Most would agree that the leading problem facing the construction industry today is supply chain issues. Prices for several product categories have skyrocketed, if they are even available. Long lead-times have come to be expected, causing nightmares for contractors trying to schedule a project. Framing lumber prices became the poster child of out-of-control commodity prices, increasing about 250 percent between the latter part of 2020 and this past June. Even though lumber prices have returned to more normal levels, we’re seeing similar problems for metals (steel, copper and aluminum), plastic construction products, gypsum products, as well as finished products like appliances and windows.

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While volatile materials prices are unfortunately a fact of life, they typically are caused by strong demand. At present, that is not the case. We have a very healthy home building and remodeling market, although nothing compared to the housing boom prior to the Great Recession. Nonresidential building activity however is currently below levels it was at a year ago in the middle of the pandemic. Instead, we have a serious supply problem primarily caused by pandemic-induced disruptions to the supply chain. By and large, U.S industries are more vulnerable to supply chain disruptions now for three reasons: the prevalence of just-in-time inventory management at U.S. producers, the high share of products used in the U.S. that are imported and that these imports come from a broader range of countries.

Ever since it was adopted by Toyota in the 1970s, the just-in-time inventory system has grown in popularity not only in the U.S. but worldwide. This strategy links orders for inputs from suppliers directly with production schedules, thereby increasing efficiency and decreasing waste by receiving goods only as they need them, which reduces inventory costs. This method, however, provides little buffer if there are disruptions in the supply chain.

Additionally, over the past several decades, U.S. companies stopped making as many products domestically and relied on imports from other countries. So, for example, in 1940 the value of imports was just 3.3 percent of our gross domestic product. By 1980 imports had risen to the value of just above 10 percent of GDP, and they totaled almost 16 percent by 2010 before dropping off a bit compared to our GDP in recent years.

As recently as 2005, Canada and Mexico accounted for more than a quarter of our imports. That meant that we relied less on potentially overburdened ports, blocked waterways or expensive air freight to get goods into our country. While China accounted for almost 15 percent of our imports that year, Japan, Germany and the U.K. were high on the list of top importers to the U.S., developed countries that might be expected to have more robust infrastructure and a more highly developed supply chain.

Over the past decade and a half, we’ve seen some fairly dramatic shifts in the sources of our imports. China has moved up to become the top source, providing more than 17 percent of U.S. imports, Canada has moved behind Mexico to No. 3 on the list, while the share of imports from Japan, Germany and the U.K. all have fallen. In their place, there have been growing shares from South Korea, Taiwan, India and particularly Vietnam. These developing Asian countries provide needed commodities, and produce goods very efficiently, but typically don’t have the advanced infrastructure to withstand supply challenges.

Many U.S. manufacturers are now seeing the vulnerabilities of a global supply chain. While we won’t go back to a system of total self-sufficiency, we can expect some significant changes. Producers are likely to hold more work-in-process inventory and move at least some production closer to home. Hopefully, this will help minimize the potential disruptions that have been exposed by this pandemic.

Kermit Baker is the senior research fellow for the Joint Center of Housing Studies at Harvard University. He may be reached via e-mail at [email protected].