PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

USTR Statement on Promoting Supply Chain Resiliency

By at 23 May, 2024, 2:08 pm

Statement on Promoting Supply Chain Resiliency

Public Hearing

Office of the United States Trade Representative

May 23, 2024

 

Raymond J. Keating

Chief Economist

Small Business & Entrepreneurship Council

Good morning. I’m Ray Keating, and I serve as chief economist for the Small Business & Entrepreneurship Council. SBE Council is a nonprofit advocacy, research and education organization dedicated to promoting entrepreneurship and protecting small business.

As we all know not long after the COVID-19 pandemic struck, supply chains became hot topics. While the definition of a supply chain is straightforward, how supply chains work and are managed is expansive and complex. In reality, of course, there isn’t one supply chain, but instead many supply chains for particular industries and businesses.

A supply chain is a network of industries, individuals and businesses, using assorted resources and technologies, and engaging in various activities, in order to create, sell and deliver goods and services. In the most general terms, a supply chain can begin with extracting raw materials, which go to wholesalers and then to manufacturers, who in turn create finished products. Distributors or wholesalers then get products to retailers, who sell them to final consumers. Of course, other industries are involved at various stages, such as payment processing, information, telecommunications, transportation and delivery services.

Supply chains ran into problems during the pandemic as assorted businesses and industries were shut down, but consumer demand, after a brief decline, quickly moved back to growth. The systems faced severe constraints in terms of labor, capacity, equipment and so on. Some people were surprised by how long these problems lingered, but again, supply chains turn out to be broad, complex systems.

Supply chains also tend to be largely about small businesses, which isn’t surprising given that industries across the U.S. economy overwhelmingly are populated by small and mid-size businesses. It was noted in a Harvard Business Review article by Karen G. Mills, Elisabeth Reynolds and Magane Herculano that “The importance of small and midsize businesses in supply chains goes far beyond a few key products or industries. Supply chain companies — defined as those that sell their output primarily business-to-business (B2B) — represent about 44% of U.S. private employment… And these businesses are largely small and midsized companies, not goliaths. Companies with fewer than 500 employees make up 98% of supply chain firms and over 20% of U.S. private employment.”

As for supply chain resiliency or health, private sector entrepreneurs, businesses and investors, of course, possess every incentive to solve supply chain challenges, and do so by responding to price and profit signals with increased investment.

For example, in the face of supply chain woes, venture capital investment jumped dramatically. For example, Pitchbook reported: “Supply chain startups reached a high-water mark for VC fundraising in 2021, bringing in $62.2 billion. At the time, pandemic-induced lockdowns and port closures motivated investors to seek out and invest in founders with grand ideas to disrupt an industry with a reputation for being static, inflexible and inefficient.”

As for policymakers, the key is not to undertake the impossible task of trying to, for example, micro-manage, subsidize or guide current, emerging and future businesses making up sprawling and dynamic supply chains across industries, but instead, the policy effort should be about creating a sound policy foundation upon which supply chains can be built, innovate and expand.

That most certainly includes tax and regulatory relief to reduce costs and enhance incentives for starting up and expanding B2B or supply chain enterprises. It also means reducing trade barriers (such as tariffs and quotas) in order to expand supply chain opportunities. It’s odd that supply chain issues somehow have been twisted against free trade agreements. That doesn’t make much sense if we’re looking to diversify and strengthen supply chains.

First, consider that real U.S. exports as a share of real GDP went from 3.1 percent in 1960, for example, to 11.1 percent in 2023. Meanwhile, real imports as a share of real GDP went from 3.5 percent in 1960 to 15.3 percent in 2023. Keep in mind that since nearly every import into the U.S. is an input to a domestic business, then imports are central to supply chains.

Second, it was noted in a report from the Brookings Institution that international trade improves economic resiliency in difficult times: “…the COVID pandemic provided novel arguments against free trade based on global supply chain resilience, but neither the pandemic nor short run policy response had enduring effects on trade flows. We demonstrate that global trade was remarkably resilient during the pandemic and that supply shortages would likely have been more severe in the absence of international trade.”

That shouldn’t surprise anyone, as more diverse supply chains provide more options during times of crises and non-crises, and therefore, prove more flexible and durable. Indeed, as we look at the supply chain, the enormous importance of trade to the U.S. economy should become even clearer, and reinforce that the best policy agenda for supply chain resiliency includes advancing free trade accords.

Thank you for your time, attention and hosting this hearing.

 

News and Media Releases