What Can We Learn from a Big Boat Stuck in a Canal?
Financiers thinned out our supply chains. That was a risky bet.
|Matt Stoller||Mar 29||90||41|
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Today I’ll be writing about the big boat stuck in the Suez Canal. This situation is a very simple and dumb disruption to global trade, and it is precisely the simplicity and stupidity at work that lets us peak beneath the glossy sheen of trade happy talk that has fooled us for so long.
The Empire State Building Falls into the Suez Canal
In this newsletter, I do a lot of explaining about complicated problems caused by big dumb corporate institutions. I don’t have to do that this time, because the story of the mess in the Suez is so simple. “After years of bitcoin and reddit short selling and credit default swaps and a million other things I don’t understand,” one random person put in a tweet that went viral, “it’s so refreshing to hear that global commerce is in peril because a big boat got stuck in a canal.”
That’s basically the story right there, it’s a big boat and it got stuck in a canal. The ship blocking the Suez, called the Ever Given, weighs 220,000 tons, and is as long as the Empire State Building is high. Despite the hilarious nature of the problem, the disruption to world trade is large and serious, costing tens of billions of dollars. And if the ship can’t be dislodged soon, some consumers will once again experience shortages of basic staples like toilet paper. (UPDATE: It was dislodged.)
That said, the reason this disruption to global commerce seems so dumb is because it is. It starts with the ship size itself. Over the last few decades, ships have gotten really really big, four times the size of what they were 25 years ago, what the FT calls “too big to sail.’ The argument behind making such massive boats was efficiency, since you can carry more at a lower cost. The downside of such mega-ships should have been obvious. Ships like this, which are in effect floating islands, are really hard to steer in tight spaces like ports and canals, and if they get stuck, they are difficult to unstick. In other words, the super smart wizard financiers who run global trade made ships that don’t fit in the canals they need to fit into.
The rise of mega-ships is paralleled by the consolidation of the shipping industry itself. In 2000, the ten biggest shipping companies had a 12% market share, by 2019 that share had increased to 82%. This understates the consolidation, because there are alliances among these shippers. The stuck ship is being run by the Taiwanese shipping conglomerate Evergreen, which bought Italian shipping firm Italia Marittima in 1998 and London-based Hatsu in 2002, and is itself part of the OCEAN alliance, which has more than a third of global shipping.
Making ships massive, and combining such massive ships into massive shipping monopolies, is a bad way to run global commerce. We’ve already seen significant problems from big shipping lines helping to transmit financial shocks into trade shocks, such as when Korean shipper Hanjin went under and stranded $14 billion of cargo on the ocean while in bankruptcy. It’s also much harder for small producers and retailers to get shipping space, because large shippers want to deal with large clients. And fewer ports can handle these mega-ships, so such ships induce geographical inequality. Increasingly, we’re not moving ships between cities, we’re moving cities to where the small number of giant shipping lines find it efficient to ship.
Dumb big ships owned by monopolies are the result of dumb big ideas, the physical manifestation of what Thomas Friedman was pushing in the 1990s and 2000s with books such as The Lexus and the Olive Tree and The World is Flat, the idea that “taking fat out of the system at every joint” was leading towards a more prosperous, peaceful and competitive world. Friedman’s was a finance-friendly perspective, a belief that making us all interdependent with a very thin margin of error would force global cooperation.
Just make ships bigger, went the thinking, until a big boat got stuck in a canal, taking down global supply chains with it. It seems so dumb. And it is. But it’s also reality, because for whatever reason, a lot of powerful people at one point thought Thomas Friedman was a genius. And frankly, we should have seen this coming, because a lot of people have been noticing supply chain fragility, even if Thomas Friedman didn’t.
I had been paying attention to supply chains and shortages for about a decade, when I noticed that Hollywood was freaking out over a lack of video tapes. People who made TV were frantically working to get tapes they could use to make shows. The NBA scrambled to get enough tape to broadcast the NBA finals, with one executive saying, “It’s like a bank run.”
Who needed video tapes in 2010? And why would there be shortages?
It turns out that this situation was far weirder and more serious that I expected. Specific kinds of specialized video tapes were necessary, not to watch shows, but to film them. And the Fukushima earthquake halfway around the world had knocked offline a Sony factory that was the major source of supply. What I was seeing is what is known an industrial supply chain crash, like a bank run, only with actual inputs and outputs of real world stuff.
This wasn’t the first industrial supply chain crash in the era of globalization created in the 1990s. The first recorded one was in 1999, when an earthquake in Taiwan hit semiconductor production, causing factories all over the U.S. to shut down and firms like Dell and Hewlett-Packard to stop selling computers. Other industrial crashes or near-crashes soon followed, happening for an array of reasons. In 2004, England shut down a single flu vaccine factory, and the U.S. lost half its flu vaccine supply. The Chinese government cut off rare earth mineral exports to Japan, with rare earth minerals being a pivotal input into electronics. Hurricane Maria caused an IV bag shortage, as Puerto Rico shut production.
Then came Covid, which showed just how vulnerable the 1990s thinned out supply chain model of globalization had made us. Nurses and doctors wore garbage bags and got Covid because we didn’t have enough personal protection equipment and our producers couldn’t ramp up production quickly. Sometimes the shortages were comical; we lacked enough nasal swabs because the monopoly producer was a Maine-based family-owned company whose owners were cousins who hated each other so much they refused to speak.
Then there’s the current semiconductor crisis. Taiwan Semiconductor is effectively a global monopoly in contract production for high end chips, and its capacity is outstripped by demand. Meanwhile, other forms of chip manufacturing and petrochemical refining shut down in Texas due to the arctic blast, which is amplifying problems on top of already brittle supply chains. The net effect is that there are now shortages of popular consumer electronics, and auto manufacturers, who depend on microchips, are now shutting production as they lack necessary chip inputs.
Semiconductors and Suez are the most prominent supply chain disruptors, but there are shortages wherever you look. We are still in shortage of hundreds of pharmaceutical products, including salt water in a bag. Bedding makers are having trouble getting access to foam, ammunition makers can’t get enough metal and primers, RVs are in short supply, as are fridges, air conditioners and furniture, and there’s still a basic lack of shipping containers.
And these shortages are often in critical components that can shut down whole industries. For instance, flat steel form ties, a small piece of metal that ties together aluminum panels to make basement walls, are a critical part in short supply in the construction industry. These cost about a dollar, but without them, you can’t build a home with a basement or crawl space. Tom Woods, a 55-year industry veteran building homes in Missouri, called this shortage “catastrophic,” noting that “If you don't pour any basements or walls, then you're not going to build any houses.”
(And those are just the reported shortages. I hear about other shortages all the time. A friend has been waiting months for a steel mounting plate for a winch on his jeep, which is a part that a year ago he could have gotten same day. I’m told big farm equipment manufacturers are having trouble sourcing steel for bailers and tractors.)
Industrial crashes, in other words, are happening in unpredictable ways throughout the economy, shutting down important production systems in semi-random fashion. Such collapses were relatively rare prior to the 1990s. But industrial crashes were built into the nature of our post-1990s production system, which prioritizes efficiency over resiliency. Just as ships like the Ever Given are bigger and more efficient, they are also far riskier. And this tolerance for risk is a pattern reproducing itself far beyond the shipping industry; we’ve off shored production and then consolidated that production in lots of industries, like semiconductors, pharmaceutical precursors, vitamin C, and even book printing.
What is new isn’t the vulnerability of the Suez Canal as a chokepoint, it’s that we’ve intentionally created lots of other artificial chokepoints. And since our production systems have little fat, these systems are tightly coupled, meaning a shortage in one area cascades throughout the global economy, costing us time, money, and lives.
It’s a dumb way to organize a global supply chain system, just as it was dumb to build ships that are too big to fit into canals. And that’s why the "big boat stuck in canal" is such a great illustration of the problem, it shows our policymakers and corporate leaders couldn’t even think through what would happen if Really Big Thing Got Stuck In Important Canal.
The answer to addressing the problem of thinned out supply chains is to recognize that hyper-efficient globalization inherently carries the downside of unpredictable shortages, geopolitical tension, and supply disruptions. And then redesign our global trading order to make it less efficient and more resilient. There are three basic changes we’ll need.
First, we need to restore anti-monopoly rules, such as antitrust, to prevent the consolidation of production and distribution in the first place. Second, we should re-impose friction, like tariffs, in global trading so that we relocalize production. Trade is generally a good thing, but every country or geographic bloc should be able to provide itself with the essentials, in case there are disruptions. Third, we should rapidly restructure the way that firms finance themselves, so that they have less debt. Debt is a cruel taskmaster, and it leads CEOs to cut deeply not just into fat but into muscle and bone.
These principles sound simple, and they are, but using them to design a new system will take time and effort. Fortunately, policymakers and business leaders are moving in that direction. There’s a rethink of antitrust going on globally, with the most forward looking proposals in the U.S., where they can actually be put into practice. Relocalizing production is also happening. The new CEO of Intel, for instance, marked out an exciting path with a refocus on production of semiconductors in the U.S. and Europe. Finally, changing the way our corporations finance themselves is also on the table; the debt-heavy private equity model is, finally, under attack.
It won’t be an easy transition. While the problem is conceptually simple, there are trillions of dollars of sunk infrastructure invested in the current model, and financiers and monopolists very much like what they have now. After all, one person’s bottleneck supply disruptor is another person’s extremely profitable tollbooth. It’s also a scary situation. We haven’t, for instance, ever seen our global supply chain put under the strain of a powerful entity that truly wants to disrupt commerce for geopolitical ends, and what that might look like it frightening. Even without that incentive, having lots of bottlenecks and chokepoints heightens the stakes of territorial influence; Chinese and the U.S. both see Taiwan as a flashpoint for global conflict, in part because of its critical place in semiconductors.
At any rate, all of these problems are manageable, if we take the many hints we have gotten over the years about the the dangerous way we are organizing our global systems, and restructure the way we produce things and trade with one another. Pandemics will happen. So will earthquakes. Boats are sometimes going to get stuck in canals. We should recognize these things happen when re-designing a global trading system.
Thanks for reading. Send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.