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Why Israel Has Been Spared the Global Supply Chain Crunch – So Far

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No child in Israel will be toyless for Hanukkah this year
No child in Israel will be toyless for Hanukkah this yearCredit: Shutterstock

Let me tell you a tale of two holidays.

Christmas in Britain this year is shaping to be a dispiriting affair of high-priced or absent turkey dinners and a paucity of toys for the children. But in Israel, Hanukkah should carry on as normal: admittedly, less of a wallet-buster as holidays go, there will still be jelly donuts galore and plenty of Lipitor for the after-effects. No child will go toyless. Prices will be a little higher, but Israelis will experience nothing like the sticker shock many Brits are suffering.

Britain is feeling the effects of the global supply chain crisis magnified by the severe labor shortage brought on by Brexit. But it’s not alone in feeling the impact. Around the world, Amazon orders are taking longer to arrive, store shelves are often empty, factories are cutting back production for lack of spare parts and ports are backed up.

All this has prompted dire back-to-the-future predictions of a return to 1970s-style stagflation, with sharply rising prices due to the supply-and-demand imbalance and tepid economic growth as shortages of raw materials and components curtail manufacturing.

One might expect Israel to be feeling the brunt of the crisis. After all, our economy is heavily weighted toward foreign trade. Like Britain, Israel is experiencing a labor shortage mainly because many people have decided to delay getting a job. That includes a shortfall of some 3,000 truck drivers, which should be delaying deliveries of goods to stores. 

But, against the odds, we’ve barely felt the supply chain crisis. There are spot shortages of critical things (car parts and cleaning products) and marginal ones (pet food and toys and a few Asian food specialties). Israel imported fewer cars last month because automakers have cut back production in the face of a shortage of semiconductors. If you’re ordering goods online from overseas, the wait can be quite long, but they will arrive.

Why isn’t it worse? One economist I spoke to suggested that during the peak of the COVID crisis last year, Israeli manufacturers built up their inventories of raw materials and components. For now, at least, they are less reliant on the global supply chain. Even food makers, whose raw materials often don’t have long shelf lives, can count on local farm products for much of their needs, said another.

If Israel is feeling the effect of the global crisis, it’s coming in the form of higher prices.

The slow boat 

The cost of shipping a standard 40-foot container from China soared from between $2,000 and $2,500 pre-pandemic to as much as $18,000 today. Meanwhile, commodities prices have soared, especially for energy.

Those higher global prices have trickled into Israel in the form of higher inflation. Israel’s consumer price index rose 2.3 percent in the 12 months through October, and the treasury thinks it could reach 2.8 percent for all of 2021. If so, that will be the fastest increase we’ve seen in a decade.

More worrying is the producer price index (the price manufacturers pay for products, which naturally they will be tempted to pass along to consumers). That rose 11.2 percent in the 12 months.

After a 20-year vacation from high inflation, is it coming back to lighten our wallets? Probably not. Israeli prices have not risen as fast as elsewhere. U.S. inflation was 6.2 percent year on year last month, its biggest rise in three decades. In the eurozone, it rose 4.1 percent. Bank of Israel Governor Amir Yaron seems confident the surge of price rises that we have felt will be short-lived.

Israel has gotten off lightly thanks to 1) the strong shekel, which has helped contain the soaring price of imports, and 2) locally produced natural gas, whose price is disconnected from that of global markets and has held steady or even fallen.

Longer term, of course, Israel can’t continue in splendid isolation. If the world’s supply chain – the network of factories and farms; ships, planes and trucks; ports and airports; and warehouses and retailers – can’t get its act together, eventually we will feel the impact

Not a few people think the supply chain can’t and won’t recover, and that the whole system is bust. But I think that judgment is needlessly harsh.

It is true that the coronavirus exposed how delicate the system is. Many of its hallmarks, such as just-in-time production, left factories critically short of inventories when components and raw materials stopped coming just as they needed them. Another of its hallmarks, the complicated network of suppliers moving goods back and forth across borders before the final product emerges, meant that delays in one country could bring an entire production process to a halt.

On top of that, the global supply chain has been intimately linked with globalism, which is a nasty word for many. The global supply chain hollowed out whole industries in the West and struck a mortal blow against the American and European working class. The resentment that followed is haunting us to this day in the form of populist politics.

Those claims are valid, but there is a lot to be said in favor of the global supply chain. It has lifted many countries out of poverty, most notably China, and has reduced prices to the consumer. It has even arguably forced countries to think twice about stoking tensions with rivals. Witness the United States and China, neither of whom can afford to push the trade war too far because of their economic interdependence.

My guess is that the global supply chain will come back, albeit with some minor fixes. It worked well before COVID struck, and there’s no reason why it shouldn’t work well again after the world has recovered from it.

The beauty of the system is that it is not some grand design but the product of millions of businesses, workers, consumers and policymakers seizing opportunities and adapting to circumstances. That kind of collective wisdom isn’t perfect, but it’s pretty good. It should be no less effective in the post-Covid era. We just need to give it a little time.

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