Supply Chain Opportunity Costs about to Explode

The cost of tariffs gets a lot of popular media attention, but it’s a shallow treatment of a complex disease. Yesterday Bloomberg ran a piece titled, “The Age of Global Supply Chains Is in Trouble,” about the worrying impact of export restrictions on global supply chains.

As a former military officer, I’m all too aware of the correlation between warfare and countries needing access to resources and prosperity to take care of their people. It’s no coincidence that the wealth of the Industrial Revolution also gave rise to waves of deadly wars and conflicts. It’s hard for a government to placate poor and hungry people when they see neighboring countries who are better off.

Thanks to a world dominated by free trade, we take materials sciences and engineering for granted. But protectionism and tariffs’ greatest impacts are their opportunity costs. In the short run we can afford to pay a little extra for protectionism, yet in the long run they can deprive nations of important components of their livelihood. After all, money is fungible, but there are only a few places in the world to get fine wines, cheap rare earths, advanced microchips, or exotic supercars, no matter how deep your pockets.

For an example of the sorts of tensions and problems that can arise from tariffs and protectionism, look at the spat between South Korea and Japan. Japan is putting limits on exports of fluorinated polyimide, photo-resists, and hydrogen fluoride. Estimations assess Korean corporations now depend on Japan for over 90% of all the fluorinated polyimide and photo-resists, and 44% of its hydrogen fluoride. Samsung needs fluorinated polyimide for production of foldable panels (think Samsung’s Galaxy Fold), while photo-resists and hydrogen fluoride are needed for chip and display production. Some South Koreans have mounted demonstrations and boycotts against Japanese companies.

The Fourth Industrial Revolution is about to make these basic materials sciences and engineering much more important. As the Fourth Industrial Revolution alleviates the bottlenecks of interconnectivity, integration, and agility, but it is making countries realize how important access to materials has become. If you were in China’s shoes, watching how much profit Apple makes off of each iPhone compared to how much goes to China where much iPhone assembly occurs, you’d probably lose a little faith in the international trade system too. Clearly controlling key technologies matters to wealth and prosperity.

Tariffs are survivable, if painful. Increasing opportunity costs or outright denying other countries opportunities is a much more dangerous game that, unfortunately, will prove the next challenge to supply chain managers.

Past technological shifts have nearly always led to conflict as wealthier countries tend to throw their weight around, and inequality provokes innate human competitive instincts. Hopefully if enough people speak up, we can change our policies, but probably prudent to assume the worst.