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If the US can’t make: transistors, resistors, capacitors, magnetic motors, VLSI chips, batteries, wiring and PCBs onshore then we are toast. Fundamental electronic component manufacturing is key to drones, robotics and autonomous weapons systems. Lose the ability to directly manufacture those and then the loss of access to Chinese markets due to a war in Taiwan and game over. Eighteen months of the loss of those supply chains and the U.S. can’t build missiles or anti-ship weapons etc. game over and we only have our aging nuclear fleets to defend us.

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I think the question isn't whether we can make it (of course we can), but whether we can make as much in peacetime as we'd need in wartime (no).

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the question is really if we can make enough of them to be quality and cost competitive at scale. High volume manufacturing of *quality* goods with low defect rates is extremely hard.

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How can we make anything at the level of wartime during peacetime? Production requirements change by orders of magnitude. If we had the capacity for wartime production during peacetime >90% of it would sit idle or just pile up in warehouses.

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We solved this problem in World War 1 and World War 2 by hiding behind the ocean until we built up the needed capacity - even Britain and France didn't start full-scale war against Nazi Germany until some time after they declared war in response to the invasion of Poland.

https://en.wikipedia.org/wiki/Phoney_War

Which raises the question:

Suppose China decides to invade Taiwan and begins with a Pearl Harbor-esque attack on US naval bases in the Pacific. China's navy then fights the US navy; it suffers heavy losses at first, but China keeps throwing forces at the US Navy until it begins to literally run out of munitions to fight with. Having turned the fight into a medium-term war of attrition, China's superior production capacity eventually overwhelms the US fleet and it is forced to abandon the South China Sea. China then launches an amphibious invasion of Taiwan and successfully occupies it. Nobody has used nuclear weapons during the conflict and the United States is a clear loser.

After occupying Taiwan, China offers the US a peace treaty that would state that the South China Sea within the "nine-dash line" is the exclusive territory of China and that no US ship will enter it without permission from the Chinese government. Would the US accept defeat and agree to the peace treaty and give up "freedom of the seas", or would we stay at war and spend a couple of years attempting a World War 2 style military buildup to reclaim the South China Sea and possibly "free" Taiwan?

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Even if the entire supply chain is in one country, it still does not overcome the complexity issues raised in this article.

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Economics is making progress. Rules matter. Institutions matter. Supply chains matter. They haven't quite traced the supply chain back to the earth yet. The start of every supply chain is nature, Creation, the natural world, ecosystem goods and services. An economy grown out of scale with the planet is going to suffer shortages. Or collapse when things run out.

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Great article. I was "going to post" - that the free-market supply chain's overlying problem is that it is a completely chaotic unmanaged independent set of autonomous actors. Who have ZERO mutual self interest. They only have short term price-product-service relationships. But you said it !!! better !

Herein is the fatal flaw in laissez-faire, globalization willy-nilly. If you know about things like kinematics, thermodynamics, systems of viscoelasicity (time based damping with instant spring response systems), then duh - yes systems drive to:

A. BIG is Better - which really is, the bigger (ie the only one doing something), the harder they fall

B. No in is charge to do FMEA, PFMEA - - on the entire supply chain system and dynamics.

Finally, crazy maybe, but I have thought for a long long time, that we actually need to explore - Anti-Productivity - SMALL is better. Inefficiency - actually might be a GOOD thing.

Why? - well first off, you eliminate the single point of failure. Like - Suez Canal, Like TSMC in Taiwan, like key things only from China. Secondly - you build failure mode recovery, and redundancy. These are SECURITY for the nation, for the manufactures, and thusly for the consumer and citizens.

Sometimes the obvious thing, is obviously the problem - Go smaller, go more discrete, understand the value of ineffiecency.

Says I with nearly 50 years in business, and few courses with Prof Samuelson.

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Yes, laissez-faire is the problem, and central planning is the fix. That is why the Soviet Union is held up as the paragon of economic efficiency.

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Central planning works for some things and not others. Very few countries lack a centrally planned military, for example, although centrally planned agriculture has often been a disaster.

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The US military is not centrally planned. Units receive “Commander’s Guidance”, not “Commander’s Prescriptions”. This lets subordinate commanders do their own planning to accomplish the overall goal, and this is why our military is superior to those that are centrally planned and controlled.

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There are degrees of difference in local latitude, but strategy and logistics remain centrally planned.

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What makes you think logistics is centrally planned?

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A real president would bust the hideously corrupt ILWU wide open and force automation through on all American ports. If the ILWU had their way we're still be shipping everything in barrels and baskets. The fact this mendacious group of entitled free riders exercise this type of stranglehold on this country is a national scandal.

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Hmm. Busting an independent labor union, selective use of corruption charges as lawfare, and centralize control over investment at American ports and harbors? Brilliant ending for the most “pro-union” and “pro-democracy” president of my lifetime lol

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"If the ILWU had their way we're still be shipping everything in barrels and baskets."

Literally true.

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I once had a goal of becoming a casual laborer for the Anchorage Independent Longshoremen, signing the dream list every other month, slowly working my way up the list. It was a very exciting day when my pager went off with old Paul the dispatcher calling! I’ll never forget when he asked me if I’d ever been on board and he said we’re going in! I got to go into the hull of a cargo ship! I gave up the goal of signing and paying dues cause I had another job paying almost as good. Sort of a minor regret that I abandoned that chance. Hoping the strike isn’t the “October Surprise” and that it will be averted.

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An excellent overview of our globalization dilemma. The fragility of it all is frightening enough, but what really caught my eye was the realization that nobody is in charge and few even understand there is a problem. “An ounce of prevention is worth a pound of cure.”

Being trained in disaster response, I find it interesting that climate change is not mentioned as a mitigating factor triggering a supply network collapse. The Philippines flooding is a prime example of how much of the world’s low cost manufacturing is located in regions prone to natural disasters. Not only is our supply network fragile, but our foundation of reliance on consistency of climate and natural resources is equally frail. We recently experienced how a virus infection could bring down the entire house of cards, so too could a series of super storms and severe flooding. Nobody is in charge of global climate change with everyone kicking the can down the road. One can only imagine the scale of the disaster required to get our collective attention and establish priorities.

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This one took me back to my graduate econ studies:

"Individual stretches of road could be operated by separate businesses, in a market system. Each business would be responsible for doing its own maintenance. The operators could charge users directly via electronic tolls—or they could have a claim on a city’s tax revenue. We suspect that this wouldn’t work very well, and that there are reasons why very few places run their roads like this."

UC Irvine 30 years ago specialized in Transportation Economics and the department was run by aficionados of the Austrian School. One of our major projects was the 91 Express Lanes, a congestion priced, electronically tolled, privately owned roadway paralleling the 91 freeway. It opened right before I graduated from UCI and was a great success.

However, 15 years later, it ran into many the problems you mention, mostly an unwillingness of the owner to increase capacity. As a result, Orange County acquired the road and now runs it as a public toll road. (And it still works well.) Libertarianism has its limits.

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that's a great story!

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The Houthi supply chain of missiles and drones would seem ripe for disruption.

More generally, policies to remove choke points -- a "public good" that the private sector cannot supply for itself -- have a high NPV.

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As I understand it, the Houthi supply chain mostly runs to Iran. The missiles and drones are pretty low tech. Ukraine can manage to produce its own drones in the middle of a war, so I imagine a force like the Houthis can do the same.

I suspect disrupting the Houthis personnel and launch capability would be easier.

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Well, this was frightening.

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Several points.

A) The relation between supply chain disruptions and inability/unwillingness of foreigners to supply is tenuous. In general, they do not “supply” much rationale for policies to encourage more US production over imports as especially not to restrict imports.

B) Unions whose raison d’etre is to bargain away some to a firm’s monopoly rents for its workers do not typically cause supply chain problems. If there is a problem is the firms’ monopoly power, a power BTW that is lessened by the absence of restrictions off trade. Unions that are themselves creators of monopoly power, like the dockworkers is a different story. Lina Khan should be on this case.

C) Supply disruptions were one of the “shocks” that led the Fed properly to temporarily engineer over-target inflation. That made the shock such as it was less damaging by facilitating the adjustment of production and consumption decisions to the shock. Supply disruptions would be more disruptive, would reduce real income more, if the Fed did NOT engineer the temporary inflation and the adjustments took longer.

D) That the supply disruptions and inflationary response were politically costly to Biden was partly the Administration’s fault for having claimed that it was “stimulating” the economy and in general that it rather than the Fed was managing the macro economy.

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Lina Khan is not going to touch unions. Nobody at the FTC or DOJ is going to touch unions, regardless of administration.

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Given that this blog is moving in the direction of "what should the US do post-pax americana" when things get topsy-turvy, optionality and Taleb's work on risk would be really, really valuable. For example if I was in the manufacturing biz, I'd really want to own a lot 3d printers right around now, so I can print WHATEVER shortages start happening due to the strike because nobody can predict exactly but I would be very capable of responding to it.

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Excellent.

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Supply chains are complex. An understatement, period, full stop.

Thank you for a brilliant and engaging part 1!

Until tomorrow 🐾

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As an aside, are Bennet W. Golub and Ben Golub relatives? And for Noah Smith, are you a devotee of Paul Krugman? Thanks for allowing me to comment and thank Claire for the post.

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Zooming up to 30,000 feet, you're criticizing JiT (Just in Time).

The alternative is for factories to have storage for incoming materials. We used to have warehouses filled with stuff as a result of this policy/practice.

Can't do that anymore.

The warehouses are full of cannabis being grown for dispensaries.

Propose a solution, not a 3 million word description of the problem.

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I recommend reading part 2 of the article!

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I thought Jared Kushner fixed the supply chain. No?

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“With it, the prospect of a Chinese invasion of Taiwan—a threat decades in the making—looms larger. Beyond the profound political and humanitarian implications, the threat of a new age of war also has an economic dimension: the prospect of damage to supply chains that would make the Houthi attacks in the Red Sea look like a minor inconvenience.”

Assuming Xi and his hard-liners aren’t arrogant or lacking in common sense, this precisely why China won’t invade Taiwan and instead will play the long game of thinking in terms of decades. Just what is the upside for China aside from indulging in the sentiment that Taiwan historically belongs to China? Sounds like Putin’s rationale for invading Ukraine, an incredibly stupid move that has robbed Russia of its young, talented, and educated workforce that fled to other countries; lost its EU natural gas market so it’s forced to bend the knee to Xi; and just as important gave the lie to the weaknesses of Russia’s military.

As these authors point out, an international blockade of China post-Taiwan invasion would have devastating consequences for its people. When push comes to shove, Western nations, unlike China, can feed themselves. Western nations are producing plenty of energy and driving its costs down. Xi, like Putin, is overrated, the last and worst of Deng’s successors. It comes down to what are the people surrounding Xi telling him? We know Putin was also surrounded by advisors who were afraid to tell him what he needed to hear.

In addition to its economy, China has serious fundamental domestic problems, fresh water being but one.

ASML likely isn’t the only “kill switch” in Taiwan. A Pyrrhic victory in the making?

Time will tell.

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