Navigating Endless Disruption: The East Coast Port Strike and The New Normal in Supply Chains

Over the past decade, rising trade barriers, labor shortages, natural disasters and a host of other challenges have created an era of relentless supply chain disruptions. The Port Strike is only one among many.

Background: On October 1st, the International Longshoremen’s Association, representing dockworkers at most U.S. ports on the East and Gulf Coasts, is set to strike. These ports account for approximately 50% of U.S. oceanic trade. Even if West Coast ports can increase their throughput, this will still leave a significant gap in US trade. JP Morgan estimates a 6% drop in U.S. economic activity for the duration of the strike, while others warn that if the strike lasts two weeks, the repercussions could be felt well into early 2025.

The Big Picture: The drivers of increased disruptions are manifold. Among others:

• Trade restrictions are up 15x: Increased by 15x since the early 2010s according to the IMF.

• Armed conflict intensity is up 6x: Global deaths from armed conflicts up by 6x since the early 2000s (Uppsala Conflict Data Program). Surprisingly, the Ukraine War, while significant, has contributed less than from interstate civil wars.

• Weather disasters is up 3x: Weather-related disasters of over a $1 billion (adjusted for inflation) are up by 3x since the late 2000s National Oceanic and Atmospheric Administration).

• Labor:

  • Strike intensity is up 10x: The number of workers affected by strikes in the US has increased by over 10x since the early 2000s (Bloomberg Law labor data).

  • Persistent labor shortages: The shortage began prior to the Pandemic in 2016. There was a labor surplus in the early 2000’s (even prior to 2008). (US BLS)

  • Skilled labor shortages: Construction of new manufacturing plants for high-tech products up by over 10x from the typical level of the past decade, but the number skilled tradespeople to build them remains flat. For example, the number of welders has increased by at most 5% (US BLS).

• Cybercrime growing exponentially: It barely existed in the early 2000s but cost US industry $10.3 billion in 2022 (US FBI).

• AI Computing Power is up 20x: The number of the processors that train and use AI (GPUs) are up by 20x since 2017 (author estimate).

• Activist Government Policy: Since 2018, US policy has reversed course, increasing tariffs, outright bans, restrictions on what’s considered domestic content, and passing subsidy acts such as the Inflation Reduction Act. All current US Presidential candidates have promised to continue more active intervention.

Future Trends: New sources of disruption are becoming important as well.

• Electric power demand increases: Demand on the US power-grid will rapidly increase due to AI, electric vehicles, and the electrification of production facilities. Estimates vary wildly, but the 2024 forecast for demand in 2030 in Texas made by its grid administrator (ERCOT) increased 100% from the 2020 forecast for 2030.

• China demographics collapse: The working age populations of China will shrink by 70 million working-age people, greater than the number of working-age people in all Vietnam (PopulationPyramid.net).

Bottom Line

• Supply managers continue to think that the global landscape will return to the normal of the 2010s and they can return to 2010s policies just-in-time inventory management. But it won’t work. Switching to “just-in-case” inventory and production management is a good first step, but it’s not enough to cope with the new normal.

• Supply chain managers need to recognize the change and leverage new product design, on-shoring, scenario planning, and ones not even thought of yet.

• On the plus side, the new normal presents a window of opportunity. Firms that can make the switch to the new normal can grab market share and profits from firms that won’t adapt.

Rapidly Expanding Regulations Could Grind Supply Chains to a Halt

Policymakers must think hard before expanding regulation requiring firms prove that each and every part of a supply chain meets US requirements.

Background: Two weeks ago, more than 13,000 Volkswagen-made autos—including Porsches, Audis, and Bentleys—were impounded in ports by US authorities. The reason: US officials suspected that a small electronic subcomponent in one of the vehicles’ parts may have been made by forced labor in Western China. Until Volkswagen can disprove this with “clear and convincing” evidence, it cannot deliver the autos to dealers.

Zooming in: The US enacted the US Uyghur Forced Labor Prevention Act in 2021 (UFLPA) with the undeniably honorable intention of preventing forced labor. What’s new is that—in a change from prior regulation from 1930—the act presumptively assumes that any part or other raw material made in Xinjiang province has been produced by forced labor. Unless a firm can prove otherwise, any products with such value-add produced in Xinjiang at any point in their supply chain are banned from entry into the US.

Why this matters: Having studied supply chains for more than 20 years, I propose that proving a supply chain is pure through and through is spectacularly hard to do so.

• Most firms have poor visibility into their supply chain. One survey by Resilience360 and Business Continuity Institute in a survey of 350 global manufacturers and retailers found that only 36% knew the geographic location of all their Tier-2 suppliers. Because supply chains often extend many tiers below that, knowing where each and every part, raw material and so on is located is beyond most firms. Even the large automotive firms with their sophisticated supply chain management staff and databases are often in the dark. How can smaller or less sophisticated firms (i.e., the majority of the US economy) manage it?

• There is a large amount of forgery, obfuscation and other fraud with respect to certification by suppliers in many regions of the world

• It’s still fuzzy what “clear and convincing proof” means in practice.

The Big Picture:  The history of regulation suggests that regulations expand in scope over time, not shrink.

• Assuming a product’s entire supply chain does not meet regulations unless proven otherwise could easily expand beyond forced labor. For example, what if any part or material from Russia in a supply chain is banned?

• How deep into the supply chain will a ban be enforced? For example, what if the chemicals used by a Canadian firm to produce fertilizer for Mexican produce comes from a banned region? Will the Mexican produce require documentation before crossing the border? What if the oil to make the fertilizer comes from Iran?

Bottom Line: US Policymakers need sort out the scope, breadth and enforcement or these regulations before expanding them to other areas. Actions that are needed include:

1. Create traceability standards that constitute “clear and convincing evidence.”

2. Define exactly a supply chain starts and stops.

3. Expedite the “census” of US suppliers announced last November to give firms alternatives to prohibited suppliers.

4. Consult with supply chain experts to ensure that importation bans achieve their goals without grinding US industry to a halt.