Coronavirus and the tunnel vision of macroeconomics

According to the U.S. Census Bureau’s Economic Indicator Division, U.S. International Trade grew from $563 billion in 1980 to $5,619 billion in 2019. Many economists—dare I say most economists—view this explosion in international trade favorably. People in once proud manufacturing towns may not see it the same way.

While there is merit in the economists’ perspective, a supply chain professional could argue that economists have tunnel vision—their perspective does not acknowledge the full costs and risks that come with expanding global trade. Those of us in the supply chain are more likely to understand these risks. But for years, any supply chain professional who attempted to have a conversation about risks got a one-way ticket to visit the IT department, as many believed that better visibility or increased cybersecurity would provide a cure.

And then the coronavirus hit, and, suddenly, everyone is talking about supply chain risk.

Not without cost

It’s true that international trade creates jobs and boosts economic growth. Exports also expose domestic companies to a broader set of requirements and learning experiences. Research shows that exporters are more efficient and resilient than companies that focus on domestic markets.

So, according to an economist, global trade is good.

The past century taught us that the best way to boost exports is to remove friction from international trade. Governments have done this by reducing tariffs and other blocks to imports. Consider China. In 1989, according to the Census Bureau, the total trade in goods between the United States and China was over $17.5 billion. Thirty years later, the total trade in goods has grown to $558 billion, a development that economists were happy to see. 

But this expansion in global trade also paved the path for the rapid dispersion of the coronavirus.

Additionally, those measures to remove friction from international trade reduced jobs in domestic industries that couldn’t compete outside of their domestic market. This led to job outsourcing, which is when companies relocate call centers, technology offices, and manufacturing to countries with a lower cost basis.

Consider Apple. Apple saw the shift predicted by the economists and moved decisively. Once a world-class operator with manufacturing based in California’s Silicon Valley, Apple began manufacturing iPhones in China in 2007. Today, substantially all manufacturing for all Apple products is done by Foxconn in China. Foxconn is the largest private company in China—not the United States—with over 1 million employees. 

Apple may have some of the smartest technologists in the world, but it seems that they did not understand the concept of supply chain risk and risk management. According to the Financial Times on February 6, amid the uncertainty caused by the outbreak of the coronavirus, Foxconn was “recalling its factory workers in phases to its assembly lines as China struggle[d] to revive the world’s second-largest economy from the paralysis wrought by the spread of the coronavirus. But for Foxconn, China’s largest private sector employer with more than 1 million employees, a return to full production ‘will take weeks,’ said one person at the company with knowledge of the matter.”

Another benefit of global trade, according to economists, is that it creates more efficient capital allocation, an overall benefit to an economy. But it’s important to note that when digging deeply into statistics and analysis in academic economic literature, the qualifier “ceteris paribus” often appears. According to the Merriam-Webster Dictionary, ceteris paribus means “if all other relevant things, factors, or elements remain unaltered.” 

No matter how you define relevant, in the supply chain all relevant things never remain unchanged. We live in a dynamic world, and there are always surprises in the supply chain. Long supply chains—global supply chains—inherently introduce risk.

These risks come in many different strains. Some are physical. Some are business-related. Some relate to technology. And some, like the coronavirus, are invisible. Invisible, but devastating. And removing barriers in the supply chain—opening up international trade—is one of the catalysts that has helped to spread the virus around the world.

Today, U.S. firms face a growing list of uncertainties in the supply chain. While the tariff war between the U.S. and China seemed to have cooled down for a while, it could flare up again. Then there are the increasing concerns around cybersecurity and intellectual property theft. In February, the U.S. Department of Justice charged China’s People’s Liberation Army with computer fraud, wire fraud, and espionage for hacking into Equifax. Also, in February, the Department of Justice indicted Huawei for stealing trade secrets and racketeering. Then there is the unresolved issue of Brexit. Now layer the coronavirus on top of all that. 

Spread your bets

The complexities of global supply chains cannot be captured in a single set of statistics like the total international trade import and export volumes that economists look at. There are always other factors. To address the oversimplification and collateral damage implicit in the economist’s view, we need to step outside the macroeconomic framework. 

The macroeconomic view of international trade leaves out risk management, a key factor in a supply chain decision process. Supply chain decisions never benefit from perfect information; they are inherently made in an environment of uncertainty and risk. 

How do you respond? By spreading your bets. According to The Business Dictionary, investment risks can be reduced or eliminated “by combining several diverse investments in a portfolio. Nonmarket (nonsystemic) risks are diversifiable risks.” In supply chain terms, you need to spread your sources and your target markets around rather than going all in with one supplier, like Foxconn, or one country, like China.

This is not an economist’s view. This is not a theorist’s view. This is a practitioner’s view. This is a supply chain view. This is how a true supply chain professional manages risk.

Patrick Thompson explores supply chain risks in his Q3 2019 article, “Trade wars and tariffs: understanding the risks in your supply chain.” His advice, summarized in the following simple checklist, applies to the current circumstances as well. To manage risk, ask yourself the following questions:

• Do you have a contingency plan to shift to sources away from troubled suppliers or regions? Contingency plans matter, especially for internationally sourced items or international markets.
• Do you have a risk-adjusted process to manage threats across your supply chain portfolio that addresses events like the coronavirus? Oversight matters.
• Do you have any way of assessing the impact of risk propagating through the lower levels of your supplier network? Tier 2 matters.
• Do you have any way of assessing the impact of risk propagating through your markets? Think about the customer’s customer, too.
• Have you identified and developed alternative sources of supply, especially for your internationally sourced components? Ordering from a location in the United States doesn’t necessarily mean your product is coming from the United States.

Those are the sorts of inputs supply chain professionals should have at their disposal when assessing risk across their portfolio. There are more. Build your own list. 

The coronavirus is a wakeup call to every supply chain professional. Take off the blinders. Avoid tunnel vision. Peel back the layers. Take control. Get to work.