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Could the United States Handle a Major Supply Chain Disruption?

We Need to Take a Closer Look at Our Manufacturing Base

SOURCE: AP/Koji Sasahara

Workers give the final check on Yaris compact sedans, set for export to North America, on a newly opened assembly line at a Toyota plant in Japan. The shutdown of a General Motors' truck plant in Louisiana on March 21, 2011, shows how fast production problems in Japan are spreading around the globe.

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Japan’s recent disaster focuses our attention on some big questions: How bad could a disaster be on our shores, and how well prepared is our infrastructure? (The answer to the latter question, according to our colleague Donna Cooper, may be “not very.”) But there is another question the United States must ponder: What is our industrial base’s capacity to handle global or domestic supply chain interruptions, and, more fundamentally, would the United States be able to rebuild after a similar disaster?

We know that the goods we buy are made in factories around the world. But the intricacies of what economists call “the global supply chain” are striking. A supply chain is the linkage between manufacturers as they produce a final product. In general, the supply chain is made up of a network of parts suppliers, from the lowliest bolt up to major components, together with the plant that does final assembly.

The company that buys the final product and packages it under its own brand is known as the original equipment manufacturer, or OEM. In automobile manufacturing, for example, a variety of suppliers make the windshields, rubber tires, engine, and other components that ultimately go into the automobile. An assembly plant then puts these together, and an OEM such as the Ford Motor Company or General Motors brands and sells the final product.

These suppliers are increasingly located all over the world, which means that disruptions in countries that supply essential parts have a ripple effect on the overall supply chain and on the ability of the OEM to get products manufactured and sold.

We’ve learned just how dependent our manufacturing base is on parts coming from Japan in the wake of the country’s disaster. For instance, a General Motors plant in Louisiana recently shut down because it needed a specific part from Japan. The plant is set to open again on March 28.

Further, our vulnerability to global supply chain disruptions increases with each manufacturing plant or industry that leaves the United States to locate overseas. Over the past few decades, the U.S. manufacturing sector has declined as a share of employment and gross domestic product, or GDP. (see Figure 1) We still make things here in the United States, but less so every year. Japan is also seeing a decrease in manufacturing’s share of its GDP, but it continues to produce more than we do.

The United States and Japan don't make as much stuff as they used to

Perhaps more important, many of the things we still make depend on the global supply chain. As a result, the United States is particularly vulnerable to global supply chain interruptions. Bloomberg BusinessWeek reports that many manufacturers across the country use a “just-in-time inventory” system. For instance, parts for Boeing’s planes are shipped in from Japan and are not made elsewhere. Companies such as Boeing maintain tighter inventories by not keeping these parts on hand and shipping them in when they need them.

Just-in-time inventory allows companies to save on storage space and reduces surplus parts. But it clearly can cause major problems when the supply chain is interrupted—which happened in the wake of the Japanese earthquake. Over 130 assembly plants have had to close for at least a short time in Japan, which will likely cause further supply chain interruptions as shipments of needed parts are either delayed or cancelled altogether in future weeks.

Despite these concerns, Washington is not debating how to better prepare for global supply chain interruptions. In fact, our federal government cannot even begin to think about this issue at the moment since we do not have a comprehensive, publicly available manufacturing census or survey that tells us exactly which manufacturing firms exist in the United States and where they procure and/or sell their component parts.

In part this is because supply chains are, for many companies, “proprietary information.” This means that companies don’t want anyone else to know where they get their parts from. But keeping this information secret makes it extremely difficult for the nation as a whole to be prepared to deal with the economic implications of disasters such as Japan’s.

The lack of a decent assessment of U.S. manufacturing also has to do with our political allergy to developing any kind of “industrial policy” or overarching plan for economic competitiveness. Most other industrialized countries—including our biggest competitors in the global marketplace—have such a plan.

The Center for American Progress reviewed many of these industrial strategies in a recent paper, “A Focus on Competitiveness,” and determined that the United States is in critical need of a “horizon scan” that identifies the state of affairs for American competitiveness, including opportunities and barriers across different sectors of the economy.

Such a scan would be a great first step in evaluating our vulnerability in the face of global disasters, whether natural or man-made, which might disrupt key supply chains and impinge on our ability to participate in the global marketplace or to rebuild our own infrastructure and institutions in case of disaster on these shores.

A focus on competitiveness leads to a better understanding of our vulnerability to supply chain interruptions because of its emphasis on inherent risks and opportunities within our manufacturing system. A competitiveness horizon scan, among other measures, would identify key supply chains and clarify how they operate. It would enable us to identify supply chain risks, weaknesses, and opportunities by industry.

As noted above, aircraft manufacturers such as Boeing had just enough inventory to cope with the recent disasters, but they are now considering methods to buffer and “second-source” their inventories to increase resilience against future shocks. Long-term economic competitiveness risks are fundamentally interwoven with short-term production disruptions.

We offer three steps below that the United States could take to become more educated and aware of our current supply chains, their potential for disruption, and the impact such disruption would have on the national economy.

Develop a national manufacturing strategy. Congress could support a “Make it in America” agenda, including legislation such as that recently introduced by Rep. Daniel Lipinski (D-IL) and advocated for by Sen. Sherrod Brown (D-OH). Rep. Lipinski’s bill, H.R. 4692, introduced in the 2nd Session of the 111th Congress, would create a President’s Manufacturing Strategy Board inside the Department of Commerce that would work with other agencies to produce a national manufacturing strategy, which would focus both on identifying existing manufacturing strengths and on targeted policies and programs to build on those strengths.

The bill calls for the president to issue a national manufacturing strategy, followed by a review, to evaluate success on the strategy’s goals and implementation. The first of these reports would be due a year after the bill’s enactment, followed by consequent reports the second year of each presidential term in consultation with the President’s Manufacturing Strategy Board.

Similarly, H.R. 516, The Bring Jobs Back to America Act, introduced by Rep Frank R. Wolfe (R-VA), seeks to create a national manufacturing strategy, return manufacturing jobs to the United States, and increase U.S. competitiveness. This would in turn make the American economy less vulnerable to supply chain disruptions on the global level by shoring up our domestic manufacturing capacity.

Commit to a Quadrennial Competitiveness Assessment. The administration could commit to a Quadrennial Competitiveness Assessment as CAP recommended in the competitiveness paper referenced above. This assessment, done on a similar timetable to the Department of Defense’s Quadrennial Defense Review, would be performed by an independent expert panel convened by the National Academies, the independent advisory body to the government and public on scientific and technical policy issues.

The panel would focus on collecting economic data and information on long-term American competitiveness from diverse federal agencies and private-sector actors to identify challenges and opportunities for long-term competitiveness in the United States. This would include both domestic and international levels of production and projected production; the identification of emerging and evolving markets and manufacturing sectors; and other metrics of factors affecting U.S. competitiveness

Better labels that say where products are made. In the shorter term, Congress could recommend that U.S. companies be required to label goods sold in the United States in a way that more accurately indicates where those products were made, and potentially even discloses the origin of major component parts. This would enable consumers to make more educated purchases and add to the information available to policymakers as they consider a national manufacturing strategy and consider the impact of major supply chain interruptions.

Currently, to be labeled “Made in the USA,” the Federal Trade Commission requires that that “all or virtually all” of the product must be manufactured on U.S. soil. Imported goods manufactured or assembled in multiple countries are labeled with “the last country in which a ‘substantial transformation’ took place,” which does not provide consumers or policymakers with much information on the supply chain. Cars made after October 1, 1994, must say where they were assembled, where the engine and transmission are from, and what percentage of it came from the United States or Canada. But again, this requires no information on the supply chain.

Companies that create products for “disaster preparedness” for individuals and families are ramping up their advertising in the wake of Japan’s tragedy. We could all go out tomorrow and purchase emergency kits, bottles of water, and gas masks to prepare us for the worst-case scenario. But will America be able to as easily purchase the major manufactured goods and parts that will allow us to repair and rebuild this country if an emergency occurs?

The bottom line is that we risk being unprepared for any potential natural and man-made disasters to come without a better assessment of U.S. manufacturing and its reliance on global supply chains.

Heather Boushey is Senior Economist and Kate Gordon is the Vice President for Energy Policy at American Progress.

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