Global Supply Chains Make Protectionism More Costly Than Ever

Protectionism never made sense - driving up the cost of goods, inviting retaliation, and destroying more jobs than it creates. But in an era of supply chains, it is a more self-destructive policy than ever. The trade war with China offers a textbook example.

The days when a product is made top to bottom in one location are long gone. Elaborate supply chains allow companies to source their production where expertise is available and wages are competitive. The moving assembly line that Henry Ford birthed is now world-wide, and more efficient than ever.

Not surprisingly, Apple Inc. is worried about the continued efficiency of its supply chains in light of the trade war with China, a concern it underlined for U.S Trade Representative Robert Lighthizer at hearings last week. The company has a lot at stake. The proposed tariffs would hit the supply chains of nearly all Apple products, including the iPhone, iPad, MacBooks, Apple Watches, Air Pods and iMac.

And the blow would not just land on Apple shareholders. Apple is one of the biggest employers in the United States, with its products providing jobs for 2 million Americans.

Imagining Apple’s success without its cross-border supply chains would be like imagining an iPhone without apps or a soft keypad. Apple assembles the iPhone in China, but makes parts for it around the globe. The company spent almost $60 billion on U.S suppliers last year. Most of the best and highest-paying jobs Apple generates are based in the United States — including in R&D, marketing, and legal.

But the company’s ability to compete and create jobs does not come with a lifetime guarantee. Blue Silk Consulting estimates that moving iPhone production out of China could cost the firm - and its largely American shareholders - as much as 30 percent in increased production costs. Apple’s ability to provide good jobs for Americans depends on its ability to produce all over the world - most definitely including China.

Apple’s dependence on supply chains - which serves its customers well - is an experience shared by almost all companies today. The world is a global factory, and supply chains are its conveyor belt. Trying to replace these global networks would disrupt the production process, drive up prices, and shed jobs.

Intel produces raw chips at six locations - including three in the United States. But if Intel makes its chips at one of its U.S plants, sends them to China for further work, and brings them back to be placed into a device manufactured in the United States, the chip would be hit by the proposed new U.S tariffs. The tariffs would only shoot American workers in the foot.

Kenneth Cole Productions and Ralph Lauren have both warned that cutting their firms off from Chinese suppliers would drive drive up prices for American consumers and nip expansion in the bud. Best Buy has pointed out that snapping its supply chain would very much increase economic inefficiency. The fireworks company Spirit of 76 has warned that its product is largely imported from China, and tariffs would force it to raise prices - undermining its stateside hiring and expansion.

No doubt, a trade war by the United States would prompt some companies to move some operations from China and set up plants in countries with plentiful cheap labor - such as Vietnam and Cambodia, as many firms making shoes, garments and toys have already done. But companies mostly invest in facilities with a long life expectancy. And a production shift would merely propel Vietnam into China’s place, doing nothing to transplant semi-skilled jobs to the United States. Moreover, poor infrastructure and telecommunications makes most developing countries costly places in which to invest.

Many hope that companies will return to the United States. But that hope is a dim one. Rather than pay the crippling wage costs demanded in developed countries, companies will choose to invest more in robotics. The result may be more production facilities in the United States, but no more jobs.

Global supply chains make many products possible, create millions of jobs, and rationalize production across the widest possible network. Cutting out China would needlessly and counter-productively sacrifice a vital link in that chain. There is no point trying to pursue a 21st-century lifestyle with 19th-century policies.