Government Will Have to Undergird Supply Chain Resilience, Scholars Expect
Supply chain scholars disagreed on how likely companies are to move production out of China, either due to tariffs or to a desire to diversify sourcing, but agreed that companies aren't likely to be ready for demand shocks without government support. They spoke Dec. 4 during a webinar hosted by the Center for Global Development.
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Yossi Sheffi, director of Massachusetts Institute of Technology's Center for Transportation & Logistics, argued that “garment production moved long ago” to Bangladesh and Sri Lanka. He said few companies are choosing China for labor arbitrage at this point, but they have to stay in China for electronics, automotive and textile production because there's a full ecosystem of suppliers that cannot easily be replicated elsewhere. He said that South Asian cutting and sewing operations are a seventh of the cost of Chinese garment factories.
Kimberly Ann Elliot, non-resident fellow at the Center for Global Development, agreed that clothing and footwear production has already been moving, but she disagreed on how much of what's left is heavily reliant on Chinese business advantages. She said Trump administration tariffs have been accelerating the process of manufacturers moving to lower-cost countries, such as Vietnam or Bangladesh, and she said “that is something that is likely to continue.”
Fred Hochberg, who was once CFO at his family's company, the Lilian Vernon catalog merchandiser, said that moving away from just-in-time delivery adds resilience but also is more expensive. “I’m a little skeptical we’re going to be able to add cost as part of that resilience and the market will fully accept it,” he said.
Sheffi said companies won't abandon just-in-time practices, and the government will have to step in to make sure supply chains don't fail during pandemics. He said that hospitals should be required to have a certain amount of gloves, masks or other gear on hand during a pandemic; he also said there should be a national stockpile of critical national supplies. There was a stockpile, but many of the N95 masks in it had expired when the COVID-19 pandemic hit.
The scholars also talked about how they think Joe Biden's administration will approach trade policy. Elliot said she hopes the U.S. will agree to back the candidate for director-general who's gotten the backing of most countries at the World Trade Organization. She said that would be easy to do quickly, and would not be politically painful. But otherwise, she said, the unemployment crisis and the pandemic will be the priorities in Washington. “I think trade policy is going to be a much lower priority in 2021, possibly even in 2022,” she said.
Sheffi said the trade war with China could get worse before things get better, and China might retaliate against European countries, too, if Biden is able to get them on board to pressure China to end its mercantilist policies. “Short term, I think trade will suffer,” he said, but said confronting China's economic distortions is crucial.