Clogged Ports Compel Firms to Rethink Supply Chains
Supply chain disruptions have caused businesses to rethink the benefits of sourcing from faraway places, and intensified U.S.-China trade tensions
Noah Zuss
Noah Zuss
Nov. 15, 2021 15:24
Clogged Ports Compel Firms to Rethink Supply Chains

The ongoing U.S.-China trade feud, Covid-19 pandemic impacts to economies, and aftereffects from the Trump administration's protectionist trade policies have prompted companies to reconsider their shipping logistics from faraway locations as they aim to bolster supply chain resilience. 

Record levels of imports are causing a shipping glut at U.S. ports. As a result, companies are rethinking a range of business operations and logistics, including reshoring to the U.S., or nearshoring closer to domestic markets.

"The supply chain issues are causing companies to think about relocating closer to the United States or perhaps to Mexico and even coming back to the United States," said Jeff Moon, president at China Moon Strategies and a former assistant U.S. trade representative for China.

The first point to consider is overall imports have been at record highs, said Peter Oak, senior supply chain research analyst at S&P Global. "It has essentially been almost peak season for U.S. imports the entire year," he continued. "What that's done is it's basically reached the capacity of the U.S. import system."

Import levels, since March, have been at or above the volume level from last October, which was the previous record for U.S. imports. With record supply, bottlenecks have become an issue, he added.

These trade and economic strains have meant that companies must accommodate a new normal, said Max Wolff, managing partner with Leste Clearway Capital, part of Leste Group, a venture capital and private equity adviser and investment manager. 

"The biggest story in the supply chain world is we will not return to the pre-Covid-19 supply chain," he explained. "It was already not viable because of the trade tensions between China and the U.S., [but] it was falling apart slowly so we could patch it better."

US-China Impacts and Inflation

Supply chain disruptions have also exacerbated tensions between the U.S. and China. Disruptions to supply chains and labour market shifts in China as a result of an ageing worker population and labour shortages, have forced companies to rethink their supply chains, sourcing for imports and reliance on China, said Bill Post, senior managing director in the dispute advisory services practice at FTI Consulting.

Potentially higher labour costs will be passed onto shipping and then to consumers. More expensive goods would reduce the trade benefits for U.S. companies relying on China, he explained.

With additional tensions between the U.S. and China, Post said that a question to ask leadership in corporations around the world is: "How are you weighing the advantages and disadvantages of doing business in China?"

He continued: "It's something that has to be thought about from the perspective of not just the supply chain but other geopolitical issues that relate to the countries and what the objectives are."

Companies have also had to reconsider the benefits that are garnered by sourcing from faraway places including China, and implications for established business practices, such as maximising efficiency by purchasing from the cheapest producer.

"We've operated for the last 20 to -25 years on efficiency and execution as the watchword of global manufacturing and sourcing, without really spending the resources and taking the time to understand how that global supply chain operates," Post said. "When there is this level of disruption it has led to questions, if you're a company that is sourcing exclusively through China or any other faraway place whether you're really going to get in the long term, the same types of benefits."

Inflation is also exacerbating supply chain strains as the price for goods has increased in 2021. 

In the U.S., supply chain disruptions were initially most acute for automobiles but have now impacted consumer goods. Inflation has increased this year, up more than 5% in the past 12 months and 4% in September, according to the U.S. Bureau of Labor Statistics. Inflation for consumer prices in China is at 2.4% currently, according to World Bank data.  

Inflation and supply chain disruptions could add up and be harmful to both the U.S. and China's economies. The holiday shopping season is critical for U.S. domestic spending on goods, many of which are produced in China. Clogged ports could prove harmful to both domestic economies if companies are unable to get goods onto shelves and keep stores well stocked.

Logistics and Relocations

The Covid-19 pandemic prompted business shutdowns and also decreased U.S. demand for goods from China, sources said. Before the onset of the pandemic, many companies were already giving more thought to relocating some operations from China or adding locations to support logistics and supply management, explained Moon.

"Before the pandemic, many companies were considering 'China + 1' strategies to address ongoing supply chain risks in China that included political uncertainty, cost increases, and the ageing worker population," he said. "We now face additional supply chain uncertainties created by nature and sudden disease outbreaks, clogged ports, and regulatory mistakes caused by human error from mistaken supply and demand estimates, as well as macroeconomic fundamentals including inflation."

Firms have been forced to consider location impacts to supply chain resilience, Moon added.

"Recent disruptions have not only confirmed the wisdom of the 'China + 1' approach but have also raised the issue of relocation to improve resilience," he said. "Firms are now building resilience into their supply chains by pursuing relocation options elsewhere in Asia or places closer to the United States such as Mexico, which is more attractive in the wake of USMCA (United States-Mexico-Canada Agreement)."

Another trend for companies is greater examination for business partners' supply chains and elevating transparency which is essential to understand recent disruptions and to predict future outcomes.

"The old-fashioned way of performing due diligence by meeting with supply chain staff and partners and visiting facilities has become impossible during the Covid-19 era, and virtual meetings from a distance are a poor substitute," Moon said. "The only way to address this problem in distant locations is to rely increasingly on what is knowable from open-source information, established business and official contacts, and other locations that are more accessible. The accessibility factor weighs in favour of considering relocation to areas closer to home that may involve fewer external risks."

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Topics :China, Trade War, Markets
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