Now that Evergreen has released the large vessel that blocked the Suez Canal for almost a week, and the ships have begun to sail through the crucial waterway, it is tempting to see the obstacle as temporary hiccups. But, like the Kovid pandemic, it exposed the fragility of world trade, especially its reliance on global supply chains.
The rapid decline in transportation costs and the low labor availability in the jurisdiction with light regulation and strict laws against the Union contributed to the explosive global growth. It has created fewer or fewer jobs, raised the living standards of many in some poorer countries, even though wages paid for those jobs are lower (but more than a substitute, it does not work), and have also reduced global inflation because consumers produce goods at a lower price than they would if they produced at home. Be able to buy.
The end of the Cold War also helped, as it opened up countries where markets were skeptical of governments choosing to run their economies with strict controls. These countries built tariff walls, imposed import quotas and restricted foreign investment. After the Cold War, they began to invest from abroad, many of them looking to reflect the experience of Southeast Asia and Mexico, which successfully attracted foreign investors to produce goods locally for export. It will only work if transportation costs are low and supply chains operate around the clock worldwide.
The Japanese had already invented a method for it. Also known as con ban or just-in-time inventory management, it relies on efficient manufacturers who supply key components to other manufacturers who further process these, delivering the baton to the next in the value chain, the manufacturer, who assembles the products for shipping before these inputs reach the final. It works on everything from television sets to cars. Manufacturers must be agile for operations, infrastructure must be fail-safe and processes must be efficient.
When I was a graduate student at a US business school in the early 1980s, Detroit’s carmakers were suffering at the hands of Japanese automakers, and President Ronald Reagan threatened Japan’s PM Nakason Yasuhiro that the US auto industry could survive by seeking ‘voluntary export restrictions’. Our B-school professors taught us complex principles for determining the size of the EOQ or economic order.
Global supply chains work effectively without supply barriers. As the Suez Crisis (mercilessly violent, 1956) revealed, things can go wrong when a choke point is blocked. Ship queues began to form, and some carriers began to return around the Cape of Good Hope in Africa, adding nearly two weeks (and costs) to this voyage. A globalized economy that relies on just-in-time supply will not tolerate such barriers. This is a setback for world trade and other forms of exchange. The food intended to reach its destination hurt consumers and farmers; Cars used to reach patients in paramedics remote areas are stuck on board; Drugs for pharmacies are getting closer to dates through their use; The oil humming generators is also stable so that hospitals can operate 24×7.
The stalemate came on the heels of an epidemic that affected many industries and bankrupted many companies. When shopping malls were closed, the cascading effect was felt not only by the classified brands that sold the garments, but also by the manufacturers in the exporting countries and, most importantly, by their millions of workers, many of them women, who sewed those garments. Ultimately, they bear the burden. This supply chain made sense as long as the supply was moving. When the economy suddenly stops, the dislocation is severe. This highlighted the need for safety nets, however, which, in theory, would increase costs and reduce efficiency.
Companies are thinking of rationalizing supply chains. This will lead to consolidation, less large suppliers will remain competitive and the search for alternative ways. But there is an in-depth lesson: Just-in-time inventory management is relevant. If not cheek-by-joule, it can be relied upon if all suppliers are somewhat close. Spreading the idea globally means relying on ever-failing shipping and shipping systems. This, as the pandemic and the Suez closure have shown, is more dangerous than once thought.
Perhaps the simplest solution is to accept some slowdown. Businesses need to reduce costs from their processes in order to maximize profits, while traditional readings of economics suggest trading between efficiency and equality — you may have one or the other. As Arthur O’Connor highlighted in his 1975 book, Equality and Efficiency: The Big Trade Off, markets are intended for a purpose; We are not intended to serve the market. Capitalist democracy motivates everyone to do better than others by following rules that do not undermine the system. This obvious contradiction has one purpose: to level the playing field. High emphasis on efficiency can cause businesses to cut corners, undermine standards and ignore vulnerabilities, which can be brutally exposed in times of crisis. Safety nets are very important for everyone to get the right opportunity. That is to make equality an important goal as efficiency.
Salil Tripathi is a New York writer. Read Salil’s previous mint columns at www.livemint.com/saliltripathi