FreightWaves CEO Craig Fuller has a new article in which he argues that supply chains will continue to deal with a list of issues independent of the Covid pandemic over the long term. His list:
- Supply chains will remain under constant threat of disruption for the next decade
- Supply chains operate best when the world is peaceful and stable
- A smoothly running supply chain requires “buffer stock,” which is challenging with declining population demographics
- There is a conflict between environmental, social and governance (ESG) goals and supply chains optimized for cost and speed. If we prioritize ESG, we will need to contend with supply chain risks
- Supply chain technology will become the big venture capital category winner as companies continue to make investments in technologies that can help them mitigate their supply chain challenges
The first two points are related: Peace and stability are necessary to avoid supply-chain disruptions. For ocean trade, the U.S. Navy is the guarantor of that peace and stability. Keeping ocean trade free and safe is one of the reasons that the U.S. must be a seapower, as Jerry Hendrix argued in a National Review cover story last year. Investing in the Navy will be a major expense in the defense budget, but the economic benefits of ocean trade far exceed the costs. Throughout human history, access to safe and secure waterways and cheap and efficient shipping vessels has been one of the reliable predictors of economic prosperity. The U.S. is the only country with both the means and the will to keep global ocean trade secure.
Fuller’s point about “buffer stock” is not primarily in America’s control. The demographic profiles of Asian countries have changed. They no longer have large, underemployed, young populations that are especially suitable for manufacturing. The one-child policy in China — which will likely go down as the worst central-planning failure in human history — has left the world’s most-populous country with an aging and soon-to-be-declining population. Businesses are already looking to leave China, with Vietnam, India, and Indonesia among the countries contending for more economic development. Those switches will be necessary, but the transition will be expensive.
The ESG component of Fuller’s argument is one of our top concerns at Capital Matters. Fuller writes:
Companies have instituted ESG requirements that require disclosures and monitoring of how and where products have been sourced. This pressure means that goods that are produced in factories that don’t match Western standards for environmental controls and human rights may not be available to Western consumers. The factories that do produce goods that match Western standards will often be more expensive and therefore there will be less buffer stock in the system.
The same ESG standards also create challenges for commodity producers, as the cost of adhering to environmental and social disclosures makes it more expensive and less productive. It also discourages investment in the production of environmentally sensitive commodities – most obviously in energy.
Environmental concerns and regulations that have prevented exploration and production and killed pipeline projects are largely the reason that the world currently lacks sufficient energy resources to buffer against the consequences of the Russia-Ukraine war.
Unlike Asian demographic trends, the ESG wounds are self-inflicted. The U.S. must stop letting environmentalists have a heckler’s veto on economic growth, and investors must stop letting green ideology obstruct prudent investment in energy and transportation. Access to cheap and abundant energy has been another reliable predictor of economic prosperity throughout human history. The U.S. has it and cannot squander it.
That’s especially true because the U.S. has the advantage in Fuller’s last bullet point: technology and capital. The demand for improved supply-chain technology has exploded, and systems that have been outdated for years are finally getting attention. Venture-capital investment in supply-chain technology began taking off last year. The U.S. has the right combination of technical know-how and wealth to make the supply-chain improvements the world needs, but those improvements aren’t inevitable. Actual people have to use actual money to actually make them happen. That will be America’s supply-chain challenge over the next decade.