Severe Supply Disruptions Could Speed Demise of Globalization

March 22, 2020 Updated: March 25, 2020
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WASHINGTON—Governments and businesses are learning hard lessons from the rapid spread of the CCP virus that is causing supply disruptions across the globe.

Closings related to the virus, which causes the disease COVID-19, have been bringing the U.S. and global economies to a grinding halt.

American companies dependent on global sourcing are facing an unprecedented type of disruption amid the pandemic. And the ones that heavily or solely rely on factories in China for parts and materials are the hardest hit.

The Chinese state required factory shutdowns across most of its provinces in February, and U.S. companies have felt the effects. The Chinese Communist Party (CCP) virus, commonly referred to as the novel coronavirus, has disrupted supply chains for nearly 75 percent of U.S. companies, according to an Institute for Supply Management survey conducted in late February and early March.

In addition, there is a shortage of air and ocean freight options to bring products to the United States, compounding the delivery delays.

The crisis prompted President Donald Trump on March 20 to invoke the Defense Production Act, which will speed up and expand the supply of products from America’s industrial base, if needed. The Korean War-era statute will force certain U.S. companies to produce goods that are in short supply, such as medical masks, ventilators, gloves, testing swabs, and other essential equipment.

“The coronavirus pandemic is going to have serious implications for how we think about globalization broadly and China specifically,” said Robert Atkinson, founder and president of the Information Technology and Innovation Foundation (ITIF), a U.S. think tank.

“I think the days when everybody just assumed that there’s just one integrated global market that we can all trust—those days are gone. And there’ll be some repercussions from it, and I think China will end up paying the price.”

ITIF has long been critical of Beijing for embarking on “innovation mercantilist” policies, which include massive government subsidies, industrial espionage, cyber theft, forced joint ventures in exchange for market access, and acquisition of foreign companies to attain sensitive technologies.

These policies spurred innovation in China, but that came at the expense of innovation in Western economies, according to ITIF.

Globalization, the most powerful economic force to have shaped the world over the past two decades, is now giving way to a new world order. Souring sentiment against globalization in the past few years, particularly in developed countries, led to a global revival of nationalism and protectionism. That marked a fundamental shift in the global trade order.

Atkinson said the trade war and the CCP virus outbreak have made U.S. companies even more concerned about supply chain vulnerabilities and dependency on China. They are now pushed to create more resilient and diverse supply chains.

“Certainly, the Trump tariffs and the trade war have also sent that message to many companies and so they were already moving in that direction,” he said. “The coronavirus will, I believe, accelerate that movement and encourage more companies to take it more seriously.”

Exodus From China

In an effort to diversify its supply chain, Apple last year asked its top suppliers to consider moving 15 to 30 percent of their production to Southeast Asia from China.

It also started the process of moving the manufacturing of AirPods, its popular wireless earbuds, to Vietnam from China. Atkinson believes roughly half of AirPod production is now done in Vietnam.

The trade war between the United States and China has turned into a boon for countries such as Vietnam and Malaysia. Large corporations have been able to quickly switch to producers in these countries for electronic products and furniture that were affected by U.S. tariffs.

At least 50 multinational companies, including American, Japanese, and Taiwanese, last year announced plans to move manufacturing out of China to avoid punitive tariffs, according to research by Nikkei Asian Review.

U.S. personal-computer makers Hewlett-Packard and Dell, footwear company Skechers, athletic footwear and apparel manufacturer Brooks Running, and small video camera producer GoPro were among those companies.

If Apple decides to exit China, that will have a big impact on a lot of companies, said Ray Zinn, founder and former CEO of Micrel Semiconductors.

Apple is the world’s largest consumer of electronics, buying chips, glass, aluminum casings, cables, circuit boards, and many other products from suppliers that are mainly concentrated in China.

According to Zinn, iPhone assemblers such as Foxconn can easily pull out of China but moving component manufacturing is more challenging.

Nevertheless, the U.S. government could easily put pressure on companies such as Apple to shift their supply chains by imposing tariffs, he told The Epoch Times.

China Lost Trust

Zinn was at the forefront of the semiconductor industry, serving as CEO and president of Micrel from its inception in 1978 until his retirement in 2015. He claims to have been the longest-serving CEO of a publicly traded company in Silicon Valley.

For decades, he watched many U.S. firms moving their manufacturing operations to low-cost countries.

“My company never did go to China,” he said.

“Back in 2000, when we had the Y2K and the dot-com explosion, my company’s executives wanted to move to China, because everybody else was moving. I said, ‘No, we are not going to go to China.’”

He admits such moves brought cost benefits and competitive advantage to those companies in the short term.

“But in the long term, I think they’re going to pay a price for that. I didn’t want our technology stolen,” he said.

An incident 15 years ago made Zinn lose trust in China. He said FBI agents in 2005 swarmed his factory in San Jose, California, after they had found parts produced by Micrel in explosive devices that were being used in Afghanistan and Iraq.

“We found that it was a distributor in China that was buying our parts, through Korea and Japan, and then selling them to Iraq. So, once I found that out, I didn’t trust China. Because that was killing our soldiers,” he said.

Zinn urges other U.S. companies to have a conscience and do what’s best for the country.

“I don’t think it’s right for our companies to do business with someone who is potentially an enemy to our country and who does not have our country’s best interests at heart,” he said.

China has lost global trust and goodwill over its handling of the CCP virus outbreak as well, media reports say.

Experts believe the U.S. government can encourage more companies to relocate manufacturing to the United States from China by offering a tax holiday or tax incentives.

White House economic adviser Larry Kudlow told reporters on March 16 that the Trump administration is considering a plan to offer incentives to the U.S. firms to bring production back onshore.

The White House also is preparing an executive order to help relocate medical supply chains from China to the United States amid the pandemic crisis.

Medical Supply Chain

The United States is heavily dependent on China for health care products, which makes the country vulnerable to supply chain disruptions. And the outbreak has been a huge wake-up call for policymakers as the regime in Beijing has exacerbated this vulnerability problem.

China is the dominant supplier of crucial medicines, active ingredients, and personal protective equipment (PPE) such as face masks, respirators, surgical gowns, and gloves.

Rising global demand and slowing production in China due to the outbreak have created a severe shortage of protective equipment in hospitals across the United States.

“There’s a logistics nightmare right now on top of everything,” said Michael Einhorn, president of Dealmed Medical Supplies, a New York-based medical supply distributor.

While factories in China are reopened and running at 90 percent of capacity, his company can’t bring the products into the United States fast enough, because of high demand and shipping backlogs, he told The Epoch Times.

“We’re trying to get things out of China, but it’s becoming very, very difficult,” he said.

Dealmed distributes more than 25,000 products in New York, New Jersey, Connecticut, and Pennsylvania. And more than 50 percent of those products are sourced from China, he said.

Due to the trade war, Einhorn had to move 35 percent of his business to Malaysia, the United States, and Mexico last year from China. However, he said, China is still a crucial supplier of PPE products, such as protective masks and isolation gowns.

The pandemic is a very serious lesson for this country, he said. “We need to move medical manufacturing back into the United States.”

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