Is our supply chain collapsing? This week, Brent Sadler, a senior fellow in Heritage’s Center for National Defense, explains the reason behind today’s shipping backlogs and why it could lead to national security concerns.
Michelle Cordero: From The Heritage Foundation, I'm Michelle Cordero. And this is Heritage Explains.
Cordero: So last week I was shopping at the mall for some work clothes, and something weird happened at my favorite women's clothing store. Instead of an array of fall-colored wrap dresses and trendy, puffy-sleeved sweaters, they had pretty much nothing.
Cordero: Their racks were spread out and sparse. It was like someone had moved clothes around just so that there was a little bit on each display. Were they closing? I panicked and asked an employee. Get this, they were waiting on shipments that were delayed.
Cordero: What? This happens with paper towels, toilet paper, lumber. The last I heard, maybe even refrigerators. But clothes now, too? I thought that stuff was starting to get better. Or is it?
Clip 1: What are we seeing, and what is it going to take for it to ease?
Clip 2: Yeah. And so, you are seeing over 70 container ships still waiting right now at the port of Long Beach, but that's not the whole story. There's actually over 130 container ships waiting at US ports. So that east coast has some traffic congestion. Seattle, you're seeing similar things. And actually it's even worse than that. If you go over to China, you'll see even more container ships, 90 waiting in Shanghai.
Clip 3: Hey, good morning to you, Joe. A record 71 container ships are waiting to unload at the port of Los Angeles, Long Beach. It's a new record, and a 31% increase just from early September. Companies racing to get holiday goods into stores has led to a surge in container shipping, but container shipping on US rails has declined over the last two months, even though it's a cheaper way to ship.
Clip 4: That's because the US container shipping network is backed up, bottlenecked, and just flat-out maxed out. Now companies are pushing your sneakers, electronics, and furniture, all the things shipped in containers, on to trucks.
Clip 5: If you've taken a recent trip to your local grocery store or a retail store, you may have noticed some sparse or even empty shelves. Things like toilet paper, cleaning supplies, appliances, smartphones, toys, all are running low due to issues with the supply chain. As a result, companies are taking measures to avoid running out of their products. Consumers are also feeling it in their wallets, seeing higher prices on many goods.
Cordero: So why is shipping so backed up? How bad could this get? And when will it end? Our guest this week, Brent Sadler, breaks it down. But also explains why it's not just holiday shopping we should worry about. He says there's more serious national security implications. Our conversation after this short break.
Cordero: Brent, thank you so much for joining us.
Brent Sadler: Oh, thank you for having me.
Cordero:Many of us started to notice supply chain issues in one way or another, or at least we've heard about it in the news. But what we all don't know is exactly what's causing the backlog. Can you explain that to us?
Sadler: Yes. It's actually a complicated combination of several factors that if you, under normal times, any one of them or two of them probably would have been unnoticed to the vast majority of consumers, or would have just been a blip on price increases.
Sadler: But what we've seen is, even before COVID there were some stresses on the supply chain, which is lean inventories, which means you just have enough stuff in your warehouse to meet your production demands, and thin supply lines. In other words, you've relied on one particular transporter or port of entry and export. Those were already slightly under stress, and then COVID hit in early 2020. And that actually took the workers offline, for a lot of reasons that happened. And so production went down, and so you had less supply. And for a while demand was pretty low. But then, fairly quickly, demand started to pick back up. But yet you still had this stressed supply chain, which was brittle.
Sadler: And then you had less workers in the shipyards, less workers driving trucks. And so you had containers sitting on the port, and more importantly sitting on a ship at anchor off the coast in Southern California. And then there's a political aspect of this as well. When COVID policies were put in place that would shut down a whole port for one case or incidents, and other policies that might've caused labor dislocations, all coming together causing shelves to be in some cases empty, or prices going up from this supply-demand pressure.
Cordero: So COVID equals labor shortages, which kind of takes all of the things that you mentioned at the beginning and makes them way worse?
Cordero: And then is it true that there are actual shortages in shipping containers?
Sadler: Yes, it was interesting. So the containers that you see on these large ships, they carry several thousands of them that just stacked up, and they come into specialized ports with special cranes. The vast majority of those containers are manufactured in China. And when the ships are sitting off a port, or awaiting to be offloaded, those containers aren't emptied and then returned back into the chain for more imports or exports.
Sadler: And then, if you need to get stuff into a container, you would put an order in for new containers to be built. But then they go on a ship to be shipped to where they're needed, and you have the problem. So it's a little bit of a catch 22. You want it, but you can't get it.
Cordero: So we all know that supply chain backlogs lead to fewer options, but how do they also lead to higher prices and layoffs?
Sadler: So there's a supply and demand price pressure that's going on. And so I'd guess it's, I guess the way I would attack it first is, the supply of products or produce just coming out of a factory, the demand went down so companies, anticipating that during COVID, reduced the supply, the production.
Sadler: And then as soon as demand started coming back, they didn't have the workers in the factory, because they laid them off for cost-cutting. And then you also had labor, or unemployment benefits in the case of the United States and many other Western countries, that were very favorable for having people stay at home to prevent the spread of COVID. And those policies lingered for far too long, and so industry and the producers didn't have the capacity to build or produce more products.
Cordero: So not being able to produce more products leads to higher demand for the products that are existing on the market, which makes the prices go up.
Cordero: And then can you explain again how that in-turn leads to layoffs, less people?
Sadler: Oh yes. So yeah, just to focus on the labor aspect of it. First, there was layoffs because of anticipating demand to go down. So you had layoffs in the beginning of COVID. And then on top of that, you had unemployment benefits that kept people out of work, or encouraged those people to leave the workforce just at the time that producers needed it. So that was what was considered a temporary labor shortage.
Sadler: But what's happening now is you have people that are just not reentering the market. Some companies are folding because it's not economically viable to stay competitive in the marketplace. And so those workers in those industries, like hotels in Hawaii, there's a couple that were closed down. Those jobs aren't going to come back. When the COVID and all the unemployment benefits go away, those companies that have folded under the pressures of the last year, those are lost jobs. And it's still a little early to know what that impact is. But as a Navy guy, and looking at the military considerations of this, I'm very concerned about what we might be losing in the supplying base for things like the Columbia submarine that's being produced.
Cordero: Yeah, let's get to that. In your op-ed you note that shipping backlogs may, they may make things like Christmas shopping harder. But the situation is actually far worse than that. How so?
Sadler: Well, the Columbia Submarine for one, that's our next strategic deterrent submarine, an SSBN. It is one leg of the strategic triad for deterrence against China and Russia. 5,000 suppliers provide the parts, and the equipment that's required to build that submarine. We know about one or two levels below that who's making what, but we don't know much further down that chain who's bringing in the fasteners, the fittings between pipes from overseas. And as the workers, the drivers that aren't showing up to work for trucking companies, or the longshoremen on shore not showing up, or being overwhelmed with a demand for their labor and the ports, those materials may be coming from overseas. And if they're not getting into the supply base, then that means it delays, at best. Or we may have to find new suppliers and quality issues for building the submarine. And that's a delay that we can't tolerate, because that submarine's timeline, it has to be online in very tight timeframe in order to sustain our strategic turns.
Cordero: Is this a situation that's ever happened in the military before?
Sadler: Not to my knowledge. I asked both the army and the Navy transportation, the agencies involved with moving the logistics for both military and the supply base. And so far they haven't witnessed any firsthand bottlenecks that have impacted operations. Talking to the ship builders, they've been able to manage it so far. Now how long that can continue, that question hasn't been answered.
Cordero: How long do you think we could sustain not being able to build ships and other vehicles that we need?
Sadler: Well, the Navy's under-sourced a number of ships. So any delay to that is a strategic issue for the country. If we were in a crisis and we had ships that we needed to get repaired quickly and put back out to sea, that's another very serious question. But it only happens if a crisis occurs, but you can't predict.
Cordero: Exactly, yeah. So we're okay unless something bad happens, which is not a great position to be in.
Sadler: That's correct.
Cordero: So what are some of the lessons that the military could learn from this?
Sadler: I think the first, most important lesson is understand your supply base. And when you understand that having a single source for a critical part, or even parts that you don't think are critical, but if you didn't have it, becomes critical. In other words, something as simple as a pipe fitting. If that fitting is something that's fairly common, but you can only source it from overseas, be aware of that, and then at least diversify your supply base.
Sadler: So that's one, is understand your supply base. The other is actually look at more diversified logistics nodes. If we are reliant on trade with Asian markets, most of that's coming into the west coast. Perhaps diversify entry points into the east coast, to the Gulf of Mexico, and have more routes of inflow, of sourcing of materials to the US military.
Cordero: When do you think Americans could potentially see an end to this issue?
Sadler: Well I think, so there was another ... It's worth mentioning also the Suez Canal crisis. I mean, we had that canal closed for about a week, and the backlog was imminent. And I'll come around to answer the question about how long we'll probably anticipate this and looking at the Suez crisis.
Sadler: So the end of March shuts down for a week. Suez Canal, no traffic goes through. That immediately caused a backlog into the Red Sea, and of course in the Eastern Mediterranean to go north or south through the canal. That backlog actually had ripple-on effects that lasted for three to six months. And we're still kind of feeling some of that.
Sadler: So that now you add in the COVID, you add in some of the other policies with labor on top of that, it's probably going to be, I've seen some of the experts that are looking at this saying until the summertime, next summer, is probably when we'll see a lot of this start to stabilize.
Cordero: So if we're still feeling effects from the Suez Canal issue, essentially this is just the beginning of the backlog we're experiencing now.
Sadler: I think it's probably, it's hard to say it. And again, there's a policy or political element, and it's not just the United States that's causing this. It's actually, policies in China have a huge impact. When they shut down the world's second largest, first largest, or third largest ports for containerized traffic, that actually has a global impact. And that's not something that we can necessarily influence one way, that we have to just respond to it.
Sadler: So it's hard to predict where we are in that trajectory, but it certainly feels like we're probably at the plateau of the peak of it.
Cordero: Okay. In conclusion, just taking your expertise and making use of it for our listeners here, what items do you think are going to be the hardest to find this winter?
Sadler: Outside of the military, it's always the basic thing. It's the things that you assume are not a big issue for the military. That's what I'm more worried about. Because it's, you never think about it.
Sadler: So for the mil, that aside.
Cordero: Aside from submarines.
Sadler: Aside from submarines, things like LCD panels and plasma displays that are used.
Sadler: That's something, we addressed that issue years ago as a critical issue. We may assume that that's not an issue and it's more of an issue of what we don't know that bothers me on that. And there's a few of those out there. Precision machinery equipment's another one, but I think that's a longer term. With this, that's something we have to think about beyond this shipping and logistics bottleneck problem.
Sadler: But for myself and my family at home, we like fruit. And it's interesting, this morning read a story about the government Philippines, with some help from our USAID, actually have chartered and actually have a container ship that's moving, that did traffic within the Philippines to actually, for the first time in 45 years, come to the United States. Partly because of food insecurity, lack of availability of shipping capacity, so they can also move their fruit.
Sadler: And fruit's perishable. And the longer that you have delays on these container ships, it doesn't matter if they are cooled or not, the food that's onboard, those perishables will rot in a certain period of time. So that's one that I worry about. Because a family with growing kids, we like the fruit. It's going to be back to the future for us, because in the seventies, I remember large portions of the winter, you didn't have access to lot of the fruits that we take for granted. So it's another dynamic of what you take most for granted, that may be where the biggest surprises come in the winter time.
Cordero: Brent, thank you so much for explaining all this to us.
Sadler: Thank you.
Cordero: That's it for this week's episode of Heritage Explains. Please find us wherever you listen to your podcasts, and leave us a rating and review. We love getting your feedback and we'll see you next week.