Impact of the Global/U.S. Supply Chain

Impact of the Global/U.S. Supply Chain

March 2022 

Ukrainian Invasion

In response to Russia’s military invasion of Ukraine and its recognition of Ukraine’s separatist regions, with consideration of sanctions previously imposed against Russia and Belarus, (pursuant to Executive Order 14024), the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has issued directives imposing further, significant sanctions. These sanctions prohibit the approval, financing, facilitation, and any guarantees with respect to the direct or indirect importation of goods, services, or technology into the United States from Russia and other covered regions. Most bond/surety companies have now undertaken the process of immediately canceling surety bonds issued to sanctioned entities and individuals, in compliance with the OFAC directives. They are also prohibiting new business and bond renewals where there are identified relations to these territories. Consequently, we are now unable to process entries where the country of origin is Russia, Belarus, or Ukraine.

 Automobile and the Aerospace Industries Impacted

While experts indicate that automobile and aerospace companies may have enough inventory to fulfill their immediate needs, both will need to look for alternative suppliers of semiconductors, due to disruptions in the supply chain. Currently, Ukraine produces up to 90% of the semiconductor-grade neon that is used in the United States. Shortages of semiconductors have affected auto production since late 2021 and are expected to continue, which may result in higher prices for new and used vehicles globally.

Russian Embargo

Russia is the major exporter of titanium and titanium forgings which are heavily used in production for both the aerospace and the automobile industries. The U.S. will further feel the stresses caused by the industry supply chain shortages in auto manufacturing and by the Russian embargo, which is anticipated to negatively affect U.S. aerospace production.

The U.S. and other governments have ordered airspace closures and initiated trade embargoes against Russia, who has retaliated with similar restrictions. As a result, the worldwide supply chain has been severely impacted, exacerbating the existing congestion woes. As of February 24, 2022, over 300 companies announced that they have closed stores, reassigned staff, and stopped sales of products in and out of Russia. Products that were en route to or from Russia are now causing global congestion at docks, warehouses, rail depots, airlines, etc.

China Slowdowns

Goods transported by air freight from China to Europe and the Eastern U.S. are being rerouted; shippers may be forced to use slower, and perhaps more expensive, modes of transportation. The China-Europe rail had experienced a boom in 2021 due to congestion in major European ports. There are now reported backlogs in that rail line due to congestion from stalled or stranded Russian cargo, leading to mounting cancellations in China from their European customers.  

The disruption of the rail route from China could cause severe damage to China’s “Belts and Roads” initiative. This trillion-dollar project is aimed at reshaping global trade and affirming the dominance of a China-centric global supply chain, especially with Europe and Asia as their trading partners. As China appears to be an ally of Russia, such actions could drive a movement to reduce U.S. dependence on critical materials used in the making of semiconductor manufacturing, medical supplies, electrical batteries, and other goods currently imported from China.

China has reported a surge of COVID-19 cases and has responded by increasing the number of cities that are locked down. Shenzhen, the southern Chinese tech hub, was placed under citywide lockdown as of March 13, 2022. The Chinese government has asked Shenzhen’s seventeen million residents to stay home, with some exceptions. The lockdown is anticipated to last until March 20, 2022. For nine consecutive days, over forty cities have reported increased COVID cases. Analysts expect no relaxation of China’s COVID-19 policies before the end of this year, and the recent surge in cases may push Beijing to reconsider/redesign its strategy, especially as economic stability becomes the top concern for that government.

COVID Impact on Supply Chains in the U.S.

As the virus remains a threat forcing several regions and economies to continue lockdowns, the disruptions to supply chains remain severe. Approximately 94% of Fortune 1000 companies have reported that they continue to see unprecedented supply chain disruptions from COVID-19. This has had severe operational and financial consequences for businesses as they have addressed reduced productivity, supply shortages, inventory placement challenges, and large surges and drops in demands in many sectors. Businesses have realized successes by making decisions based on real-time information from the supply chain. Inconsistencies created by COVID rendered future planning unreliable. The negative operating occurrences have affected all small to medium-sized businesses and large corporations alike, all of whom are experiencing overall difficulties and increased costs.

Inflation Rate

The annual inflation rate for the U.S. was 7.9% for the past 12 months, which ended February 2022. It is currently the highest it has been since January 1982. The next inflation update is scheduled for release on April 12, 2022. 

Per the most recent report published on March 10, 2022, by the U.S. Department’s Bureau of Labor Statistics, the price of gasoline increased by 40% in January alone. Gasoline prices increase daily, and trucking and delivery companies cannot and will not absorb the costs, which will inevitably be passed on to customers.

Unfortunately, COVID and the conflict created by Russia will continue to affect the supply chain across the globe. We will continue to keep you informed and assist with your supply chain needs. Please contact your Western Overseas representative with any questions.