When the pandemic struck in early 2020, individuals and businesses were quickly forced to curtail their activity, sending the global economy into a brief but damaging free fall.
As offices closed and factories halted production, companies have laid off workers en masse, taking purchasing power out of people’s hands. With fewer products manufactured and fewer people with paychecks to spend, companies assumed demand would decline sharply. But a much more complicated situation unfolded, straining the global supply chain.
At the start of 2020, the entire planet suddenly needed surgical masks and other protective gear. Most were made in China, which produced half of all protective masks the previous year. As factories ramped up to meet new demand, freighters have delivered protective gear around the world, even to regions that trade relatively little with China, such as West Africa.
Empty shipping containers have piled up in many parts of the world. The result was a shortage of containers in the country that needed them most: China.
Chinese factories pumped goods in record volumes. Despite fears that economic devastation could destroy spending, the pandemic has only shifted demand: Instead of eating out and attending events, Americans bought office furniture, electronics and kitchen appliances.
The pandemic has greatly accelerated the shift towards online shopping, a trend that has been progressing for years. From April to June 2020, as the first wave of the virus spread, Amazon sold 57% more items than a year earlier.
Spending in the United States was also encouraged by government aid programs that sent checks to households, as part of a record-breaking effort to revive the economy.
As demand increased, a wave of cargo quickly overwhelmed US ports. With too many ships arriving at once, ships sometimes had to wait in lines of 100 ships off the ports of Los Angeles and Long Beach in California. Inflated orders have also exceeded the availability of shipping containers, and the cost of sending one from Shanghai to Los Angeles has increased tenfold.
Once unloaded, many containers piled up on the docks unclaimed due to a shortage of truck drivers needed to transport the goods to the warehouses. Truck drivers had long been scarce before the pandemic, with wages regularly eroding under grueling working conditions.
Businesses across the economy have struggled to hire workers: in warehouses, at retailers, in construction companies and in other skilled trades. Even though employers resorted to higher wages, labor shortages persisted, exacerbating the scarcity of goods.
Shortages of one thing turned into shortages of others. A shortage of computer chips, for example, has forced major automakers to cut production, while even delaying the manufacture of medical devices.
Businesses and consumers have responded to the shortages by ordering earlier and in addition, especially before the holiday season. This put more strain on the system.
The crisis has its roots in a production model developed by Toyota at the end of World War II. According to the model, called “just-in-time” manufacturing, companies stock as few raw materials and parts as possible, instead purchasing what they need as and when they are needed.
It only works when they can get what they need when they need it. For years, some experts have warned that the global economy is too dependent on lean manufacturing and distant factories exposed to the inevitable shock. The pandemic has apparently validated this point of view.