Why Supply Chains Matter
The supply chain is the most underappreciated piece of statecraft of the last decade. Here is what it is, how it broke, and what comes next.
If you had to pick the single most important geopolitical fact of the last five years, you could do worse than this: the supply chain is a piece of statecraft. That is a strange thing to say, because until 2020 most people — including most economists — thought of supply chains as a back-office logistics concern, not a question of national power.
This essay is an attempt to recover why that view is wrong, and what it means.
What a supply chain actually is#
A supply chain is the sequence of processes that turns a raw material into a finished product, and then moves that product to a buyer. Most people think of it as the second half — the logistics. The interesting part is the first half. The interesting part is the sequence of transformations: bauxite to alumina to aluminium to rolled sheet to stamped body panel to painted body panel to finished car.
Each transformation is an industrial process. Each process has a fixed cost, a variable cost, a learning curve, and a political risk profile. The shape of a global supply chain is the equilibrium of all of these forces, computed over twenty years.
The supply chain is the residue of a thousand political decisions: tariffs, subsidies, currency policy, immigration policy, education policy, and war.
It is, in other words, an artefact. It can be redesigned, but only at a cost. The cost is measured in years and capital expenditure, not in dollars.
How it broke#
Three things happened, roughly in sequence.
First, in 2018–2019, the United States imposed tariffs on Chinese imports, and the Chinese retaliated. Most economists predicted that the cost would be small. It was not. The cost was large, and it fell on US consumers, not Chinese producers. This was the first hint that the supply chain was more brittle than people thought.
Second, in 2020, COVID-19 hit. Factories in Wuhan, then in northern Italy, then in Mexico, shut down. Container ships sat idle in ports. The system had been optimised for cost, not for resilience, and the cost of that optimisation became visible.
Third, in 2022, Russia invaded Ukraine. The grain supply chain from the Black Sea was disrupted. The neon supply chain from Ukraine (used in chip lithography) was disrupted. The energy supply chain from Russia to Europe was disrupted. The fertiliser supply chain from Belarus was disrupted. All four disruptions fed into the same inflationary cycle.
The aggregate effect was a global rediscovery of a fact that had been forgotten since 1973: economic security is a subset of national security.
What came next#
The response has been four-fold.
- Reshoring. The United States passed the CHIPS Act ($52B for semiconductor manufacturing) and the Inflation Reduction Act (~$369B for clean energy). The European Union passed its own Chips Act. Japan and South Korea followed with their own industrial policies.
- Friend-shoring. The US has, in effect, divided the world’s manufacturing base into two blocs: a friendly bloc (Taiwan, South Korea, Japan, the Netherlands, Germany, India) and an unfriendly bloc (China, Russia, Iran, North Korea). The friendly bloc gets subsidies; the unfriendly bloc gets tariffs.
- Nearshoring. Mexico has become the largest beneficiary of US-China decoupling for non-chip manufacturing. Vietnam and India have become the largest beneficiaries for chip-adjacent assembly.
- Inventory rebuilds. Companies have moved from just-in-time to just-in-case. Inventory-to-sales ratios are at multi-decade highs across the US economy.
What it means#
The implications are large, and they are not all bad.
For one, inflation will be structurally higher than it was in the 2010s. The cost of insurance — and inventory is a form of insurance — is non-zero, and it will show up in consumer prices.
For another, the geography of manufacturing is changing. The places that are winning are the places that have stable electricity grids, deep-water ports, trained workforces, and political allies. The places that are losing are the places that lack one or more of these. This is a story about Texas, Arizona, and Ohio as much as it is about Vietnam and India.
For a third, the cost of decoupling is being paid by consumers, not by producers. This is a politically important fact. The CHIPS Act is a subsidy to TSMC and Samsung, paid for by US taxpayers. The IRA is a subsidy to GM and Ford, paid for by US taxpayers. The EU’s industrial policy is a subsidy to ASML, paid for by European taxpayers. The political constituency for these policies is fragile, and the next administration will be tempted to renegotiate.
What to read#
If you want to go deeper, the right place to start is:
- Henry Farrell and Abraham Newman, “Weaponized Interdependence” — on how networks become tools of coercion.
- The Economist’s special report on supply chains — published in 2022 and still mostly correct.
- The US International Trade Commission database — for primary data on tariff and trade flows.
The supply chain is, in the end, the most concrete thing geopolitics has. It is a thing that can be measured, audited, and redesigned. If you want to understand what is happening to the world order, this is where you look.