Marc Levinson

Category: Uncategorized

  • Of Value Chains and Inflation

    What do central banks have to do with value chains? Traditionally, not much. I think that’s one reason for the resurgence of inflation in many countries during the COVID-19 pandemic. There had been little study of the connection between global value chains and monetary policy, so when disruptions in international trade flows began driving up prices in 2021, central bankers were uncertain about what to do. While politicians are playing a typical blame game—in the United States, Republicans have pinned the inflation surge on the Biden Administration’s spending, while Democrats point to the massive increases in shipping costs and import prices—something of a consensus seems to be emerging among economists that the responsibility for the unusually high inflation rates from 2021 through 2023 lies with central banks. 

    The question of how central banks should respond to value-chain disruptions has become the subject of serious study. One paper published earlier this year finds central banks’ interest-rate increases more effective in taming inflation and less damaging to economic growth in the midst of supply-chain disruptions than under more normal conditions. A different analysis, updated in November 2024, agrees that strained supply chains strengthen the effectiveness of monetary policy in controlling inflation. An International Monetary Fund study of 29 African countries argues that while central banks can’t keep supply-chain disruptions from driving up prices of traded goods, they can limit the impact on non-tradable products by raising interest rates quickly. An interesting paper based on European data finds that the greater a country’s role in international value chains, the more quickly the central bank needs to tighten monetary policy in the event value chains become unsettled.  

    The implication of this research seems to be that the Federal Reserve and other central banks should not sit on the sidelines if value-chain disruptions start driving up inflation. During the pandemic, they should have begun hiking interest rates sooner than they did. At the end of 2020, the members of the Fed’s Open Market Committee, which sets interest rate policy, projected that consumer prices would rise only 1.7% in 2021, so they took no action when value-chain tangles drove up their favored inflation gauge, the personal consumption expenditures price index. That’s why U.S. consumer prices soared, rising about 8% between January 2021 and the Fed’s approval of a very tentative interest-rate increase in March 2022. The bottom line seems to be that there’s nothing about global value chains that makes it intrinsically harder for central banks to control inflation.  

  • Automation on the Docks

    From time to time, I’m lucky enough to be able to visit container terminals: some of the people who run them are familiar with my books, and they are kind enough to give me a peek inside the gate. Each terminal, of course, is unique; the old saw “if you’ve seen one port, you’ve seen one port” is absolutely true. But there’s one lesson that’s pretty consistent among the terminals I’ve visited in various countries over the past few years: automation doesn’t always pay off.

    On October 1, the International Longshoremen’s Association, which represents dock workers on the Atlantic and Gulf Coasts, launched a strike that is at least nominally intended to block automation that could eliminate its members’ jobs. (I say “nominally” because whatever labor negotiators say about a pending dispute should be taken with a grain of salt.) This has become a hot-button topic. U.S. container ports are woefully inefficient compared to their counterparts around the world, as measured in a variety of ways. Automation is often proposed as the fix. And now that everyone seems concerned about supply-chain risk, we hear automation being touted as a way to make supply chains more resilient.

    These are talking points. In reality, “automation” does not have a specific meaning when it comes to container terminals. Technology can replace humans in many different tasks, from allowing trucks through the entry gate to operating the vehicles that move containers between storage locations and piers. Almost every terminal I’ve visited has some automated functions. There’s none at which management can simply lock the gate and let computer-guided equipment run things. As Elon Musk admitted in 2018, after acknowledging that Tesla had installed too much automation in its California factory, “Humans are underrated.”

    In most terminals, automation seems to have led to more efficiency, if efficiency is defined as container moves per worker hour. But in many cases, automation has not cut the time required to discharge and reload a vessel–the sort of efficiency ship lines care most about. More problematic, terminal operators have learned that automation isn’t always a wise investment. New hardware and customized software have to be paid for, as does the army of technology professionals needed to install and maintain them. These are fixed costs, and if the volume of containers is less than anticipated, the return on investment may be negative.

    Introducing automation, in general, is a good idea; I don’t favor preserving jobs that computers can do better than people. But it is legitimate for the ILA to be concerned about protecting its bargaining power and about compensating or retraining workers whose jobs may disappear. If union resistance leads terminal operators to think more carefully about what technology to bring to the waterfront and how workers might benefit from it, that may not be such a bad thing.

  • Nearshoring in Mexico Is Mainly an Aspiration

    There’s been much talk about “nearshoring,” the idea that manufacturers are reducing risk in their supply chains by bringing production closer to their end markets. Mexico is supposedly one of the big winners from this trend, as companies by the score are said to be building factories there to serve the U.S. market. Much of this investment ostensibly comes from Chinese firms that want to make things in Mexico to circumvent U.S. tariffs and trade sanctions on imports from China.

    The data, though, show scant evidence of a Mexican manufacturing boom:

    • Industrial production in Mexico has risen only 7% over the past six years. Moreover, industrial growth has been dominated by petroleum refining, favored by the government and protected against foreign competition. Output in sectors such as paper, chemicals, and basic metals has flatlined, and manufacturing of transport equipment–the target of much foreign investment–has been growing by less than 1% per year. Traditional industries such as furniture and textiles have been shrinking.
    • Fixed investment is up sharply since a slump in 2020, but nonresidential construction and imported vehicles account for almost all the growth. Investment in machinery and equipment–the sorts of investment needed to open new factories–looks strong only because it looked so weak between 2018 and 2021.
    • Foreign direct investment set a record in the first quarter of this year, but almost all of that came from foreign companies reinvesting the profits of their Mexican operations. Very little new direct investment came into the country, and almost none of that money came from China.
    • The number of trucks crossing the border appears to be at a record level.

    What’s going on? One plausible explanation is that much of Mexico’s boom in nonresidential construction involves warehouses. The inventories of U.S. manufacturers and wholesalers are high, by historical standards. It’s often cheaper for them to import goods through the ports of Los Angeles and Long Beach and truck them to warehouses in Mexico than to store their stuff in the United States, so developers are building vast amounts of warehouse space in northern Mexico. The increase in cross-border truck traffic may be due to this merchandise moving back and forth rather than to exports of goods churned out by Mexican factories.

    Nearshoring, at least in Mexico, seems to be more of an aspiration than a reality, at least for now. Claudia Sheinbaum, who is to be sworn in as president on October 1, may need to make some major policy adjustments if she hopes to change that.

  • What Makes a High Performer?

    The World Bank puts immense effort into its Container Port Performance Index. The index, compiled annually with the help of S&P Global Market Intelligence, ranks ports based on how much time a container ship spends, on average, from its arrival at the pilot station to its exit beyond port limits after discharging and loading cargo. This is not a simple undertaking, as the authors need to adjust for differences among ports in average vessel size, the average number of container moves per port call, and other factors. To no one’s surprise, Yangshan Port near Shanghai, the world’s largest container port, ranks first in the index for 2023, released June 4. More bewildering, the largest U.S. port, Los Angeles, ranks 375, some 155 places behind Port au Prince, in Haiti, and more than 300 places behind Beirut.

    The purpose of this exercise, according to the report, “is to pinpoint areas for enhancement.” The authors contend that “development of high quality container port infrastructure operating efficiently has been a prerequisite for successful export-led growth strategies.” Their work seems intended to encourage public officials to invest in automation to boost port efficiency and move higher in the ranking.

    I’m no expert in port management, but I confess to misgivings about this approach. At one major port I visited recently, a highly automated terminal moves fewer containers per crane per hour than a less automated terminal nearby. At another, a manager acknowledged that his terminal had automated too many operations and would have been better off doing less. A third is staggering under the high fixed cost of software to manage equipment that operates far below capacity. A recurrent theme in my conversations with port and terminal managers is that automation of the various tasks in a port needs to be pursued selectively. New equipment and software do not always lower costs or speed up supply chains.

    The danger of the Container Port Performance Index is that public officials, eager to raise their port’s ranking, will encourage investments that don’t make financial sense. The authors acknowledge that their index is not the only way to evaluate port performance. One metric they might incorporate is return on investment. The ports that deserve high rankings are not those that have spent the most to become more efficient, but those that have spent wisely.

  • The Population Bust

    The notion that demographic change will slow the flow of trade in manufactured goods met some resistance when I suggested it a few years ago in Outside the Box. Some countries, notably South Korea, China, and Mexico, are heavily dependent on manufacturing, and the idea that making stuff and exporting it will lose importance doesn’t go down easily. In the United States, the political imperative of adding factory jobs is somewhat at odds with the reality of weak demand for many of the things factories produce, not least motor vehicles.

    In many countries, consumer spending on services is outpacing spending on goods by a considerable margin, due in good part to the declining the number of new families and the increasing number of older people, whose consumption tends more to services than to goods. “The EU’s population is shrinking faster than expected,” according to a report in the Financial Times. The same is true in China, Japan, and Korea. In all these countries, and some others, population stagnation or shrinkage is discouraging home building, which in turn is holding down demand for imported refrigerators, carpets, and the other sorts of things people put in their new homes.

    I don’t mean to suggest that stuff is going extinct, but these factors imply that goods trade will not be robust in many parts of the world. They also point to a shift in trade patterns that is already underway, with Africa and South Asia, where the number of new households is still growing, playing more prominent roles. These trends are likely to have major impacts on ocean shipping and on ports in Europe, North America, and East Asia that are under continuing pressure to expand. It’s curious that we don’t hear much about this.

  • Piling On

    If there’s one thing the political types in Washington can agree on today, it’s this: let’s go after China. Just about everything is seen as part of a nefarious Chinese master plan to take over the world.

    In February, the Biden Administration announced a plan to subsidize the manufacturing of ship-to-shore container cranes in the United States after concluding that Chinese-made cranes represent a security risk. “These cranes may, depending on their individual configurations, be controlled, serviced, and programmed from remote locations,” the U.S. Maritime Administration insists, without much proof. Over time, the Chinese-made cranes are to be replaced by cranes manufactured in the United States by Mitsui, a Japanese company, because the Japanese are now our trusted friends…

    …except when it comes to making the steel that goes into the cranes. In March, President Biden made clear his opposition to Nippon Steel’s plans to purchase United States Steel Corporation because the United Steelworkers Union is against it. Since then, senators of both parties have attacked the transaction on the basis of a report by an outfit called Horizon Advisory, which claims that “Nippon’s exposure to and operations in the Chinese market…introduces a potential national security risk.” It’s not clear who paid Horizon to write this report, but if a Japanese company’s involvement in China is reason to block its investment in the United States, do we really want Mitsui, which has extensive ties to China, to be making our container cranes?

    This month, we’ve heard from both Republican and Democratic members of Congress who want to prohibit index funds from investing in China and to tax investments in China in a punitive way. One of them, Rep. Victoria Spartz, thinks that “Congress has a duty to the American people to protect their hard-earned money from foreign adversaries like China” and therefore needs to tell Americans which stocks they can and cannot own. Instead of index funds that hold Chinese stocks, apparently, we should own stocks like U.S. Steel, which, according to the consulting firm Macrotrends, trades at a lower price now, adjusted for splits and dividends, than it did in 2006.

    Let’s be clear: China poses some serious national security challenges to the United States. They need to be addressed in a careful and sober way. Treating everything as a Chinese threat may generate headlines, but it does nothing to make the United States more secure. It’s just piling on.

  • More than Cheap Labor

    It’s been no secret that Chinese companies have been building factories in Mexico to protect their access to the United States market in the face of high U.S. tariffs on many Chinese exports. The Financial Times has now put numbers on this: using figures from Xeneta, a data analytics company, and Container Trades Statistics, a data supplier, the FT estimates that the number of containers from China imported into Mexico rose 28 percent in the first three quarters of 2023, compared with the same period of 2022.

    This needs to be kept in perspective: Mexico’s containerized imports from China over those nine months, the equivalent of 881,000 twenty-foot containers, are about what the United States imports directly from China in a single month. Nonetheless, it’s obvious that many Chinese companies see Mexico as a ticket to the United States. Many Mexican exports enter the United States duty-free under the U.S.-Mexico-Canada Agreement. The remainder typically face very low tariffs. While the punitive duties the United States has imposed on many Chinese products since 2018 generally apply to Chinese-made goods shipped to the United States through Mexico, they may not apply to goods that are in some way transformed in Mexico, such as Chinese-made components used to make other products in Mexican factories. Several Chinese vehicle manufacturers are reportedly scouting sites for Mexican assembly plants from which they could export to the United States with low or zero tariffs, causing considerable distress in Washington.

    Predictably, a blowback is underway, with talk about rewriting the rules of origin that determine what is a Mexican product for purposes of U.S. Customs. If done right, this could actually benefit Mexico.

    At present, there is little Mexican value added other than factory labor in most of the manufactured goods that come across the border into the United States. Nearly half the value in Mexican exports originates in other countries. If Chinese-owned factories in Mexico must incorporate more North American value added in order to receive U.S. trade preferences, they will likely need to undertake more sophisticated activities in Mexico, such as making more of their own inputs there and engaging more Mexican engineers, designers, and programmers. That could help the Mexican economy become more than a cheap labor play, which the 30-year-old free-trade arrangement among Mexico, Canada, and the United States has distinctly failed to do.

  • Misguided Missiles

    I’ve received several inquiries from journalists asking my thoughts about how the attacks on commercial ships off the coast of Yemen are likely to affect trade and shipping. There’s no question that the unfriendly fire of the Houthis and their Iranian sponsors since November 19, when black-clad fighters carrying automatic weapons dropped from a helicopter onto the deck of a car-carrying vessel in the Red Sea, is outrageous. But for the world economy, the disruption of shipping as carriers avoid the Red Sea and the Suez Canal is an inconvenience, not a catastrophe.

    Some people seem to associate the current goings-on with the supply-chain chaos during the COVID-19 pandemic. Then, port closures, crew shortages, and delays moving cargo into and out of container terminals led to hundreds of sailings being cancelled at a time when demand for manufactured goods was unexpectedly strong. At one point, more than 500 container ships were queuing outside harbors on three continents to load or discharge. Freight rates reached the stratosphere. Manufacturers and retailers had no idea where their goods were or when they might be delivered.

    Conditions today are quite different. Before November 19, the cost of shipping a 40-foot box had tumbled to the lowest level in four years and a record level of shipbuilding portended excess capacity well into the future. The Houthis’ attacks have led many carriers to sail around Africa, lengthening the trip between Shanghai and Rotterdam by eight days to three weeks, depending on how fast the carrier wants to steam. The longer voyage times have sopped up excess capacity, restoring the pricing power container carriers lost with the end of the pandemic. They must pay more for fuel, wages, and mortgage or lease payments on each trip, but save by avoiding Suez Canal tolls. Higher ocean freight costs will likely be reflected modestly in consumer prices, but they are not likely to turbocharge inflation.

    Although ocean transport is taking longer than it did before the Houthis took aim at merchant shipping, the impact of those delays is related mainly to private companies’ decisions about how to structure their supply chains. That’s why I find it troubling that the United States and several other countries claim to be attacking Houthi fighters and weapons systems “to defend lives and the free flow of commerce.” When we read that shipping delays have led to retailers lacking goods to sell and an auto assembly line closing for want of parts, we should remember that companies, not governments, determine where to obtain inputs and how much inventory to hold in the warehouse. Some companies work harder than others to make their supply chains resilient. Protecting those that have chosen to accept greater risk of supply-chain disruption is not a good reason to shoot missiles at Yemen.

  • China’s Intangible Future

    China, as everyone knows, is a manufacturing powerhouse: it accounted for nearly one third of manufacturing globally in 2022, according to United Nations data. Factories were responsible for 28 percent of China’s economic output (compared to around 10 percent for the United States). So it’s understandable that on a recent visit to talk about my book Outside the Box, my hosts were particularly eager to discuss my assertion that in the future, globalization will have more to do with spreading ideas than with moving stuff.

    How does one support such a claim? Normally, one would bring data to bear, perhaps creating a simple chart showing a rising line. In this case, though, the data aren’t worth much. Even people who specialize in tracking international trade at places like the World Trade Organization and the United Nations Conference on Trade and Development admit that they don’t have a handle on the exchange of intangibles across borders. If an American tourist buys a ticket on Lufthansa or rents a hotel room in Tokyo, statisticians can tally a U.S. import of services because a monetary transaction occurs. But if engineers in France and Korea collaborate on the design of a video game, their sharing of code may not register as trade. Some of the value of digits moving internationally shows up in economic statistics as a return on investment, but much of it doesn’t show up at all.

    While we don’t know the quantity of intangibles flowing across borders, there are some relevant things we do know. One is that services, from research and development to after-sales maintenance and repair, account for a growing proportion of the value of manufactured goods. Another is that consumers in the world’s wealthy countries, and even in some middle-income countries, are devoting increasing shares of their spending to services and diminishing shares to goods.

    My hosts in China, I suspect, are concerned that if goods trade grows slowly, China’s vast factories and gigantic container ports won’t be fully utilized. They may be right. That’s a good reason for Chinese firms and their workers to focus more on creating intangible value, such as by inventing products and selling services, and focus less on stamping or weaving or assembling goods. But the government’s crackdown on data flows shows that it may not be ready for Chinese firms to export intangibles as vigorously as they export stuff.

  • The Supply-Chain Bureaucracy

    Back before the covid-19 pandemic — it seems decades ago, not a mere four years — nobody in Washington gave much thought to supply chains. Queues of container ships outside ports, rate increases of 500 percent or more for ocean shipping, long delays in shipments of imports and exports, and factory closures due to lack of critical components changed all that. President Biden appointed a supply-chain “czar” to straighten it all out, and claimed victory when port congestion cleared and freight rates returned to normal (although the end of the pandemic had far more to do with that than federal action). Transportation Secretary Pete Buttigieg even asserted this week that “part of what’s led to disinflation is the attention we paid to shipping costs,” although there’s not much evidence that Biden’s criticism of “foreign-owned shipping companies” is responsible for bringing inflation down.

    Now, the Biden Administration has named a White House Council on Supply Chain Resilience, whose 27 or more members — the membership list includes unspecified “other senior officials” in addition to a bunch of cabinet secretaries — are supposed to advance a “long-term government-wide strategy to build enduring supply chain resilience.” What does this mean? According to the press release, the plan includes funding to “strengthen our domestic food supply chains and create more opportunity for farmers and entrepreneurs in 37 states and Puerto Rico”; “to develop a nationwide plan for smart manufacturing”; “investment in clean energy supply chains” in communities affected by closures of coal power plants; and so on.

    It’s all interesting stuff. But you wouldn’t know from the Administration’s announcement that most supply chains are organized by private companies to meet their business needs. Many of those companies are currently trying to figure out how to make their supply chains more resilient in the face of disruption without raising costs so much that they sacrifice market share. This is a problem they must resolve in cooperation with their suppliers, freight forwarders, transportation carriers, and customers. They don’t particularly need the help of an expanding federal supply-chain bureaucracy.

    It’s not that the federal government has no useful role here. The Administration has done a lot to provide better data about the flow of freight into and within the United States. The Bureau of Transportation Statistics’ supply chain and freight indicators, first published during the pandemic, are particularly valuable. And defense supply chains are a legitimate federal concern. But the United States would be better served by pursuing international arrangements to smooth trade through supply chains, such as the 14-country Indo-Pacific Economic Framework it negotiated in 2022 but has since turned its back on, than by an all-of-government effort to manage the flow of goods in a $25 trillion economy.