Supply Chains

When politicians and pundit refer to trade or supply chains, they invariable mean cross border trade or supply chains.  This is a mistake. President Trump recently provided a particularly nonsensical example:

“In Washington, President Trump lambasted corporate America for “these stupid supply chains” and said the pandemic had proven him right on the need to bring factories home.

“We have a supply chain where they’re made in all different parts of the world. And one little piece of the world goes bad and the whole thing is messed up,” he told Fox Business in May. “I said we shouldn’t have supply chains. We should have them all in the United States.” “Coronavirus-globalization-manufacturing”

Trade occurs whenever you sell your labor or whatever you produce and buy what you need from others. Trade starts at your doorstep and without it you would starve to death. Supply chains exist whenever you purchase inputs to whatever you (or the firm you work for) are making from someone else rather than making every component yourself. If you are a carpenter, you buy your tools from someone else.

You might think that you should confine trade and/or associated supply chains to your family or your village for some reason, but you would give up the efficiencies of greater specialization when trading more widely (maybe even across national borders). And such restrictions would lower–potentially significantly lower–your income and standard of living as well as the incomes of your trading partners.

This does not mean that there are no risks in relying on others to produce some of what you want. If there is only one source of what you buy, you risk going without if that source stops producing. But that is rarely the case. I briefly thought it might be for toilet paper in March when the supermarket t-paper shelves were empty for a few weeks. But I bought some on line from China and it was delivered to my door.

Manufacturers whose supply chains have only one source are taking a risk for whatever efficiency they enjoy. Having multiple suppliers or supply options is a form of insurance and is generally wise.  But it makes little sense for a Southern California manufacturer who buys some of its inputs from across the border in Mexico to be forced to shift its supply chain to Pennsylvania in order to have it “in the United States.” Transportation costs would be higher and with greater risk of weather or other transportation disruption. On the other hand, relying on the much closer source across a national border has the risk of an unpredictable President imposing a tax (tariff) on imports from Mexico. Our wise constitution prevents him from doing so on interstate commerce.  

The uncertainty of today’s world is causing firms to reevaluate the risks of long supply chains. That is prudent, but insisting that everything be produced and purchased within the United States is nonsensical and harmful for everyone involved.

About wcoats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My most recent book is One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.
This entry was posted in trade and tagged , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s