Supply Chain Resiliancy

Finance, International Trade: Supply Chain Resiliency: Alleviating Backlogs and Strengthening Long-Term Security, June 15, 2022

Please let me address two issues the Administration witnesses cannot.

The first is the role of the Chinese in the supply chain crisis. SARS-CoV-2 was not the reason for this issue, at least not directly. Rather, according to published reports, the Chinese government was offended by off-hand remarks by the Prime Minister of Australia on the origins of COVID, leading to an embargo on Australian coal. This led to an energy crisis in the industrial coast of China. In essence, China cut off its nose to spite its face. When Indonesia suspended all coal exports, including to China, the crisis deepened.

The Trump-manufactured trade war with China showed how bad petulance can be in trade policy. Such petulance is a key feature of authoritarianism. This always backfires on the authoritarian. The Chinese fit of pique had ramifications for the United States supply chain. Profiteering by port operators was not the sole cause of our current supply chain issues.

The United States and its commercial sector need to diversify, but not in the way capitalists would do so on their own. Africa will be the next major labor market. In the past, capitalist firms would set up factories in developing nations with excess labor forces (usually due to modernization of agriculture or rent seeking by landed elites) and pay the workers as cheaply as possible. It is the messy way to industrialize. It seems to work, but it carries human costs while workers gather the leverage to organize and the power to increase domestic demand by consumption. Both of these factors increase wages.

We need not be messy about assisting the Motherland on its road to industrialization. As capitalism moves toward establishing a foothold in Africa, our trade policy must be ready to insist on the right of African workers to organize, partnered with the American labor movement in helping them to do so. We can partner with American colleges to establish campuses in sub-Saharan Africa so that their best and brightest need not come to us. We can come to them.

Technical assistance on employee-ownership (which is still emergent in the United States), as well as in the creation of property rights for farmers, is essential. Finally, we can assist Africa in creating commodity futures markets of their own so that farmers can obtain working capital by selling futures and decide whether it is in their interest to sell food abroad. The natural progress toward industrialization is not inevitable. It can move past exploitation without stopping there.

This brings us to the second supply chain issue: energy prices.

The world has plenty of available oil. What it does not have is an honest futures market. The Dodd-Frank reforms led to regulation of the New York Mercantile Exchange, especially the oil futures floor. When Mick Mulvaney was made acting director of the Consumer Financial Protection Authority, these regulations were quietly gutted.

The petulance of Trump strikes again. If Obama did it, Trump tried to undo it. That the inevitable oil futures bubble happened to this Administration is simply bad luck. The prior Administration did not have the mental faculties to play such three dimensional chess.

The challenge for the current Administration is to quietly restore these regulations, which I assume it is doing. If this can be managed, energy prices will decline rather than crash - as they did in 2008. When Congress made attempts at regulating oil futures trading, the balloon burst and traders had to cover their positions. The assets available to do this were mortgage backed securities and credit default swaps. We all know where that led.

Action to increase capital gains taxes as part of Build Back Better will also help deflate commodity prices as smart traders cash out of all sorts of assets. As they do so, junk assets will quietly be devalued rather than starting a rush for the exits. When the oil futures prices begin to slide, those holding the bag may be able to cover their currently insane bets. At least we can hope so.

Massive pain may be inevitable, but we must at least try to avoid it. The best shot we have is to Build Back Better. Members of both parties need to put duty to country ahead of loyalty to party and make sure the bill passes (even with Potemkin opposition). Overt obstruction will be remembered in November if it leads to collapse. In November 2008, voters knew who to blame. They will know who to blame if the economic ship is not righted soon and obvious sabotage has occurred.

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