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The broken supply chain: Many factors, no easy fix

The six-day blockage of the Suez Canal just added to the significant backlog in global trade

These two things may seem to be unrelated, but they’re not.

That’s because the Ever Given’s error is one of the contributing factors in a series of unfortunate events that will likely end in fewer products and higher prices in Irish shops this Christmas.

Casualty of (trade) war

“We have a very complex range of factors that all came together into this perfect storm, which has absolutely caused havoc with global supply chains,” said Amanda Ratcliffe, lecturer in retail marketing at Technological University Dublin.

The supply chain issues may only have come to a head in recent months, but the origin of them goes back many years.

One corner stone was the ramping up in US-China trade tensions by then president Donald Trump, which have largely been continued by his successor Joe Biden.

While the tit-for-tat trading of tariffs was an attempt by the two giants to gain an economic advantage, a side-effect of it was a destabilisation of the global supply chain network.

Tariffs saw demand for some products dip, or shift to other countries. Prices of some other goods spiked, and new pressure points appeared in the supply chain as it tried to readjust.

Pandemic paralysis

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There’s never going to be a good time for a pandemic, but the supply chain’s vulnerable state meant it suffered particularly badly when Covid-19 hit.

For a time, the pandemic meant that global trade simply came to a halt.

Lockdowns in Asia saw factories and ports close – cutting off a massive flow of products to the rest of the world.

The sudden onset of the pandemic also caught shipping firms on the hop. That meant their ships were stuck in ports around the world – with containers full of goods forced to wait for some version of normality to return before they could move on to their destination.

“Global supply chains depend on a very complex network of linkages, they depend on everything happening at the right time,” said Ms Ratcliffe. “When the pandemic hit, everything came to a shuddering halt.”

The lockdowns that followed in Europe and North America led to a plummeting in demand for certain products. Meanwhile other items, from toilet roll to home office equipment, became highly sought-after.

All of this led to an across-the-board mis-match in supply and demand.

Chain reaction

As the dust began to settle on the pandemic’s initial impact, factories and ports did begin to reopen. However it was not a case of business as usual.

Multiple factors – including ongoing social distancing requirements and Covid infections – means that factories aren’t going to return to pre-pandemic output levels for some time.

Meanwhile rolling shut-downs continue to hit vital trade facilities, as China in particular has taken a hard line in its efforts to keep a lid on the virus.

“In August, the third biggest port in the world was closed down because of one, single case of Covid,” said Ms Ratcliffe. “That has huge implications, because it’s creating more blocks in the system.”

That’s made it harder to work through massive backlog of containers that built up in the early shutdowns of the pandemic. It has also had the effect of taking many shipping containers out of action for an extended period of time – meaning companies are finding it harder, and more expensive, to make new shipments.

And it’s against that backdrop that the Suez Canal incident occurred – with the six day blockage leaving more than 400 ships stuck waiting, and many more delayed or rerouted because of the issue.

It meant that, when the global economy suddenly kicked back into life – with far more intensity than was anticipated – the supply chain was in no position to respond.

Closer to home

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While most of these problems originate on the other side of the world, some of the trade disruption being felt here is far more local.

Brexit has, unsurprisingly, led to a rebalancing of Ireland’s supply chains in the past year as Britain’s move out of the EU single market has created new trade barriers between the two countries.

Unlike the pandemic, firms did have plenty of notice that this change was coming.

However the last-minute nature of the Brexit deal meant many – in Ireland and in Britain – were still trying to reconfigure their operations well into 2021.

The fact that they were doing that while also trying to navigate the difficulties of the global supply crunch only complicated matters further.

The end of the line

All of this is already having an impact on consumers.

The taxes and fees that now apply to British products has made them far less attractive to Irish consumers – effectively cutting off a number of outlets.

Meanwhile some British retailers have cut back their offering here in order to manage the new complexity arising from Britain’s EU exit.

The global shipping backlog – and the resulting shortage of containers – has made it far more expensive for companies to get foreign goods into the country. And even those trying to get Irish goods out are feeling the pinch.

“The main problem is on the cost of shipping – the cost of containers has gone up just because of the shortage of them,” said Simon McKeever, CEO of the Irish Exporters Association. “It’s more of a cost rather than an ability to ship [products] at the moment.

He said Irish firms are also facing problems getting products – including raw materials – into the country, largely due to Brexit, but this is not an acute issue at the moment.

“I have nobody at this stage saying that this is stopping them from making things and shipping them off the island,” he said. “One of the way that has been alleviated has been by sourcing more items away from the UK and directly from Europe – so there is import substitution going on.”

Higher costs inevitably get passed down to consumers – who’s bills are already heading north due to rising energy prices.

However there is also the prospect of products simply not being available in the coming weeks – and particularly in the lead up to Christmas.

Mr McKeever points out that limited shipping capacity and higher costs will likely see certain types of goods being prioritised over others.

That could see lower-margin products face extended delays, as companies will be more inclined to pay the premium to move a box with higher-valued contents.

This prospect has prompted retailers like Smyths Toys, Penneys, Halfords and Ikea to issue warnings to consumers – advising people to do their important festive shopping earlier than they might otherwise tend to.

“We’re not looking at anything like the issues that are being clearly indicated in the UK,” Mr McKeever said. “It’s not going to be anything like that – but in advance of Christmas I’d be encouraging people to maybe shop a bit earlier than they normally would.”

Break the chain

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Predictions vary on how long the global supply chain squeeze will persist.

On Thursday, it was announced that the Port of Los Angeles was going to operate 24/7 in order to clear its backlog – which would not only alleviate pressure in the US, but also send a positive ripple through the global system.

This kind of push has led some to predict a resolution in a matter of months.

However the ongoing impact of Covid-19 – and the dramatic effect it continues to have on major cogs in the global trade machine – has prompted others to give a far more pessimistic forecast.

“One of the leading container companies in the world – DP World – they have said that they believe the problems will last for another two years, and it’s because of this ongoing ripple effect from the pandemic,” said Ms Ratcliffe.

Ultimately many argue that the only long-term solution is to shorten supply chains again by pushing manufacturing back to where demand is.

The pandemic – and the current supply chain chaos – has made many in Europe and North America uncomfortably aware of just how reliant they are on cheap Asian output.

It was something French president Emmanuel Macron lamented in April 2020, saying; “we must rebuild our national and European sovereignty” by bringing more industry back to the region.

But rebuilding manufacturing here – and essentially reversing the decades long trend towards globalisation – would be no easy task. It would come at a cost, and it would take a considerable amount of time.

For now, many businesses and consumers will be happy to get through the rest of 2021 unscathed.

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