Somewhere along the way the world economy has taken on a structure that proves to have some serious vulnerabilities. One ship sideways in a major chokepoint had global consequences. The New York Times has some details:
...Two weeks could strand as much as a quarter of the supply of containers that would usually be in European ports, estimated Christian Roeloffs, the chief executive officer of xChange, a shipping consultant in Hamburg, Germany.
...Three-fourths of all container ships traveling from Asia to Europe arrived late in February, according to Sea-Intelligence, a research company in Copenhagen. Even a few days of disruption in the Suez could exacerbate that.
...Whenever ships again move through the canal, they are likely to arrive at busy ports all at once, forcing many to wait before they can unload — an additional delay.
Even before the Suez incident, this January 19 Wall Street Journal article reports there were shipping problems that may persist for months.
More than 40 cargo ships with tens of thousands of containers aboard were lined up waiting to get into the ports of Los Angeles and Long Beach this week in a new sign of unyielding backlogs that are hampering U.S. importers at the country’s main trade gateways.
A surge in shipping volumes that began in late summer and rose during the holiday season has continued into the New Year as retailers and manufacturers try to rebuild inventories that were depleted at the onset of the Covid-19 pandemic. The neighboring Southern California ports, which together handle more than a third of all containers coming into the U.S., have seen record numbers of boxes even as dockworkers have struggled to cope with the rising coronavirus cases in the state.
The pandemic, as noted above, has been a factor. Factories in China had to cut production early last year which created a supply deficit.
A large number of China's factories remain closed today [February 10, 2020] even as millions of people return to work after the Lunar New Year holiday was extended due to the coronavirus.
The shutdowns are having a major impact on the world's second largest economy and global supply chains.
Some big car makers now face the threat of a shortage of parts.
There are also concerns about supplies of Apple products as the disruptions continue.
Employers across China had been ordered to remain closed after the annual holiday as part of attempts by authorities to stem the spread of the virus.
And, while supply was taking a hit, demand was picking up. That’s contributing to the congestion at the ports.
During the COVID-19 pandemic, sales of Peloton exercise bikes and other equipment have surged as the New York City-based exercise company saw its membership subscriptions reach more than 3.1 million, more than double the number of subscriptions compared with 2019, as people have avoided their local gyms and turned to exercising at home.
But long delays at the nation’s ports to get items shipped and unloaded are causing Peloton and other companies to rethink their long-term strategies about where its equipment is manufactured and how products get to customers.
...“You may have read about the port congestion in Los Angeles and Long Beach, where shipping container volume has doubled in the last 12 months,” Peloton CEO John Foley said in a Feb. 4 letter to shareholders. “The global increase in shipping traffic has added significant delays to all sorts of goods coming into U.S. ports, including Peloton products.
“These unpredictable delays have resulted in painful delivery reschedules for many people as Peloton bikes, treads and accessories have been held at port for upwards of five times longer than usual.”
No one single person sat down to design this system of global trade; it came about from the interaction of a number of trends. Here’s a partial list:
Outsourcing. Companies that used to make all or most of the critical components of their products spun elements of their businesses off into separate companies, and/or shut them down to turn to outside suppliers — which then had to compete against each other to offer the lowest prices. The companies that turned to outsourcing may have saved money, but they lost a certain amount of control over their business when they did so.
Offshoring. Companies chasing lower labor costs moved manufacturing to countries where wages were lower. For the U.S. this meant moving jobs elsewhere — first out of the rustbelt to go to non-union South, and then overseas. The closing of manufacturing plants in America followed. One of the problems the pandemic revealed is that we have lost capacity to supply a number of critical medical goods — which were coming from factories in China that had shut down.
Consolidation. Where there used to be many companies of a whole range of sizes in a given field, mergers, buy-outs, consolidation, etc. have reduced the number of companies that can provide needed goods and services; bigger is not always better. Economic policies that have driven the “go big or get out” trend have left us with a less resilient economy — when there are bigger players but fewer, any one of them stumbling is a hazard to all, and we end up with limited or no alternatives. This also leads to a loss of innovation — fewer players trying to come up with the next big thing versus behemoths protecting outsized market share.
Globalization. It has supply chains stretching around the planet, driven by the endless pressure to minimize costs. The longer the chain, the more opportunities for disruption. Just because the world is flat doesn’t mean things can’t quickly go downhill.
The rise of container ships facilitated this by making it easier for a supplier to load product, whether raw materials or finished goods, into a container that minimized handling (break bulk cargo) until it reached the end user. And so,
Today, about 90% of non-bulk cargo worldwide is transported by container ships, and the largest modern container ships can carry over 23,000 TEU (e.g., MSC Gülsün). Container ships now rival crude oil tankersand bulk carriers as the largest commercial seaborne vessels.
Just In Time manufacturing AKA Lean Manufacturing amplifies disruption. Where once companies would maintain stockpiles of supplies and inventory, the just in time strategy attempts to limit the costs of that storage by counting on suppliers to ship only as needed exactly when needed, no more, no less. The ability in the age of the internet to track items and place orders around the globe is one reason why supply chains have stretched as far as they have.
If disruptions occur, there’s no place in the system that can take up the slack to smooth it out. Ditto for the consolidation trend that reduces the number of alternative suppliers. The global shortage of computer chips illustrates how this can manifest.
The New York Times had an analysis of the consequences of J.I.T.
...The embrace of this idea has delivered no less than a revolution to major industries — automotive and medical device manufacturing, retailing, pharmaceuticals and more. It has also yielded a bonanza for corporate executives and other shareholders: Money not spent filling warehouses with unneeded auto parts is, at least in part, money that can be given to shareholders in the form of dividends.
...Some experts have warned for years that short-term shareholder interests have eclipsed prudent management in prompting companies to skimp on stockpiling goods.
“As we become more interdependent, we are even more subject to the fragilities that arise, and they are always unpredictable,” said Ian Goldin, a professor of globalization at Oxford University. “No one could predict a ship going aground in the middle of the canal, just like no one predicted where the pandemic would come from. Just like we can’t predict the next cyberattack, or the next financial crisis, but we know it’s going to happen.”
emphasis added
The Ever Given was blocking several hundred ships from transiting the canal; some had given up waiting and are making the longer voyage around Africa, adding costs and delays to the mess. It will take time to clear the backlog.
The cost of this has been measured in billions. Kevin Drum adds some perspective:
Just one comment here. Total global trade amounts to about $20 trillion, give or take a trillion or two. "Billions" is therefore something on the order of one five-thousandth of total trade—an amount that's literally less than a rounding error. When you hear about the cost of the big stuck boat, keep this in mind.
Even before the Suez Canal was blocked, there were other sources of stress on global shipping, such as a shortage of shipping containers.
...Cargo-market disruption are playing havoc on global trade, especially for food and agricultural products. Port traffic has gotten snarled, freight costs have gone up and deliveries have slowed.
The container crisis, sparked by huge demand from China, has been playing out for months. But Suzano’s warning is among the first major signs showing the spillover into other shipping markets. If the squeeze continues to increase freight costs, it also raises the specter of accelerating inflation.
This armada of container ships circling the globe is burning fossil fuels. Although water borne transport is very energy efficient, certainly more so than by air, it still adds up. It’s not just greenhouse gases either; the particulates emitted are a health hazard. Shipping is having multiple environmental impacts. The loss of containers at sea is not helping either. As climate change ramps up, those kinds of losses from extreme weather will increase, along with other impacts.
Behind all this is one basic factor: maximizing profit, minimizing costs. When everything works, it’s fine. When something goes wrong, it’s not. And it’s not really fine even when everything works. A lot of costs are externalized, meaning the bill is shifted onto others. The extreme emphasis on creating shareholder value, making everything as ‘lean’ as possible leads to unthinking absurdities — and those who can make you believe absurdities, can make you commit atrocities.
(It would be remiss not to mention the original cost of the Suez Canal —130,000 Egyptian lives— or its legacy of imperialism and war.)
There’s no intrinsic reason to buy things from halfway around the world that can be made or grown locally. If it’s because it’s cheaper, it is because the total costs aren’t being taken into account. As I noted above, no one person sat down to design a system of global trade that can be brought to its knees by gusting winds in the wrong place at the wrong time. It came about from everyone following their own agenda without thinking about the bigger picture.
I’m going to bring up several of Kauffman’s Rules that apply here:
1. Everything is connected to everything else. Real life is lived in a complex world system where all the subsystems overlap and affect each other. The common mistake is to deal with one subsystem in isolation, as if it didn't connect with anything else. This almost always backfires as other subsystems respond in unanticipated ways.
2. You can never do just one thing. This follows from rule #1: in addition to the immediate effects of an action, there will always be other consequences of it which ripple through the system.
3. There is no "away." Another corollary of #1. In natural ecosystems, in particular, you can move something from one place to another, you can transform it into something else, but you can't get rid of it. As long as it is on the Earth, it is part of the global ecosystem. The industrial poisons, pollutants, insecticides, and radioactive materials that we've tried to "throw away" in the past have all too often come back to haunt us because people didn't understand this rule.
4. TANSTAAFL: There Ain't No Such Thing As A Free Lunch. Years ago, bars used to offer a "free lunch" as a way to draw customers. Of course, the drinks in those bars cost twice as much, so the lunches weren't really "free" at all. Similarly, in complex systems, what looks like the cheapest solution to a problem often turns out to be the most expensive one in the long run. TANSTAAFL is a way of saying, "Don't expect something for nothing -- there's always a hidden cost somewhere."
(There are 28 of of these rules from Draper Kauffman — definitely worth a look. Sara Robinson wrote them up at Orcinus with a particular emphasis on politics, but they have broader application. You can get a copy of the original 1980 text Systems One: An introduction to systems thinking at this link. It’s a bit dated but the principles still hold.)
The human race has been cruising on the carrying capacity of this planet for a long time — but we’re pushing the limits now. Like the Ever Given, we’ve become a big ship in a narrow place, and we don’t have the room to maneuver we once did. Disruption is baked into our future.
The Ever Given shows us we have serious vulnerabilities we’ve ignored. The pandemic has been a lesson in how quickly things can come apart. Climate Change is orders of magnitude worse. For the U.S. alone, recall California fires, 2020 hurricane season, 2021 spring tornado season to date — the trend line is clear.
We have work to do. This looks like a good start on rebuilding the world into a more resilient shape, America’s piece of it at least. We can always be an example to others, but it’s better to be a good one than a bad one.