Tue. Dec 6th, 2022

•More Connection—Not Less—Will Help Prevent an Era of Scarcity

By Harold James

Last year, as the first COVID-19 vaccines began to roll out, I predicted in Foreign Affairs that the global economy would come roaring back and eventually usher in a new golden age of globalization. That has not yet happened and indeed more fissures seem likely, including a possible war between Russia and Ukraine and intensifying conflicts between Russia and the West. Geopolitical disputes heighten the shortages caused by the continuing pandemic. The supply problems have engendered pervasive nervousness and fear. The induced anxiety, translated into politics, has encouraged the belief that countries need to be self-sufficient. Analysts and policymakers have pushed for autarky or at least imagined splitting the world into competing blocs. They see the interconnectedness of globalization as a vulnerability, subjecting countries to powers and forces beyond national control.

But an autarkic world also has clear limits. The notion that countries can only become resilient through radical self-sufficiency runs up against the need for complex, niche products. Small communities are not going to produce their own clothes, let alone their computers or automobiles. The persistent supply chain crisis poses serious threats to societies everywhere, but the solution to this problem is not for governments to intervene more forcefully in the interest of securing resources, or to wind back globalization. It is instead to build resilient and diverse supply networks that don’t depend on one source and seek more—not fewer—connections throughout the world.

FROM ‘CHIPAGEDDON’ TO CHRISTMAS TURKEYS

The original shortages of personal protective equipment, face masks, and ventilators that followed the outbreak of the pandemic were easy to understand. It was also apparent to policymakers that allowing the law of supply and demand to dictate the prices of these goods would be horrendously unjust and inefficient. Those who needed the protection most would be unable to afford this equipment and go unprotected while those who could treat protection as a luxury good could afford to live on islands of complacency.  

Then the shortages spread more generally. As the demand for communication devices and data processing equipment shot up, electronic components—notably chips—became so scarce that analysts described the crisis as “chipageddon.” That restricted the ability of a vast range of suppliers to deliver goods ranging from automobiles to washing machines to dog-grooming equipment. Elsewhere, the supply of timber for building could not catch up with the demand from construction projects in places that had become more desirable during the pandemic.

Within a few months, the causes of the scarcity had become so complex and so interlocking that it was hard to imagine a way out. Labor shortages, especially of truck drivers, played a part. So did the absence of shipping containers, which got stuck in the wrong part of the world or held up in enormous queues outside overwhelmed port facilities. Consumers focused on particular scarcities: the British worried that the shortage of drivers would lead to a shortage of carbon dioxide that in turn would limit the capacity of turkey slaughterhouses. Farmers could not sell their turkeys to the abattoirs and consumers believed there would be a shortfall of turkeys for Christmas (the traditional British holiday for gorging on turkeys). New Yorkers faced an equivalent lack of an iconic food—cream cheese—for their bagels.

Governments will not solve the supply chain crisis by winding back globalization.

Consumers react to shortages like these in a predictable manner: they start to hoard as much as they can. They also start to buy inferior substitutes. During the holiday season, many British consumers made multiple purchases of ham, chicken, and duck in case their Christmas turkeys didn’t materialize. They probably did not eat all the alternatives they had bought and stored away. Tremendous waste occurs as a result. Hoarding is a beggar-thy-neighbor approach to dealing with crises: hoarders may not live better but others will suffer and be relegated to fewer and inferior provisions.

The calculations of producers exactly mirror the anxieties of consumers. If manufacturers are no longer certain that their processes, which are dependent on the timely delivery of parts, can continue to operate smoothly, they need to build up extensive stockpiles. As a result, they need to have larger warehouses and that adds to the pressure on construction and the labor and supplies it demands. All these shifts add substantially to the costs of production, and then get inevitably reflected in higher prices.

Shortages thus have a way of escalating, as supply constraints induce more production problems, and interconnected networks strain and disintegrate. Countries behave in the same way as individuals: they hoard unnecessarily. One example is the stockpiling of COVID-19 vaccines by wealthy countries. These stockpiles accumulate when they could be used somewhere else; large quantities of a potentially life-saving vaccine have been simply wasted after expiring or not being stored properly. The perception of an urgent crisis makes dramatic action even more important—and politically desirable. For example, countries like to compete in boasting how much vaccine they have as a short version of explaining that they are handling the crisis very well.

The scarcities trigger competitions and bidding wars among different countries for the scarce products. They also focus attention on geopolitics. As the supply issues increase, Russia’s control of gas supplies to Europe looks more and more like a danger. China’s rivals see its access to the rare earth materials needed for battery technologies and energy storage—among other purposes—as a competitive threat. Scarcity makes heightened competition, aggressive action, and ultimately, war more likely.

THE PERIL OF SHORTAGES

The COVID-19 scarcities and “chipageddon” have intensified global competition. The power that vaccine suppliers can exercise is a reminder of how technology can be used by powerful countries to pursue their own ends. It has intensified the race to dominate cyberspace and cybertechnology. Governments see victory in these competitions as knocking out their competitors. When the most potentially productive technologies become the subject of a new arms race, many people fall at risk of losing access to these products or of only being able to access inferior and more costly alternatives.

The closest historical parallels to the focus on supply chain problems come from the repeated experience of states with major wars. There is a mutual relationship between wars and obsessions about safeguarding supply chains: leaders think supply chains can be secured by wars and they embark on wars to protect their supplies. World War I, the conflict that set the twentieth century on course for further violence and disintegration, was driven by countries’ often flawed strategy of blocking trade routes and cutting off energy supplies to starve the other side into submission.

The discussion around how to adapt to scarcity quickly becomes a debate about how to best allocate resources: through experts or technocrats, or through popular and democratic mechanisms. Technocrats bungle. Then the demand for more popular control emerges. In World War I, discontent turned into a revolutionary wave that surged westward from Russia and eastern and central Europe. A plausible interpretation of the Russian Revolution put forward by the great French historian Marc Ferro showed that the fall of the tsar and the success of Vladimir Lenin’s putsch had nothing to do with the appeal of communist ideology but instead was a response to the grain and housing shortages that the tsarist administration could not fix. In the 1970s, too, the supply shocks of the oil crisis stoked public doubts about the competence of governments. Today’s shortages are having the same effect.

A shopper in Washington, D.C., January 2022
A shopper in Washington, D.C., January 2022Sarah Silbiger / Reuters

The shortage debate is linked to increased worry about rising prices and inflation. Price increases are the natural response to scarcity and many people—especially poorer consumers—find them very threatening, as the price increases for food and fuel and other daily necessities are far higher than a general rise in prices. Indeed, many official assessments and forecasts strip out these essential goods as noncore items from the measuring of inflation but they are precisely the prices that most people feel most intensely.

Inflationary surges make the shortages worse by encouraging greater hoarding. The historical analogies from previous eras of shortage—and political turmoil—are clear. In the 1970s, Margaret Thatcher, as a member of Parliament in the opposition in the United Kingdom, noted that prudent housewives were building up reserves of jam and canned vegetables. The most common response from nervous governments to supply problems is to attempt to control prices or subsidize scarce goods. That leads to an intensification, rather than the amelioration, of the supply chain problem.

Pricing face masks or vaccines according to supply and demand would be unjust. But when it comes to turkeys, cream cheese, or washing machines, it is equally apparent that holding down the cost only exacerbates the problem. The shortages will get worse, as people snap up items that they believe to be scarce and that they see are underpriced. The producers will restrict their supply. Again, the extreme example of wartime planning tells a striking story. During World War I, many countries held down grain prices to protect urban consumers. The farmers responded by cutting the amounts of grain they sold, instead feeding the additional grain to livestock, pigs, or poultry that they could then sell on a more unregulated market.

THE FOLLY OF AUTARKY

It is unclear how long supply chain problems will persist or how long it will take to get ports and the road transportation of goods operating normally. The problem could be over quite soon—later this year—if governments manage to reestablish interconnectedness. They need to reduce the barriers to mobility built up over the past two years. But if anxious governments continue to seek autarky, the crisis could stretch into 2023, and for much longer. Pushed by scarcity, a resurgence of protectionist or nativist thinking may drive governments to ever more expensive and unpopular solutions that lead to spiraling costs but also discontent, radicalization and violence, and even war.

The roaring economic comeback that I outlined last year will only materialize when governments and policymakers see that even large countries cannot control the surging escalation of scarcity without intensifying connections with the rest of the world. At some point, the realization will set in that the race—by individuals and countries—to stockpile resources produces not only redundancy, confusion, and waste but also destruction and devastation.

Credits | Foreign Affairs

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