Leibowitz on Trade: Strategic Stockpiles and Their Limitations

While supply chain woes have made news, for these and many other items, there is simply no going back to domestic production for many products that have strategic value.

Labor, for example, in the United States is very tight—post-pandemic, the United States has full employment. (Less than 4% is widely considered to be full employment, and in May the rate was 3.6%). Creating jobs means enlarging the US labor force by getting people off the sidelines into the workforce or by increasing imports of labor through immigration.

In addition to raw materials, market economics have encouraged production overseas. Labor-intensive manufacturing tends to be drawn to countries where labor is plentiful and wages are lower than in the United States. Some labor-intensive industries, however, cannot relocate overseas—construction, restaurants, tourism and healthcare are examples of this.

Our current inflation woes are also an important factor. The prices of food and energy especially are increasing steadily with little prospect of near-term relief. The Biden administration has released crude oil from the Strategic Petroleum Reserve in an effort to limit gasoline and fuel oil price increases. This effort is clearly falling short. Prices now are nearly $5.00 per gallon for regular gas and continue to rise.

Stockpiling has become fashionable again. In addition to the Strategic Petroleum Reserve, the country has started to stockpile medical supplies in case of pandemics and natural disasters. “Personal protective equipment” (“PPE”) was in critically short supply at the outset of the pandemic. Government action solved that problem. Now there is no shortage of PPE or masks. It must be noted that imports of PPE and masks, as well as increased domestic production, were an important part of putting the shortage in the rearview mirror.

The history of strategic stockpiling has an interesting and checkered history in the United States. Going back to World War I, the United States found itself short of many items. Manufacturing solved most of these shortages during the First and Second World Wars. Vital raw materials, such as scarce metals and minerals, were more difficult. After World War II, a strategic stockpile program was expanded. But after the end of the Cold War, the disadvantages of stockpiling (such as picking the wrong products, overbuying, and economic distortions) weighed more heavily than preparedness, and many stockpiles were gradually depleted. Then, around the turn of this century, medical stockpiles were created, starting with pharmaceuticals.

Over the last 20 years or so, the government has evaluated the pros and cons of stockpiling materials to mitigate the risk of future disasters (war, food shortages, disease, inflation) and found the strategy wanting. Many strategically important raw materials were viewed as too expensive to stockpile. The identity of these materials kept changing, and purchasing more caused market effects in the private sector, leading to inflationary pressures.

More recently, strategic stockpiles of medical equipment (the “Strategic National Stockpile”) were substantially depleted by such outbreaks as the H1N1 virus. And the Trump administration failed to replenish the depleted supplies, leaving the country vulnerable when the COVID-19 pandemic hit.

It seems that strategic stockpiles, such as the Strategic Petroleum Reserve and the Strategic National Stockpile are, not surprisingly, far from perfect. Markets tend to be more responsive to sudden changes in supply and demand than government action. And the pressure points are changing. From stockpiles of chromium, we now crave supplies of PPE. And when stockpiles are full, the government stops buying, leaving the country short of manufacturing capability when it is needed.

These are hard questions that require flexibility. Part of that flexibility necessarily means being ready to tap new sources both at home and abroad. Reliance on domestic production is not always the best solution, and it is sometimes impossible or at least impractical.

When foreign suppliers pull in their horns and stop exporting, we can be damaged—just as foreign customers can be hurt when US exports stop. International cooperation and consultation, in good times and bad, may yield a better result than closing markets during times of shortage.

Our politics, unfortunately, seem to have foreclosed the possibility of reaching the optimal balance between relying on domestic production and relying on imports to meet our needs.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz
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