What’s inflation? The answer, of course, is “too much money chasing too few goods.” That, with a modification, explains what has happened to global freight rates in the last few months — too much demand, too few containers, Ciatti Global Wine Brokers notes. Plus: Shipping is concentrated in a few companies, reducing price competition.
The same thing is true for energy, Ciatti says. Energy supply, too, is concentrated in few hands. Russia is the principal supplier of natural gas to Germany, and we have all learned in recent weeks. But remember how Saudi Arabia was able to create gas lines in the U.S. in the 1970s by shutting off its shipments of oil to the U.S.
Ciotti notes “a growth in supply chain parochialism,” and the International Monetary Fund says “policy proposals to reduce dependence on foreign suppliers . . . are likely misguided. Supply chain resilience to shocks is better built by increasing diversification (rather than) domestic sourcing of inputs.”
Some companies are taking steps to reduce their dependence on one foreign supplier. Apple Inc., for instance, has been moving some iPhone production to India from China. The IMF’s logic in warning against “re-shoring” is that domestic suppliers might disappear in a crisis. So it’s a good idea to have multiple supply options.
Where the IMF’s logic breaks down is in the area of shipping. It does little good to be sourcing glass bottles, for instance, from India rather than China if the neither the Indian supplier nor the Chinese supplier can get the containers needed in which to ship the bottles. A U.S. company with several different U.S. suppliers avoids the container shortage.
Only slightly less desirable, in our opinion, is for a U.S. company to source components from Canada or Mexico. Normally, that should solve almost all problems. Unfortunately, Texas Gov. Greg Abbott has introduced “enhanced safety inspections” that have caused massive problems for trucks bringing goods from Mexico into the U.S. According to White House Press Secretary Jen Psaki, trucks are experiencing delays exceeding five hours at some border crossings. Commercial traffic is estimated to have fallen by as much as 60% since the increased inspections began April 6.
