Should the spreading economic aftermath of the earthquake in Japan cause us to unravel global supply chains that seem suddenly all too vulnerable to shortages and shutdowns? Adam Smith would say No. The philosophical founding father of globalization would urge us, not to undo our worldwide lines of supply for component parts and raw materials, but to improve them.
The tragic events in Japan have taught us how intricately interconnected the world economy has become. Not long ago, production was generally by one company in one location. Today, the production of a single manufactured product is often distributed among many companies and across the entire world.
Since 1980, intermediate trade in parts and accessories has nearly doubled as a share of world trade, and now accounts for about 20 percent of all trade internationally. Companies everywhere have embraced the just-in-time delivery methods introduced by the Japanese.
Elaborate production and purchasing networks combine parts and materials from all over the world, ship them daily, track them electronically, and deliver them only when they are needed in response to the pull of a finely-calibrated consumer demand. These interlacing links of global supply and demand have improved efficiency, eliminated waste, enhanced productivity, increased profits, lowered prices, and multiplied consumer choices worldwide.
Global supply chains have enhanced everywhere the universal opulence of an increasingly widely shared prosperity that Smith saw as the ultimate aim of all commercial exchange. Yet, as we have seen lately, those at the ends of these extended supply chains are exposed to the risk of supply interruptions and thus to resulting price hikes and plant closures that have ranged everywhere from Spain and Sweden to Shreveport, Louisiana.
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Japan, it seems, is a critical supplier to the rest of the world of many of the essential ingredients of industrial civilization -- chips for smart phones and tablet computers, LCD glass for television screens, basic auto and airplane parts, and much more. Worldwide, those dependent on Japan as a supplier at the other end of the production chain have, since the quake, been slowing production, seeking new suppliers, and asking hard questions about the risks and the rewards of global lines of supply.
Global supply chains are but one example of the division of labor that was central to Adam Smith's hopes for The Wealth of Nations. The very first sentence in the very first paragraph of the more than one thousand pages of his classic economic treatise is his profession of his belief in the productive powers of the division of labor.
For Smith, the specialization of tasks from the division of labor is the necessary key to maximizing economic growth and human prosperity, and it is limited only by the extent of the market. Today, the extent of the market has become worldwide, and so too has the division of labor as the essence of an ever-increasing economic globalization.
The Peterson Institute of International Economics has concluded that the economy of the United States alone has gained at least $1 trillion annually from globalization. Many of these recurring gains in prosperity every year are maintained by global supply chains.
Yet, for all our gains from a global division of labor, there are risks to our thin strands of production. A volcano in Iceland. Curbs on exports of rare earth elements by China. Revolts in the Middle East. An earthquake in Japan. The World Economic Forum has warned that our extended supply chains are increasingly vulnerable to disruption, and are generally poorly understood and managed.
Smith would not be surprised that natural disasters and human discord pose risks to the division of labor. Like the logistics technicians today who are among his truest intellectual heirs, he would undoubtedly urge us to find better ways to minimize the risks of our global supply lines while continuing to maximize their efficiency.
More and better corporate planning is needed to identify the potential risks of global supply chains, and to provide for more flexibility and more resilience whenever there may be missing links. Necessary short-term concern for the immediate bottom line must be matched by more long-term concern for the value and security of ongoing investment.
Smith would likely counsel us to leaven a little less of just-in-time with a little more of just-in-case. In practice, this may mean bigger inventories, more diversified suppliers, and more sources of production. It may mean, too, more truly global lines of supply that do not rely exclusively on one unreliable country or on one unstable region of the world.
Such an approach to our extended lines of supply would enable us to minimize our risks while continuing to divide and subdivide our labor worldwide, adding still more to our overall global prosperity through Adam Smith's bountiful system of specialization.
James Bacchus is a former Member of Congress, and a former chief judge for the World Trade Organization. He chairs the global practice of the Greenberg Traurig law firm.