Global supply chains — the networks between a company and its suppliers that produce and distribute goods to the final consumers — are hugely beneficial, creating value and contributing to lower consumer and production costs and increasing economic efficiencies. Supply chains are the arteries of the highly connected and interdependent global trade system, 80 percent of which is driven by multinational corporations.
Notably, supply chains facilitate the trade of intermediate goods – or parts and components of final goods – which is twice as large as the trade value of final goods. Trade in intermediate goods is a key feature of advanced manufacturing products like semiconductors and automobiles. The benefits of a global supply chain are huge – the semiconductor supply chain, for example, saves about $1 trillion in upfront investment, creates $45 billion to $125 billion in annual cost efficiencies, and reduces prices by 35 to 65 percent, when compared to a fully self-sufficient localized supply chain.
The benefits and efficiencies of supply chain networks, however, are intertwined with their risks. In efforts to reduce operating costs and increase investment returns, traditional supply chains prioritize low inventories and lean, just-in-time manufacturing principles. But these practices left producers highly vulnerable to the unprecedented economic disruptions caused by COVID-19. Suddenly, critical products like personal protective equipment, pharmaceuticals and food were in short supply, as were the consumer products and high-tech gear we use every day.
In response, U.S. businesses and the federal government are considering ways to enhance the nation’s supply chain resilience. Business executives are exploring overhauls to their supply chain operations, such as moving production onshore or closer to home and investing in digital technologies to improve supply chain transparency and visibility of the supplier ecosystem. And the federal government is encouraging greater domestic manufacturing capacity, especially for industries deemed critical to national security and national competitiveness, such as semiconductor manufacturing and rare earths processing.
But balancing efficiency with resilience is easier said than done. Altering supply chains is often cost-prohibitive, especially for industries with heavy capital expenditures like semiconductors. Proposed federal government investments and subsidies, however, may change business incentives and boost domestic manufacturing production. If more production does shift to the U.S., Texas could take advantage of these new opportunities.
In summer 2021, Texas and the global economy remained beset by a wide variety of product and commodity shortages, stemming from the economic fallout of COVID-19. The pandemic, however, only exposed and exacerbated existing vulnerabilities and risks to the supply chain network.
Some industries are more exposed than others to disruptions that cause production delays and shortages. At particular risk are industries that have large global footprints and rely heavily on trade, such as communication equipment, computers and electronics, and semiconductors and components. Moreover, production of important components may be overly concentrated in one region or one country, leaving U.S. businesses vulnerable to particular dangers in that region, like trade and geopolitical disputes and natural disasters.
And cyberattacks are an increasing risk to supply chain management, especially for businesses with high levels of digitization and digital data flows. Just within the past year, for instance, a number of suppliers in critical industries – including information technology providers, meat suppliers and fuel pipelines – have fallen victim to costly ransomware attacks that temporarily halted their operations.
Shortages like these continue to hamper the global economy:
The pandemic curtailed semiconductor supply as demand for chips rose faster than expected, driven by a spike in demand for electronics and other high-tech consumer equipment – all of which require chips – to accommodate remote work and school environments. In May 2021, wait times for chip orders was 18 weeks, affecting nearly 170 industries. Chip production is lengthy and highly complex – taking up to six months for more advanced units – so shortages are expected to last well into 2022. Moreover, the U.S. accounts for only 12 percent of global chip manufacturing, which limits its capacity to ease the shortage.
The automobile industry is particularly burdened by the semiconductor shortage. In April 2021, chip shortages caused General Motors and Ford to pause production at several of their North American plants, affecting 10,000 GM workers. Global automotive manufacturers are expected to produce 1.5 million to 5 million fewer cars than planned in 2021.
The slowdown in auto production reverberated through the used and rental car markets. Used car prices soared by about 9.3 percent in April, the largest monthly increase in 69 years of tracking. Prices also are up for rental cars, which are in short supply after rental car companies sold parts of their fleets at the onset of the pandemic.
Gas and oil prices saw large increases in early 2021 following last year’s high-profile supply- and demand-side disruptions. The Texas deep freeze in February caused gas prices to surge and idled one-fifth of the nation’s oil-refining capacity. In May, the largest pipeline in the U.S. suffered a ransomware attack, causing a spike in prices.
A main driver of the current shortages is simply a mismatch between demand and supply. When economies reopened, consumers were eager to spend, as suppliers were still reeling from the pandemic’s effects. Demand and supply eventually will equalize, however, and most shortages and delays will subside. Still, there is clear momentum from companies and governments to mitigate risks evident during the pandemic:
Limiting the costs of supply chain disruptions is highly important to the Texas economy. In 2019, more than 1.1 million Texas jobs were supported by exports, by far the most among states. Texas was the nation’s leading exporter in 2020, shipping $276.4 billion worth of goods, or 19 percent of the U.S. total.
Texas’ exports fell steeply during the pandemic but have since recovered to pre-COVID-19 levels. Overall, Texas exports declined by about 16 percent from the previous year. The first six months of 2021, however, show a nearly 7 percent rise compared to the same period in 2019.
Energy-related industries – oil and gas, petroleum products and chemicals – accounted for half of Texas’ exports. Oil and gas exports were up by 35 percent in the first half of 2021 compared to the same period in 2019. Exports in transportation equipment, however, remain depressed. (Exhibit 1).
|Commodity||Value, 2020 (millions)||Share of Texas |
|Percent Change, |
Jan.-June 2019 to
|Oil and Gas||$62,861||23%||-15.6%||35.2%|
|Computer and Electronic Products||$44,837||16%||-9.2%||-0.3%|
|Petroleum and Coal Products||$34,845||13%||-29.3%||-2.6%|
|Electrical Equipment, Appliances and Components||$9,630||3%||-19.3%||-11.2%|
|Fabricated Metal Products||$7,179||3%||-13.9%||-9.8%|
|Miscellaneous Manufactured Commodities||$5,505||2%||-3.0%||6.3%|
Sources: U.S. Census Bureau, USA Trade Online; Texas Comptroller of Public Accounts analysis
Mexico is Texas’ leading export destination, accounting for about one-third of its exports. China’s consumption of Texas products is rapidly rising, increasing by 60 percent in 2020; Texas exports to China continue apace in 2021 (Exhibit 2).
|Destination||Value, 2020 (millions)||Share of Texas Exports, 2020||Percent Change, 2019-2020||Percent Change,
Jan.-June 2019 to Jan.-June 2021
Sources: U.S. Census Bureau, USA Trade Online; Texas Comptroller of Public Accounts
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