SUPPLY CHAIN: HOW WE GOT HERE AND HOW LAWMAKERS ARE TRYING TO RIGHT THE (CONTAINER FREIGHT) SHIP

The nation was witness to the disappearing act of staples, namely toilet paper, in local markets throughout the COVID lockdown. As a Costco shopper myself, I felt bullish about our family’s supply of TP until my wife suggested donating some to neighbors. And though she followed through on that promise (threat?), I am pleased to report that we survived those early months of the pandemic in the presence of heaps of plush three-ply.

But, sadly, here we are again – this time with baby formula. So how did this happen, when will it stop and who is to blame? Let’s break it down.

The Timeline

What was initially viewed as panic-buying evolved into massive supply chain challenges and bottlenecks triggered by a global economic slowdown, mass layoffs and factory closures.

Early in the pandemic, manufacturers and shipping companies assumed that demand would crater as consumers hunkered down. And while demand for some goods did drop, the exact opposite was true for essential items like medical protective gear. So as production ramped up at record levels in China, where most of the personal protective equipment (PPE) was manufactured, so did the need for shipping containers which were in short supply as empty ones stood idly by in other parts of the world. Meanwhile, Americans stayed at home, surfing the web and spending money to spruce up their lockdown digs and make quarantine life more tolerable. Pretty soon, orders outpaced the availability of shipping containers.

What caught the eye of regulators and lawmakers in the summer of 2021 was the sky-rocketing costs in the industry which they themselves were seeing first-hand. As oceans provide the main transport arteries for global trade with 90% of all goods shipped by container freight ship, the cost of shipping a 40-foot container at one point soared to over $11,000 from a pre-pandemic low of $1,300 – a breathtaking increase. In fact, the largest shipping company, AP Moller-Maersk Group, posted its most profitable quarter (Q3 2021) in its 117-year history.

So as consumers waited on orders and ships waited for weeks to dock and unload at key U.S. ports, alarm bells started to sound at the White House and throughout the halls of Congress with concern and outrage about these astronomical shipping fees, unprecedented delays and record profits mounting. And the administration and Congress quickly pointed to rapid consolidation, with three global shipping alliances controlling 80% of global container ship capacity, as a key problem.

Even the United Nations chimed in on high freight rates and the direct impact those inflated rates have on consumers. Its analysis last November showed that the surge in container freight rates, if sustained, could increase global import price levels by 11% and consumer price levels by 1.5% between now and 2023. Six months later, it certainly feels like prices, whether at the gas pump, car dealership or home appliance store, have certainly outpaced those predictions and led to economic hardships for most Americans.

Taking Action

Early in the Biden Administration, the president brought together business leaders on the front lines of retail, port operations and shipping to consider the challenges presented and strategies needed to solve the crisis. The president signed an Executive Order requiring federal agencies to assess the risks in the supply chain, ranging from critical minerals and semiconductors to high-capacity batteries and pharmaceuticals. Its goal was to evaluate domestic supply chain vulnerabilities and speed up the movement of goods, while lowering costs for Americans. The lead agencies issued their reports a year later to help, “tackle this challenge head-on and set the country on the right trajectory for a resilient and globally competitive 21st century goods movement chain.” Concurrently, the administration assembled a Supply Chain Disruption Task Force in June of 2021 aiming to relieve port congestion, stock shelves and boost the workforce while engaging allies to strengthen international trade rules and strengthen global supply chain resilience.

This past February, the White House announced a joint effort by the Department of Justice and the Federal Maritime Commission (FMC), led by former fellow Hill staffer turned Congressman, Dan Maffei, to increase oversight over the global shipping industry, lower consumer costs and address potential antitrust violations. This included a call on Congress to, “pass robust reforms to the ocean shipping industry, including reforms that address the current antitrust immunity for ocean shipping alliances.” The newly-created White House Competition Council set its sights directly on the shipping industry and industry consolidation elsewhere often leading to anti-competitive behavior and price gouging. 

Meanwhile, on the other end of Pennsylvania Avenue, a divided and exceptionally partisan Congress found ways to coalesce around key pieces of legislation that sought to address the underlying challenges exposed by the pandemic. In fact, conferees are meeting as we speak to reconcile the Senate-passed U.S. Innovation & Competition Act (USICA) and the House-passed America COMPETES Act which, among other things, seeks to invest $52 billion to support U.S. production of semiconductors and $45 billion to improve U.S. supply chains. The legislation also aims to strengthen the economy and national security by preventing shortages of critical goods and ensuring that more goods are made in America. Simultaneously, the president touted new private-sector investments and job creation in the U.S. as we await the outcome of these negotiations.

Separately, the bipartisan and bicameral Ocean Shipping Reform Act aims to assist U.S. exporters as they navigate ocean carriers, who arbitrarily and unreasonably decline shipping opportunities and provide the FMC with enhanced enforcement powers. Congressional committees also launched investigations into, “dramatic price hikes” in the industry that may have fueled inflation while carriers, “collectively reaped total annual profits of $150 billion in 2021, nine times greater than the year before.”

Shifting away from the shippers, Sen. Jon Ossoff (D-GA) introduced the Solar Energy Manufacturing for America (SEMA) Act, which is designed to provide tax credits for American manufacturers at every stage of the solar manufacturing supply chain, from the production of polysilicon and solar cells, to fully assembled solar modules. The bill would help boost domestic solar production, create good-paying American jobs, and would limit America’s dependency on Chinese solar products linked to the Xinjiang region and its Uighur forced labor camps. Based on its bipartisan appeal, several key leaders on Capitol Hill have discussed targeting additional industries with similar manufacturing tax credits. The SEMA language, which was attached to the various iterations of the Build Back Better effort, continues to be alive and actively considered in Congress.

As Americans await additional congressional and administration action, the Infrastructure Investment and Jobs Act (IIJA) was a needed shot in the arm. IIJA will invest hundreds of billions of dollars in the nation’s supply chain infrastructure from ports to roads, to bridges and railroads. But additional government incentives and investments, private sector buy-in, ships, warehouses (the Staxxon foldable container technology could be one option to address spacing and environmental challenges) and an influx of truck drivers will be needed to prevent additional damage. 

The Point

The pandemic exposed the fragility of our supply chains and the complexity of our global commodity chain. Invoking the Defense Production Act, as has been done with critical minerals and now baby formula, is obviously not a long-term strategy; neither is our dependence on China for the most sophisticated semiconductor chips used in cars. And while we may never return to a scenario of cheap and reliable shipping, American businesses and consumers are looking to their elected officials to protect us from future disruptions, provide a level playing field to compete, onshore manufacturing and stop price gouging in the opaque and lightly regulated shipping industry.