Government should stay away from supply chains

The writer, a former chief executive of Honeywell, is the author of ‘Winning Now, Winning Later’

Covid-19 clearly demonstrated the fragility of supply chains. It is an issue every company needs to address, but governments should be very careful about becoming involved. Given the options of government overreaction or underreaction, society would be much better served by nothing than too much.

There are areas where government should be involved. It can play an important role envisioning potential pandemics and analysing whether products and services — such as hospitals and healthcare workers — are available to respond quickly. It can have supplies of potentially critical items on hand. It can focus on and fund improvements to the speed of response to any pandemic, whether at home or abroad.

Worthwhile pursuits for government include enabling fast evaluation of potential pandemics; developing a range of measures such as partial shutdowns, shielding of the most vulnerable or the immediate wearing of face masks; ensuring the availability of test kits; and spurring fast vaccine and test development by funding all reasonable possibilities or creating a substantial prize. 

But government should not be tempted to meddle in the detail of supply chains. That is the job of business. As lockdowns froze trade around the globe, many companies were unable to produce goods domestically because a key component came from a single supplier in another country. Some companies had more than one supplier, but both were in the same country. Every company, as it prepares its postmortem report, needs to determine where its vulnerabilities are and remedy them. This would add robustness as protection against disaster whether it stems from a country (natural or pandemic) or a supplier (such as a fire).

For key medical products — as we learnt with face masks and ventilators — companies need a reliable, expandable domestic network. Evaluation of the chain must include the machines required to make the end product. If the next pandemic requires home water-testing kits, and we have the material on hand to scale up quickly but cannot do so because the machines come from a country closed because of the disease, much work will have been wasted.

This legitimate focus on local suppliers can stray into isolationism if government is involved. American arguments that pandemic responsiveness and the threat from China require the reshoring of everything now produced outside the US are misguided. They would result in a decline in productivity if the reshored functions are more inefficient than the overseas suppliers they replace.

The US is the world’s largest economy, with about one-quarter of worldwide gross domestic product — but even so, that means three-quarters of global GDP is outside the country. It benefits US investors and taxpayers when American companies participate in that 75 per cent and they cannot do that if they only produce domestically. Most companies need a local presence that goes beyond a sales force and a warehouse to compete. With global supply chains and local presences in other countries, companies can compete worldwide, earning profits that can be brought home.

Looking beyond Covid, the US government can play a big role in further enabling the American economy to be a successful model that the rest of the world wants to emulate. Debt has ballooned in the crisis and needs to be brought under control, bearing in mind that about 70 per cent of our spending is on autopilot (mandatory entitlement programmes and interest) and tax revenues are running below the historical 17 per cent average of GDP. We must invest in education, develop world-class infrastructure and significantly increase investment in research. These actions would all help business to be successful and raise standards of living.

But government should stay away from supply-chain legislation, which can quickly lead down the path of isolationism — remember that the 1930 Smoot-Hawley tariffs led to retaliation and deepened the Depression. Government has two roles with business: enabling and regulating. Meddling with supply chain details using an expanded definition of national security is more likely to be devastating than productive.

Productivity increases driven by globalisation are raising standards of living worldwide. We always want to smooth the rough edges of capitalism and globalisation, and we must ensure that companies have robust supply chains, but the cure will be worse than the disease if legislators respond to xenophobic impulses. It is a good time for government to remember the Hippocratic oath: first do no harm.

This article has been amended since original publication to clarify the spending and tax revenue figures

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