51 percent of small businesses have openings that they can’t fill.
The Biden administration says it has been working with shipping companies, ports, unions, and large retailers to rapidly expand capacity at major ports, even as it largely blames them for the crisis. The administration has urged ports to operate around the clock.
But that raises the question, Why aren’t they doing that already, as ports do in most of the rest of the world? As my CEI colleague Sean Higgins writes, blame the longshoremen’s unions, which have negotiated shift contracts that don’t cover the full 24 hours in a day — or, more precisely, blame the laws that give longshoremen’s unions a monopoly of dockyard workers. They have used it effectively. Ports in Asia and Europe, unlike any ports in the Unites States, are fully automated, which makes loading and unloading much faster.
Yet port capacity is not the most immediate problem. Port operators have said that operating around the clock isn’t worth it if trucking companies, warehouses, and other parts of the supply chain aren’t also working 24/7 to move and store cargo.
Above all, it is the shortage of truck drivers that’s causing the current crisis. And why do we have that shortage? One reason, according to truck drivers, is that the restrictions on their access to ports are too onerous. The Jones Act has made that problem worse, too. The Jones Act “has made coast-wise shipping prohibitively costly and therefore put additional pressure on alternative inland transit such as trucks and trains,” Lincicome writes. “In practice, this means badly needed rigs that could be servicing U.S. ports currently are instead stuck on I-95 ferrying oranges from Florida to New York.”
Mexican trucks could rush to fill the shortage of truckers, but they are generally not allowed to operate in the U.S., a self-defeating exception to the free trade in services between the two countries. An exorbitant tariff on truck chassis made in China is further stifling truck-transport capacity. The consequences are being felt throughout the transport sector. Railroads are seeing flat shipping volumes, with containers stacking up at rail yards because of a shortage of truck drivers, of equipment to put shipping containers on trucks, and of warehouse workers to unload them.
As Americans are starting to find out, the supply-chain crisis is a devastating blow to the economy, and it could last through 2023. And if you’re hoping for the government to step in and help, you’re in for more bad news: Government policies are about to make the problem much worse.
The huge reconciliation bill looming in Congress will inject trillions of dollars into the demand side of an economy that is already overheating like an engine with a broken radiator. That will further fuel inflation while adding trillions more to the national debt.
There’s more. President Biden’s order that employees of all federal contractors be fully vaccinated by December 8 could be devastating for major carriers such as FedEx and UPS, which have federal contracts. FedEx has more than 650,000 employees, and every single one of them will have to be fully vaccinated by December 8. To stay in business, shippers may have to fire unvaccinated workers by the tens of thousands. As a COVID-19 measure, it will be particularly counterproductive, as it will almost certainly disrupt the supply chain for medical equipment, including COVID-19 vaccines and therapeutics.
California’s ruinous policies have thus inured to the benefit of freer states such as Texas and Florida, but some of them are ruinous for the whole country. If the Supreme Court refuses to hear the California Trucking Association’s challenge to California’s independent-contractor law, A.B. 5, the law could go into effect against California truckers immediately. The law requires companies that hire independent contractors to classify them as employees, with full benefits. If it goes into effect for truckers, it will have incalculable consequences, as a large proportion of truckers work as owner-operators of their own vehicles.
California has also banned trucks with engines built before 2008, effective January 1, 2022, and has imposed expensive regulations on diesel engines, which the state may be about to ban entirely. I’ve been told that many truckers avoid crossing the state line into California entirely, but if they can avoid California’s problems by staying outside the state, we can’t.
Globalization entails efficient allocations of labor and capital, with effects that can be painful for particular communities even if the nation is much better off in the aggregate. But globalization isn’t the reason that companies moved away from America’s factory workers. What created the Rust Belt is too much regulation and too much taxation, exactly what is creating the current supply-chain crisis now.
American politicians need to stop treating American companies — and by extension American workers — like enemies of the state. American workers are the most productive on earth. Let them compete, and they will put an end to the supply-chain crisis faster than you can say “iPhone.”