March 12, 2021
Say it Ain’t So, Joe: Please Don’t Mess with the U.S. and China’s Shared Prosperity
By Victor Menaldo and Nicolas Wittstock
On February 24th, Joe Biden signed an executive order to review U.S. supply chains. The review seeks to establish if the U.S. relies too heavily on foreign suppliers in four key industries: computer chips, large-capacity batteries, pharmaceuticals, and rare earth minerals used in electronics. The problems it seeks to address are growing shortfalls in these essential inputs and overall supply chain unreliability.
Can President Biden somehow improve supply chains and ease shortfalls by mandating more domestic manufacturing of American made inputs?
The answer is no. Global supply chains in semiconductors, batteries, computer chips, and pharmaceuticals have been battered by Trump-era trade restrictions and associated uncertainties, and COVID-19 disruptions have exacerbated shortages in some instances. These shortfalls are either self-induced, temporary, or both. The U.S. government mucking around by seeking to artificially bolster the indigenous supply of stuff America doesn’t already make or doesn’t make in large enough amounts is throwing good money after bad.
There’s a cheaper solution to that problem and it’s called more trade, not less. Growing protectionism and mercantilism will only make things worse.
Let’s be honest. This review targets Sino suppliers and is about China and America’s fraught relationship with this rising economic and technological powerhouse. Let’s also admit that it’s a Trumpist political maneuver through and through.
Donald Trump famously slapped tariffs on Chinese goods imported into the U.S. to the tune of 25 percent of their value in 2017. This is tantamount to taxing $370 billion worth of Chinese imports that range from machinery to foodstuffs. The tariffs remain in place despite a so-called Phase One trade deal signed between the U.S. and China in January 2020. That deal’s signal “accomplishment” was China’s promise to buy an additional $200 billion in American products—an overly ambitious ask, especially in light of the global pandemic.
So far, America’s new president has not removed his predecessor’s tariffs, which is telling in light of the fact that he has reversed so much of Trump’s policies, from public health to immigration. Apparently, Republicans and Democrats do agree on something these days: America’s commitment to trade is no longer what it once was.
Ostensibly, Biden’s supply chain review does not commit the U.S. to a course of action. It merely requires 100-day reviews of producers and distributors operating in so-called critical industries, as well as a one year-long review of supply chains in some broader industries. However, if the Biden Administration declares that industries are “at risk”, it may compel them to rejigger their supply chains to avoid some locations. Read: to exit China. This will dampen overall supply, increase business costs, and stifle innovation. If we add this to President Biden’s “Buy American” campaign, we end up with something that sounds an awful lot like Trumpist protectionism.
Yet, so far, criticism has been muted. And the silence is deafening. When Donald Trump waged a trade war against China, both Democratic and Republican politicians and pundits, not to mention a welter of economists, rightfully decried its incoherence and untenability. The former president launched a crusade to reduce the U.S. trade deficit, but did so by slapping tariffs on Chinese imports willy-nilly. His quixotic and counterproductive reaction to the global division of labor was always destined to fail and leave Americans poorer. There is very little that skin deep tariffs can do to change the fact that the U.S. finances, designs, and markets the things that China manufactures and sells back to us. And, by the way, American firms add the most value and reap the highest share of the profits in that equation, allowing the U.S. to import far more from China than it exports.
Likewise, a review of the U.S. supply chain is likely to end in futile efforts to artificially subsidize inefficient American producers. When the supply of some input such as microchips is running low, prices rise. This induces greater quantities to be produced for the market, which in turn leads to price reductions, back to the initial equilibrium. These new chips may be produced in China, the U.S., or Timbuktu. Wherever they are cheapest to make. No executive action needed. The market is already correcting itself as chip manufacturers are revving up supplies in light of higher prices.
American and Chinese companies have jointly created the most sophisticated and valuable vertically disintegrated supply chains the world has ever known across a wide array of high-technology industries. For example, U.S. fabless companies such as Qualcomm design high performance semiconductors, and rent them out to Taiwanese chip manufacturers and device makers like Apple manufacturing in China. The upshot? Billions and billions of dollars in profits shared among all the parties involved. And very happy American consumers to boot.
Context matters for making sense of why Washington’s power brokers are so nervous and bandying ideas about tariffs, bans, and American self-sufficiency: China managed to close the economic gap with the West by adopting—and sometimes perfecting—its technology. Much of it because of investment and trade flows from the U.S. to China. Defying stereotypes, it was this, more than its huge and low paid labor force, that helped China’s factories produce bicycles, clothes, and toys at large scales and sell them to Western markets so cheaply. Eventually, Chinese firms grew in sophistication and moved up the value chain, producing more technologically complex products, such as routers for wireless telecommunications, and providing services such as digital platforms and cloud computing.
There are certainly historical parallels to the fears voiced by U.S. policymakers regarding China’s economic and technological rise. The British were worried about the rise of the Netherlands in the 17th Century on the back of financial innovations such as liquid securities markets, which birthed the Dutch East India Company and the growth of a global trading Empire that encroached upon the British sphere of geopolitical influence, including in North America. This fueled the crown to engage in mercantilist policies such as the so-called Navigation Acts, which were aimed at bolstering British traders at the expense of their Dutch counterparts. It also triggered several Anglo-Dutch wars. Britain was also worried about the rise of the U.S. in the late 19th Century. However, in this case, the passing of the torch from the former to the latter was peaceful and gradual. While the U.S. had eclipsed Britain in economic terms by the early 20th Century, due in large part to the Second Industrial Revolution (electricity, the internal combustion engine, chemicals, aeronautics, and radio), the former surpassed the latter in geopolitical and military terms only after World War II. Similarly, the United States was worried about the rise of Japan in the 1980s. But these worries faded after Tokyo’s 1990 stock market crash, its subsequent economic collapse, and failure to return to its former economic glory after thirty years of stagnation.
Fears about China today may turn out to be just as overblown. For now, they are inducing the U.S. to harm itself. President Biden can try to tinker with the global supply chain, but he may do so at the expense of shared prosperity and amazing innovations such as supercomputers that fit in our pockets and we can purchase at a fraction of the cost of previous generations of devices. That would be a grave mistake.
