Japan tragedy highlights consequences of corporate offshoring

Our hearts go out to those who have lost loved ones as a result of the earthquake and its aftermath in Japan.

As humanity collectively sifts through the lessons that can learned from this disaster (including with respect to the perils of nuclear power), Information Week is reporting on another fallout with global implications:

The massive 8.9 earthquake that has caused widespread devastation in Japan is expected to cause worldwide shortages and severe price swings in some semiconductors manufactured in the island nation, according to some analysts.

The electronics expected to be most affected by the 8.9 quake that struck Friday include semiconductor wafers used in making microprocessors, NAND flash used for storing music, video, and other content in handheld devices, and DRAM, which is the system memory in PCs. More than 40% of the world's NAND and 15% of the world's DRAM are made in Japan, according to market researcher Objective Analysis.

In other words, there are consequences beyond just job loss to corporations' decision to offshore production to a few locations on the planet. To put it a different way, what is rational for the individual corporation can be irrational from the perspective of society as a whole.

Such a problem was predicted nearly six years ago by my colleague Barry Lynn, the author of the book "End of the Line." In a column for the FT summarizing the book, Barry wrote:

Time and again, human beings have learned to build buffers into complex systems. We design compartments into our ships, circuit breakers into our electrical networks and minimum reserve requirements for our banks. Yet since the cold war era, we have done the exact opposite with our industrial system. Rather than conceive market-friendly methods to distribute risk and dampen shocks, we devoted ourselves to eliminating the bulkheads that have traditionally existed between nations and between companies. To evoke a more raw analogy, in our production system, we bulldozed all the levees flat.

As a result, we now live in a world where an isolated political or natural disaster on the far side of the globe can disrupt basic systems on which we all depend. Consider what would happen in the event of war on the Korean peninsula, or an uprising in south India, or an avian flu pandemic in industrial Asia.

In the first case, we would immediately lose half the global production of D-ram chips, 65 per cent of Nand flash chips and much more. At a minimum, the result would be massive disruptions in the electronics industry and in all industries that depend on electronics components. In the second case, numerous global companies, including banks, would lose their ability to process information because they have relocated key back-office operations to that region. The third case, meanwhile, presents chilling proof that the production system has evolved in directions no one expected. As a recent article
in Foreign Affairs noted, one cross-border system that would collapse in the event of a pandemic is the one the US relies on for medical respiratory masks.

In each instance, an everyday disaster far away would set off potentially massive disruptions of the industrial systems on which all nations depend... It is time to admit that our grand experiment with radical laissez faire management of industry has failed.

While the global response to the Japan earthquake in the short-term will rightly focus on saving lives and avoiding further deaths, policymakers should also assess why they have allowed corporations to break down reasonable buffers against excessive offshoring of production. A little more redundancy in supply chains is not only collectively rational, but would also have the benefit of creating jobs at home.

Comments

[Don Juan of Austria]

Anon, you are typical of the laissez-faire fanatics who have damaged so many countries (including the United States).

Groups like Public Citizen have been warning for years to make sure we have enough national production of key products. Meanwhile, their opponents have been finding ways to cut costs to the bone- which almost always means not worrying at all about having national production. GTW has done a great job also exposing how idiotic U.S. trade policies-- with their fanatical devotion to free trade no matter what the reality is-- have contributed to our lack of ability to produce key products that we depend on (among other problems).

Now, some of GTW's worse-case predictions may be coming true. They are right to point this out. They are not exploiting a tragedy. You are- to try to silence them when they are right and you are wrong.