Questions and Answers: Threats to Year-End Supply Chain Policy

By Jake Medwell and Loren Smith

The views expressed herein are solely those of the authors and do not necessarily represent the views of FreightWaves or its affiliates. Jake Medwell, Founding Partner of 8VC, and Loren Smith, President of the Skyline Policy Risk Group, discuss key industry issues for this regular quarterly Questions and Answers exclusive to FreightWaves.

MEDWELL: What is the big picture for the supply chain right now and how are policy makers responding?

BLACKSMITH: Systemic pressures have eased throughout the year, which is very good. But unfortunately, it looks like the reasons for this are not so good. Inflation in the developed world has led to demand destruction, meaning people are buying less to save money, and we could see a global recession in the coming months.

MEDWELL: And fuel prices are rising.

BLACKSMITH: Yes, and especially diesel fuel. In Europe, diesel is widely used for trucks and passenger cars, and fuel markets between the US and EU are becoming more closely linked due to the war in Ukraine. US oil and gas is being shipped to offset the loss of Russian imports, and this is contributing to a rebound – perhaps a sharp rise – in US diesel prices. The Northeast US will see this the most, with possible bottlenecks.

In the US, diesel is mainly used for trucks. Price increases there lead to more expensive food and consumer goods.

MEDWELL: How is the Biden administration reacting? Or other politicians?

BLACKSMITH: The Biden administration has released another portion – previously planned – from the Strategic Petroleum Reserve (SPR). This helps bring gas prices down a bit, but the problem is that it’s only a modest push on prices and won’t last long. There’s also the fact that the SPR is a limited supply and it will be difficult to release more.

The bigger bottleneck in the system are the refineries, which are more or less busy.

This, of course, begs a strategic question for climate policy: how much is the US government willing to commit to improving the oil-to-refinery-to-fuel delivery system if it attempts to convert the US fleet to electric propulsion? For this reason, the measures seriously discussed this year were of a short-term nature: perhaps a gas tax exemption (which did not happen in the end), perhaps a dismissal from the SPR (which did happen), while at the same time it was hoped that the Russian offensive in Ukraine would soon ends and the world energy markets can return to normal. Unfortunately we do not see the war ending this calendar year.

MEDWELL: This is gloomy. Speaking of electrification, what’s next? The Inflation Reduction Act (IRA) in August should give us a little extra boost, right?

BLACKSMITH: It does this by adding some certainty to the EV purchase tax credit and targeting the tax break to more middle-class consumers. But there is a related political aspect here that is very important but will take longer to catch on. This is the geopolitics of critical minerals and the battery supply chain.

ME GOOD: In other words, where do we get all the rare earths from?

BLACKSMITH: Right. The US government has changed its strategy a bit, which is very important for observers to understand. It’s not really a party shift. It may have started under (former President Donald) Trump, but (Joe) Biden’s team is carrying it on. And that’s a more committed focus on the domestic industrial base and global supply chains.

The IRA is set to force automakers to source more production domestically to reduce debt from China, which controls more than 80% of production of these critical minerals used in batteries.

MEDWELL: They say domestic, but it’s not just that, is it? Is this where nearshoring and friend shoring come into play?

BLACKSMITH: Exactly. As the IRA was in its final stages, domestic requirements were extended to Mexico and Canada, with which the US is of course closely tied through the USMCA Free Trade Agreement. (The US-Mexico-Canada agreement is the updated version of the North American Free Trade Agreement, or NAFTA.)

Where “friend-shoring” comes into play are countries that are a little further afield, such as Australia, the Democratic Republic of the Congo and various nations in Latin America. The longer-term strategy is to establish US trading patterns that are more sphere-centric. We are in a new era of great power competition with the US and China in the lead roles.

MEDWELL: “Longer term” – but that creates its own problem, doesn’t it?

BLACKSMITH: It does. If electrification is going to accelerate now, there really isn’t time to realign the entire global critical mineral supply chain, which is decades of work. China will remain an important source for some time. Businesses are already asking for permits to claim the EV tax credit for longer than specified in the IRA.

MEDWELL: And EVs aren’t the only answer, is that right? What about hydrogen?

BLACKSMITH: Yes, hydrogen fuel cell technology is very likely the answer or part of the answer for trucking. With the advent of “green hydrogen” or hydrogen from water electrolysis instead of natural gas, life cycle emissions are falling significantly.

It’s also likely that we’ll see gasoline- and diesel-powered internal combustion engine vehicles for several decades to come, especially in colder-weather areas where electric vehicles don’t work as well. This applies to both cars and trucks.

MEDWELL: Let’s get to the freight transport infrastructure. How are we doing now that the big infrastructure bill is almost a year behind us?

BLACKSMITH: Well, implementation of the 2021 bill – the Infrastructure Investment and Jobs Act (IIJA) – is progressing, and we’re seeing much of that funding going into the freight network, especially for ports, and getting funding for several key truck parking projects. However, I still believe that permitting reform is needed to speed up project delivery and permit projects in the next year or two.

MEDWELL: Still too much bureaucracy when it comes to approval?

BLACKSMITH: The US has an unusually cumbersome permitting process, even compared to other developed nations. It’s appropriate to have multiple checkpoints for major projects to get the green light, but the process here involves literally dozens of checkpoints, meaning major projects are often shelved for years.

MEDWELL: Is there any good news here?

BLACKSMITH: The Biden administration appears to want to improve the process, and Sen. Joe Manchin (DW.Va.) has an approval proposal out there. The Manchin deal was shelved this year, but next year Republicans are likely to approve one of their projects if they have majorities in Congress. I’m not very optimistic about a deal, but it’s possible.

MEDWELL: What about the technology side? Cargo technology is something that is very close to my heart, that we can make better use of the data available to improve cargo flow.

BLACKSMITH: One of the issues the federal government is currently considering is whether or not ship manifests should remain confidential. Proponents of this approach argue that it would help streamline the sharing of data from businesses to customs authorities. However, there are concerns about shutting down this data pipeline as it is widely used for various transparency purposes. If you lock down the data, will you limit people’s ability to get a high-level view of various imports, track human rights abuses, or other problems in the system?

MEDWELL: They definitely need to think this through carefully. How is it on the work front? Some of the headlines on the rails look a little alarming.

BLACKSMITH: On the labor front, there are two major problems. You mention the rail. Already in September, the railway unions and the big transport companies reached an agreement that should apply for the next five years. The problem is that it has to be approved by the 12 different unions that represent rail workers. Two unions have now rejected this deal and the parties must agree on a further extension by mid-November.

I think there will be a deal to avoid a strike but things are definitely unsettled.

The other major labor law issue for freight shipping is the West Coast port workers’ negotiations between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA), which represents employers.

The good news on the port work issue is that both sides are negotiating an agreement on a daily basis and there have been relatively few leaks. If the talks weren’t going well, they’d probably stab themselves in the press a lot more than they’ve been up to now.

On both issues, however, my concern is that we won’t see a resolution before November 8, when the midterm elections were expected to be mostly resolved. There’s some political pressure on both sides not to turn the volume up too high, especially with all the other glitches. This pressure seems to have been positive so far. If it goes away, who knows what might happen?

MEDWELL: And so there should be some fear. There could be a strike. Maybe more strikes?

BLACKSMITH: Yes, that is possible. It’s unlikely, but definitely something people should be aware of over the next few months.

ME GOOD: What about the holiday season? That won’t ruin Christmas, will it?

BLACKSMITH: I do not think so. I think the parties understand that they have to solve this somehow. If chaos reigns between Thanksgiving and New Years, the political reaction could still be very strong. Nobody wants a huge mess, especially when a global economic slowdown is imminent.

MEDWELL: Let’s close on this hopeful note. Maybe they can find out!

BLACKSMITH: As a matter of fact!

MEDWELL: Thanks for the time and to our readers, we’ll be speaking again soon!

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