Our So-Called Foreign Policy: Why Scalpels Won’t Cut it Against China

Tags

Biden, China, China Strategy Group, decoupling, Donald Trump, Eric Schmidt, EU, European Union, FDI, foreign direct investment, Germany, Google, health security, Made in America, manufacturing, multilateralism, national security, Our So-Called Foreign Policy, semiconductors, Silicon Valley, supply chain, Taiwan, technology

Yesterday’s RealityChek post argued made clear that one of the two recent blueprints for China policy offered to President Biden from the foreign policy and technology establishments suffered from crippling internal contradictions.

The second effort, from the Silicon Valley-dominated “China Strategy Group,” can be read more profitably by the President, because popping up here and there are some insights that are genuinely valuable especially since they come from analysts once strongly supportive of what they themselves call the pre-Trump strategy of “near-unbounded integration.”

Principally, the group, which notably is co-chaired by Google co-founder Eric Schmidt, calls for recognizing that “some degree of [U.S.-China] disentangling is both inevitable and preferable. In fact, trends in both countries—and many of the tools at our disposal—inherently and necessarily push toward some degree of bifurcation.” In other words, it’s endorsed a limited version of what’s now commonly called economic and technological decoupling.

In addition, it argues that both this decoupling, along with tariffs that it acknowledges may be needed to push back against certain Chinese offenses and provocations, should be pursued even though they will entail costs – a refreshing and crucially important departure from the long-time pre- and post-Trump consensus in the mainstream American political, business and policy communities that any increased consumer or producer price, or loss of even a smidgeon of market share in China resulting from retaliation from Beijing, proves conclusively the folly of placin any significant curbs on doing business with the People’s Republic.

Finally, the group points out that efforts to rebuild domestic supply chains to reduce reliance on China for critical goods must involve “more than a focus on the end products. Safeguarding key technologies requires the United States to define and secure the entire ecosystem of production, from fabrication to supply to talent to cutting-edge innovation.” In other words, Washington can’t simply seek to become self-sufficient, or largely so, in face masks or ventilators or semiconductors. It needs to become self-sufficient or largely so in all the materials, parts, and components required to make these products.

Yet many of these important insights (and useful recommendations for restructuring the U.S. government to foster the competition with China more effectively) are kneecapped by equivocation and a resulting failure to understand that sometimes policy scalpels cut too finely, and some policy needles are too small to be threaded – especially considering the “all of society” drive China’s totalitarian system is making to gain global technology leadership, and the dangers to America’s “security, prosperity, and way of life” Chinese success would create.

For example, the group emphasizes that decoupling policy mustn’t invite “escalatory cycles of confrontation, retaliation, or unintended conflict” or overlook those areas “where cooperation, collaboration, and exchange with China is in our interest, as severing ties and closing off the United States to the ideas, people, technologies, and supply chains necessary to compete effectively will undermine U.S. innovation.” At the same time, the authors acknowledge that China will respond to any further U.S. decoupling moves “more aggressively” precisely because “China’s leaders understand U.S. dependency as an important source of leverage.”

So although in principle, this omelet can be made without breaking many eggs, Beijing won’t be cooperating in fact. And the circle can’t be squared with clever phrase-making like “navigating the asymmetric competition” that look satisfactorily reassuring on paper and in speeches to conferences but that need to survive the body blows that will inevitably be delivered by reality.

The group’s approach to Chinese investment in the United States (whether in the form of creating new businesses or taking over or contributing capital to existing firms) illustrates the other big drawback of granular approaches when it comes to China: They ignore how any Chinese entity big enough to play in any foreign market, and especially America’s, is under Beijing’s thumb in every important respect.

As a result, there’s no point in taking the time and expending the resources to follow the group’s recommendations to figure out which Chinese tech platforms (whose importance it emphasizes) are and are not violating American privacy standards or conducting misinformation campaigns dangerous to democracy, or censoring content Chinese authorities don’t like, or helping suppress human rights in China or anywherer else, or stealing valuable data, or helping terrorists and criminals launder money; or whether these activities matter enough to merit official U.S. attention, or whether troublesome practices can be negotiated away through talks with Beijing on technical and other fixes.

In this instance, Washington should stay out of the black holes of setting priorities and especially monitoring and enforcing agreements, and assume that by simply banning these platforms from operating in the United States and in fact prohibiting all Chinese entities from owning U.S. hard assets. The latter step would add the benefit of shielding participants in America’s economy from competition with subsidized, market-distorting outfits from China. At the very least, Chinese entities should be required to prove that they’re not controlled or subsidized in any way by Beijing, or engaged in the above malign activities, before gaining entry.

In addition, despite the group’s understanding that entire manufacturing eco-systems, not just final products, need to be rebuilt and nurtured to ensure supply chain security, it appears to underestimate just how widely these relationships extend. After all, most of the numerous inputs to goods like mechanical ventilators (like its controls, power sources, monitors, and alarm systems) depend on big and complex supply chain and manufacturing eco-systems themselves.

Further, just as before the pandemic, few expected face masks and surgical gloves to become products vitally important to the nation’s well-being, the list of critical goods is likely to change and grow over time as new threats emerge. Therefore, the group is correct in warning that “any product or service could be termed essential to national security in an extreme hypothetical.” But what’s the basis for confidence that many products or services can safely be ruled out, and that such hypotheticals will always remain extreme?

At least as important, like the Biden administration, the group’s determination not to ruffle too many international feathers has also clearly led it to back the notion that the definition of “Made in America” for supply chain purposes should actually mean, “Also Made in Lots of Other Countries” that it considers trusted suppliers. Unfortunately, many of the countries so classified imposed export controls on critical medical goods during the pandemic’s first wave last spring. That is, when cooperation was most needed, they built walls – meaning that their trustworthiness isn’t exactly ironclad.

And as then President-elect Biden learned when the European Union rebuffed his entreaty to consult with Washington before signing an investment agreement with China, the allies remain determined to fence sit in the U.S.-China technology competition. The group acknowledges that the list of anti-China partners “may include all of the [European Union], though in some cases EU position/member states’ positions are too ambiguous today with respect to China for inclusion in all instances, and members may need to be considered on an individual basis.” But simply stating this position and its EU-splitting ambitions is enough to make clear its absurdity – especially since the EU country most reluctant to cooperate against China is economic kingpin Germany.

None of this is to say that all trade with (as opposed to investment in hard assets from) China should be cut off completely, or that international cooperation can be of no use to the United States in its struggle versus the People’s Republic. In particular, (and due largely to recklessly indiscriminate free trade policies), America urgently needs products and knowhow now dominated by foreign producers (notably Taiwan’s semiconductor manufacturing industry, and Japanese and Dutch suppliers of key microchip production equipment and materials). And if other countries are willing to cooperate with Washington on various China containing initiatives at acceptable prices, more help is indeed better than less. But the United States will never safeguard its interests adequately without realizing that multilateralism can’t be an end in and of itself, and that against monumental threats, axes are usually more effective than scalpels.

Our So-Called Foreign Policy: Biden’s Just Been Fooled Twice by Europe

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alliances, allies, America First, AstraZeneca, Belgium, Biden, CCP Virus, China, coronavirus, COVID 19, EU, European Union, Financial Times, globalism, health security, Northern Ireland, Our So-Called Foreign Policy, supply chains, The New York Times, Trump, United Kingdom, vaccines, Wuhan virus

It’s beginning to look like a pattern: President Biden keeps making clear that he’s determined to repair the vital U.S. alliance relationships he believes Donald Trump disastrously weakened, and the Europeans, anyway, keep flipping him the bird either explicitly or implicitly. And as the old saying goes, shame on anyone who’s been fooled more than once.

The explicit example came before Inauguration Day. The European Union (EU) – whose members were touted by candidate Biden as eager potential partners in a multilateral coalition against a common Chinese economic and national security threat – were on the verge of finalizing an investment treaty with Beijing. A top Biden aide publicly asked the EU to think twice and consult with the United States before proceeding. In response, the Europeans…proceeded. (See here for the details.) 

The implicit example came last week. During the campaign Mr. Biden, as noted here, made clear (except to every American journalist who covered the matter) that his plan to strengthen U.S. supply chains and make sure that the nation would never again be reliant on adversaries like China for crucial medical equipment and other vital products was by no means an “America Only” or even an “America First” proposal. Instead, one of its planks pledged to

“engage with our closest partners so that together we can build stronger, more resilient supply chains and economies in the face of 21st century risks. Just like the United States itself, no U.S. ally should be dependent on critical supplies from countries like China and Russia. That means developing new approaches on supply chain security — both individually and collectively — and updating trade rules to ensure we have strong understandings with our allies on how to best ensure supply chain security for all of us.” (Here’s the full document.)

In principle, this characteristically multilateral Biden approach made sense. Yet the blueprint came out scant months after (as reported here) many of these allies reacted to the outbreak of the CCP Virus by blocking exports of key medical equipment to ensure they could supply themselves.

You’d think that Mr. Biden, therefore, would have learned this lesson and recognized that the United States simply can’t afford to define “Made in America” as “Made in Lots of Other Countries, Too.” But you’d be wrong.

The day after his inauguration, the new President issued an executive order to create “a Sustainable Public Health Supply Chain.” And one of it directives charged various Cabinet and other agencies and senior advisers to study “America’s role in the international public health supply chain, and options for strengthening and better coordinating global supply chain systems in future pandemics….”

Again, therefore, Mr. Biden specified that this “sustainable public health supply chain” would stretch far beyond America’s shores, and that he believed various kinds of these “global supply chain systems” could ensure the nation’s health security in “future pandemics.”

How did the Europeans react? Little more than a week later, the European Union moved to restrict exports of the CCP Virus vaccine made by pharmaceutical giant AstraZeneca because its own supplies were so short. As a top EU official explained, “The protection and safety of our citizens is a priority and the challenges we now face have left us with no choice other than to act.”

The EU almost immediately reversed its decision – but only in part. It agreed to maintain shipments to the United Kingdom (which has recently left the union under a complicated agreement negotiated after the “Brexit” referendu vote of 2015) and to Northern Ireland (which is a part of the UK, but which remains part of the Union’s single market for goods). But the Europeans, according to The New York Times, still intend “to introduce export controls that could prevent any vaccines made in the European Union from being sent to non-E.U. countries, but without involving Northern Ireland….”

For good measure, great potential remains for a big vaccine-related dispute between the United Kingdom and the EU due to differences over which party is contractually entitled to the highest priority when it comes to vaccine shipments.

And the Financial Times reported that “Belgium, a key location for vaccine production in the EU, has notified the Commission of a draft health law that would give it new powers to curb medicines exports. The proposed legislation would allow Belgian authorities to restrict or ban the shipment of critical medicinal products and active ingredients, in case of shortages or potential shortages.”

Vaccines apparently are not included, but how could any responsible leader inside the EU or outside count on Belgium keeping its word during emergencies?  The same goes, incidentally, for the word of a United States led by an adult thinker, as opposed to a globalist determined to return to the pre-Trump days of Uncle Sucker.   

President Biden clearly needs to learn that lesson, too – and also needs to start asking himself whether the Europeans are holding his administration and his allies uber alles globalism up for ransom, and if the price for securing their cooperation on any number of issues is turning out to be dangerously unaffordable.

Im-Politic: Advice Biden Should Reject, but Probably Won’t

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Alibaba, Andrew Ross Sorking, Biden, Biden administration, China, foreign policy, globalism, globalists, health security, Henry Kissinger, Im-Politic, Jamie Dimon, Joseph C. Tsai, JPMorgan Chase, multilateralism, nationalism, The New York Times, Tony Blair

All Americans of good will should hope for the Biden administration’s success. In fact, on a trouble-shadowed Inauguration Day, it seems especially appropriate to create and nurture the brightest feel-good glow possible.

Nonetheless, it’s also vital to keep something else in mind: Powerful forces are acting more determined than ever to convince the public that the new President should double down on the same major policy blunders that ensured the elites’ own power and wealth, but that dangerously weakened U.S. security and prosperity. For good measure, of course, these decisions brought hardship, despair, and (as demonstrated by the country’s deep polarization), bitterness to tens of millions of Americans. And there’s every reason to believe they have a willing audience.

And before you dismiss those thoughts as the sour grapes of a Trump policy supporter, I hope you’ll read this column from Monday by The New York Times‘ Andrew Ross Sorkin, who the paper seems to be enabling to settle into a role of out-and-out establishment mouthpiece.

According to Sorkin, “a provocative memo [is] being circulated among policymakers on both sides of the aisle and the Biden transition team ahead of his inauguration.”

Continues Sorkin, “It is even more notable for who wrote it….an under-the-radar group of global boldfaced names that act as a private advisory committee to JPMorgan Chase. Among others, they include Tony Blair, the former British prime minister; Condoleezza Rice and Henry Kissinger, two former secretaries of state; Robert Gates, the former secretary of defense; Alex Gorsky, chief executive of Johnson & Johnson; Bernard Arnault, chairman of LVMH; and Joseph C. Tsai, executive vice chairman of Alibaba.”

These globalist A-listers “typically [meet] once a year in a far-flung location with JPMorgan’s chief, Jamie Dimon.” Their discussions “are usually kept private. But given the precarious state of the world during a pandemic and change in leadership in Washington, the group put its views on paper in hopes of persuading policymakers to address what it sees as the most pressing priorities.”

Sorkin at least has the…honesty?…to describe their musings as “ a manifesto of sorts calling for a reset, a return to the pre-Trump days. It seeks to turn back the clock to a time when being called a globalist wasn’t an epithet….”

And although he adds that it “acknowledges the failures of globalism and seeks to correct them,” the group’s intentions (which readers need to take on face value, since the full document itself isn’t reproduced), justify deep skepticism for several reasons, starting with its make-up.

After all, it’s one thing to include a former foreign leader (the United Kingdom’s Tony Blair) and the head of a foreign multinational company (French-owned luxury goods maker LVMH). There’s no reason to believe that they have any special concern for America’s security and well-being, but at least they come from allied democracies.

But Joseph C. Tsai, a bigwig at Alibaba? JP Morgan’s Dimon is of course free to seek his advice on various matters, too, but maybe a senior executive from a Chinese entity that by definition is ultimately controlled by China’s hostile thug dictatorship could have been included out of the group’s effort to provide advice to an American President?

So not that other members of the group (like Kissinger for much of his post-government career) don’t have long records as China apologists and lobbyists for companies hungry to do business with and therefore curry favor with Beijing.

But Tsai’s involvement casts in an especially suspicious – and suspiciously defeatist – light the recommendation that “The best outcome for U.S.-China relations is likely managed competition — an accommodation that avoids military conflict while allowing for limited cooperation. It is impractical to think that supply chains and manufacturing can be moved simply, affordably or comprehensively out of China.”

If anything’s impractical, and indeed a spectacularly proven failure, it’s their stated belief that (in Sorkin’s words), U.S. interests can adequately be served by “a return to engaging with China, especially on climate issues and global health, while acknowledging the ‘significant challenge’ the country poses.” This soothing formula is exactly what’s led to the U.S. economic and technology policies that led directly to the rise of the Chinese threat.

The group’s perspectives on the CCP Virus and what it’s taught us about global supply chains and public health security and the like is no more impressive: “The near-total absence of American leadership, coupled with the nationalist approach of too many countries, have come at the expense of a strategically coherent, international response to the pandemic.”

Of course, it’s precisely because so many countries responded nationalistically to the virus – ostensibly when a globalist perspective was needed most – in particular blocking the export of crucial healthcare goods to ensure that their own supplies would be sufficient, that the United States can’t afford to be an exception, and needs to achieve self-sufficiency.

As for the group’s notion (as explained in the words of member Robert Gates, a former U.S. defense secretary) that “international cooperation and engagement on the international front and the relationships with our allies, …serves America’s self-interest,” it simply doesn’t suffice in bromide form any more. Now’s the time to explain exactly why this stance amounts to something more than what it turned into under the last few pre-Trump Presidents – a formula for needlessly risking nuclear war by coddling wealthy but militarily free-riding allies, and winning international friends and influencing people by giving away huge chunks of the U.S. economy’s productive heart.

Perhaps most revealing of all – both of the group’s cynicism and possibly Sorkin’s – was Dimon’s statement to the latter that “The first thing businesses should do is separate their company’s interests from what’s in the interest of the country.” This from a finance sector that has worked tirelessly for decades to push the offshoring of American manufacturing, with all the national security dangers and economic ruin it’s produced – as Sorkin conspicuously failed to point out.

Sorkin’s contention that “the message the group is advancing is common sense” makes clear that he’ll be an eager collaborator. And that probably goes for much of the rest of the establishment-idolizing and Never Trumper Mainstream Media. Fortunately for these elites, but worrisomely for the American people, everything known about Mr. Biden’s career is telling us that he will be, too.

Note: Eagle-eye readers may notice that I just called the new President “Mr. Biden” rather than “Biden.” That’s because he’s the new President, and therefore, at least in my view, deserves to be identified in a manner as distinctive as the authority of his office when the name is being used as a noun. By the same token, Donald Trump will be called “Trump” – a designation I’ve used for all other individuals I’ve written about in RealityChek, except when referring to them for the first time in a particular article.

But I’ll still restrict myself to using the family name when it functions as an adjective (e.g., “Biden administration,” “Biden policy”).

Truth to tell, I’ve had some ongoing trouble figuring out how to treat former Presidents. The tentative solution I’ve come up with is using that last-name-only form when they’re recent (e.g., “Obama”) and tending (not entirely consistently, I’m sure) to use their full names more frequently the further back in time we travel. (E.g., “former President Richard Nixon” or “former President Ulysses S Grant.”)

Even in such instances, though, I’ve struggled to be consistent without being overly pedantic with the exceptionally well known Presidents (like Washington and Lincoln). And when it comes to “Bush” and “Johnson” and “Roosevelt” and “Adams” I’ve needed to make clear whether I’m talking about George H.W. or George W.; Lyndon Baines or Andrew; Franklin D. or Theodore; and John or John Quincy, respectively.

And another complication: Sometimes, the temptations of stylistic diversity have led me to refer to former Presidents by their first and last names (e.g., “Barack Obama,” “Bill Clinton”). I’m sure these temptations will continue, but I just wanted to let you know that I’m trying to be as consistent as possible. Kapische?

(What’s Left of) Our Economy: U.S. Manufacturing Revival Plans Still Need Trump-like Tariffs

Tags

Buy American, carbon tariff, carbon tax, Dan Breznitz, David Adler, health security, infrastructure, Joe Biden, manufacturing, manufacturing trade deficit, research and development, supply chains, tariffs, taxes, technology, The New York Times, Trade, {What's Left of) Our Economy

I was thrilled to see today’s op-ed piece on U.S. manufacturing in The New York Times, and not just because co-author David Adler is a good friend. I was also thrilled to see it because a careful reading reenforces the essential notion that all the worthy proposals made by policy analysts and politicians lately (including apparent President-elect Joe Biden) on reviving industry will either come to naught or greatly underperform without steep, and indeed Trump-like, tariffs to shut a critical mass of imports out of the economy.

Those domestically-focused manufacturing revival measures have included more federal funding for research and developments, greater federal efforts to help smaller manufacturers in particular learn about and access research breakthroughs in academia and existing government labs, measures to help these smaller industrial firms access capital more easily, tax breaks to foster production and innovation in the United States, and more ambitious and better enforced Buy American requirement for federal purchases of manufactured products. In general, I’m strongly supportive, and have even criticized the Trump administration for giving them short shrift (even on the tax front, where the big 2017 cuts should have come with more investing and hiring strings).

From knowing David, I feel sure that he backs these intiatives, too; indeed, the article concentrates tightly on the Buy American slice of this agenda. And the piece gratifingly (but probably unknowingly) endorses an idea that I’ve made for many years, but that has gotten zero traction: requiring “all manufacturing industries to disclose how much of their sourcing and critical production takes place in the United States.” After all, how can Washington make the right manufacturing policy decisions when it relies so heavily for such crucial information from crumbs self-servingly cherry-picked by offshoring-happy companies themselves?

Yet as also suggested by David and co-author Dan Breznitz – who studies innovation policies at the University of Toronto – except for the Buy American proposals, the standard raft of manufacturing revival plans could work to  stimulate more production and supply, but pays inadequate attention to ensuring that all that supply is actually bought – which would eventually make companies think twice about producing more.

The authors place much stock in government’s ability to soak up this output, and so does Biden – who on top of making sure that more of what government currently purchases is American-made, has pledged to spend “$400 billion in his first term in additional federal purchases of products made by American workers, with transparent, targeted investments that unleash new demand for domestic goods and services and create American jobs.”

The former Vice President correctly contends that these measures will “provide a strong, stable source of demand for products made by American workers and supply chains composed of American small businesses.” The history of U.S. industrial policy also shows that early guaranteed government purchases helped new industries demonstrate the usefulness of innovative products that eventually interested the private sector and produced enormous new markets for their products on top of federal contracts. (Think “computers” and all the hardware and software used pervasively now not only in technology sectors but in virtually the entire economy.)

But U.S.-based manufacturers turned out just over $2.35 trillion worth of goods in 2019 (the last full pre-CCP Virus year). And the manufacturing trade deficit that year was $1.03 trillion. So unless it’s supposed that that 2019 level of domestic manufacturing production is remotely adequate (and clearly, the manufacturing policy reform supporters don’t), or unless they believe that government should buy much more of the output than the $400 billion Biden proposes over not one but four years (to sit in warehouses?), generating more private demand for industry’s output will be essential as well.

As indicated above, David and Dan Breznitz argue that more detailed, accurate labeling will help by enabling more consumers and private businesses to act effectively on their naturally strong preferences for Made in the USA goods – not only out of patriotism, but because of reasonable convictions that their quality and safety are superior. I remain all in favor, but the immense popularity of imports among both classes of customers (made clear by the huge and chronic manufacturing trade deficits) despite numerous news accounts over the years of shoddy, outright dangerous foreign-made products (especially from China), demonstrates that much more will need to be done to spur demand for U.S.-produced manufactures.

RealityChek regulars will not be the slightest bit surprised that I’m ruling out overseas demand as a promising net new source of customers for American domestic manufacturers. Unfortunately, the persistence of the huge manufacturing trade deficits is also evidence that most of America’s international trade partners are far too devoted to the health of their own industrial bases to permit major U.S. inroads. In fact, if anything, they’re likely to step up their own efforts to strengthen their own domestic industries by further curbing U.S. and other foreign competition. And that’s where the tariffs come in.

Not that David and Dan Bernitz, or Biden, overlook the need for U.S. market protection entirely. The former, for example, call for “Stopping predatory pricing by foreign manufacturers” – which entails slapping tariffs on these usually government-subsidized artificially cheap goods. The latter makes similar points, and has also mentioned a carbon tariff on products from countries that base their competitiveness on ignoring “their climate and environmental obligations.” (At the same time, Biden could use a similar levy to punish domestic companies that don’t measure up in his administration’s eyes climate-wise, leaving the net benefit to U.S.-based manufacturing minimal.)

Moreover, to ensure adequate domestic supplies of the healthcare goods needed to fight the next pandemic, simple stockpiling of products by government will be necessary. And since practically everything wears out over time, or becomes outmoded, lots of re-stockpiling will be necessary. Meanwhile, it should go without saying that many of the government purchases of manufactures will be used for critical national purposes – like repairing and building all kinds of traditional and technology infrastructure systems, and producing whatever new military equipment or refurbishing of old equipment the new Congress and the likely new administration wind up supporting.

But these are of course public purposes, and since the United States is still a strongly private sector-driven economy, that’s what’s inevitably going to determine the success of most manufacturing revival efforts. So unless manufacturing revivalists want government to play a veritably dominant role in production and consumption decisions, their strategy will employ tariffs – but not in a targeted, sector-specific, and reactive way, much less as an afterthought to domestic initiatives. Instead, they’ll be proactive, come in a flat-rate form, and stand high enough to encourage plenty of new market entrants that it makes sense to join established enterprises in vigorous, overwhelmingly domestic competition for America’s immense pool of customers.

Following Up: Podcast On-Line of Last Night’s National Radio Interview on Biden China Policy

Tags

China, Following Up, Gordon G. Chang, health security, healthcare goods, Joe Biden, manufacturing, national security, supply chains, tariffs, tech, The John Batchelor Show, Trade, trade war, Trump

I’m pleased to announce that the podcast is now on-line of last night’s interview on John Batchelor’s nationally radio show on the future of U.S.-China relations. Click here for a timely conversation among John, co-host Gordon G. Chang, and me on whether a possible Biden administration will continue or end President Trump’s trade and tech wars with China, and keep his promises to bring back home key manufacturing supply chains.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Those Stubborn Facts: A Strange Definition of a Broken Trump Promise

Tags

Associated Press, CCP Virus, coronavirus, COVID 19, health security, Mainstream Media, manufacturing, masks, medical supplies, PPE, supply chain, textiles, Those Stiubborn Facts, Trump, Wuhan virus

“Shortages of meltblown textiles, key to N95 mask-making, illustrate ‘the failure of this administration to take necessary steps to fulfill’ its promise of restoring critical manufacturing capacity lost to China.”

– Associated Press, September 10, 2020

“Pre-pandemic, five U.S. producers were making about 42 million N95 masks a month. By October, that is projected to have increased to 11 U.S. producers making 168 million a month, which could amount to 2 billion a year….”

–Associated Press, September 10, 2020

“Also pre-pandemic, 24 U.S. companies were making meltblown, with 79 machine lines in operation….But only a fraction of that was going into medical respirators….By the end of 2021… there will be 28 new lines in the U.S., representing a 35% increase, with almost all of the newly produced textile going into medical supplies.”

–Associated Press, September 10, 2020

(Source: “Scarcity of key material squeezes medical mask manufacturing, by Martha Mendoza, Juliet Linderman, Thomas Peipert, and Irena Hwang,” Associated Press, September 10, 2020, https://apnews.com/02a0542e8a05176bd5d79757134bc277)

(What’s Left of) Our Economy: Without Supply Chain Transparency, There’s No Supply Chain Security

Tags

Bureau of Economic Analusis, Defense Department, Defense Innovation Unit, defense manufacturing, election 2020, FDI, foreign direct investment, GAO, Government Accountability Office, health security, Joe Biden, medical equipment, national security, offshoring, Pentagon, supply chains, Trump, {What's Left of) Our Economy

Earlier this month, I criticized Joe Biden’s new plan to strengthen U.S. domestic manufacturing with a special eye toward boosting the security of key supply chains for holding out as a model the Pentagon’s work on defense-related manufacturing. Just this week, I found even more evidence to support the view that if the presumptive Democratic presidential nominee is really serious about achieving this goal (and given his longstanding record on trade and globalization issues, ample doubt is warranted) he’ll need a dramatically new model.

By the way, these findings show that the Trump administration also remains too far from getting its own supply chain act together.  And the main reason is a dangerous – and wholly unnecessary – lack of supply chain transparency.

The evidence comes from a September, 2019 report from the U.S. Government Accountability Office (an investigative arm of Congress) that summarizes the views of a panel of specialists convened to discuss foreign threats to the U.S. defense manufacturing base, and presents findings on the subject from various U.S. government agency, private sector, and university studies. The threats include the offshoring of the production of key defense-related goods; takeovers by foreign entities of U.S.-based facilities that supply these products, along with important services, or foreign acquisitions of significant stakes in these facilities; and the loss of U.S. competitiveness in these areas for market- and competition-related reasons and the resulting turns to foreign suppliers.

And crucially, the panelists consulted (listed on p. 40 of the report) include no notable supposed globalization alarmists or China hawks. In fact, one panelist was a senior executive of the U.S.-China Business Council, which has been a major pillar of what I call the nation’s Offshoring Lobby.

The report correctly noted that the use of foreign-origin goods and services can benefit U.S. national security interests. Specifically, it can “lower costs and provide better access to foreign workers and markets [which can help the companies in question gain the benefits of economies of scale by winning more customers].” Moreover, “When companies that offshore contract with DOD [the Departent of Defense], they can pass those benefits along. Foreign investment can help U.S. companies grow.”

So as in all areas of public policy, the key is finding the best balance, and reasonable people can always legitimately disagree on where it’s found. But here’s what’s really alarming about the message sent by the GAO report – and collectively by all the specialists and materials consulted: Neither the Defense Department nor any other branch of the U.S. government has the ability needed to achieve this goal partly because they lack the information needed to identify vulnerabilities, and partly because much helpful information is kept confidential at the request of private industry.

Here are the main relevant observations and conclusions presented in the report making emphatically clear that the nation lacks the supply chain transparency vital to improving supply chain security:

>”[T]he absence of a common definition of offshoring makes it difficult to analyze the extent to which offshoring is occurring in general as well as its effect on the defense supplier base. As such, the extent of offshoring and its effects are largely unknown.”

>”[P]ublicly available data do not provide granularity to analyze foreign direct investments in industry subsectors that comprise the defense supplier base.”

>”Pentagon “industrial policy officials told us that BEA’s [the Commerce Department’s Bureau of Economic Analysis] publicly available data are not complete enough to assess foreign investments in U.S. defense industrial subsectors. We also found that BEA does not disclose certain data for industry subsectors if the data would disclose the identity of individual companies, as these data are considered confidential. For example, BEA data on new foreign direct investment from China in the U.S. industry subsector “electrical equipment, appliances and component manufacturing” are not publicly available for 3 of the 5 years we reviewed.”

>”[A]ccording to BEA, new foreign direct investment data do not capture foreign investment transactions that involve less than 10 percent voting ownership in a U.S. enterprise. This may include data on venture capital investments in U.S. start-ups. According to a report by the Defense Innovation Unit (DIU) within DOD, there are an increasing number of investments in U.S. venture-backed startups from China-based investors that are not tracked by the U.S. government. This limits full visibility into foreign investors and the technologies they are investing in, as well as any increase or decrease in investment flows.”

>The DIU “echoed concerns about the limitations of U.S. government data and stated that the U.S. government does not comprehensively track all available data on investments, including those from private sources to assemble a complete picture of the level of foreign investment in U.S. companies.”

One big takeaway from the above is that the Defense Department is far from the only culprit here. Much more important, though, nothing could be clearer from this list of information gaps than that the Pentagon that Biden would rely on hasn’t made much of an effort to close them. And although the Trump administration has rhetorically prioritized reshoring manufacturing back to the United States in part for national security-related reasons, and can boast noteworthy progress in changing the U.S. trade policies that have encouraged so much defense-related offshoring, it’s clearly made little progress in making sure that it has the most fundamental information it needs to make sound decisions.

Also critical to recognize: It’s not that this information doesn’t exist. As I’ve previously noted, the companies that produce these goods and provide these services know exactly they, and most of their own contractors and subcontractors, are doing. Fully understanding and optimizing their own operations, after all, is one of the main ways they make money.

And the best way to extract what the government needs is to require legally what I’ve described as “Truth in Globalization” – and require it fast. Otherwise, no matter who wins the Presidency in November, the U.S. government will needlessly keep flying blind on supply chain security.

Our So-Called Foreign Policy: Evidence that the Multinationals Really Did Sell the U.S. Out to China

Tags

capital spending, chemicals, China, computers, electronics, health security, healthcare goods, information technology, investment, Lenin, manufacturing, multinational companies, national security, offshoring, offshoring lobby, Our So-Called Foreign Policy, pharmaceuticals, research and development, supply chains, tech, tech transfer, U.S-China Economic and Security Review Commission, USCC, World Trade Organization, WTO

RealityChek readers and anyone who’s familiar with my work over many years know that I’ve often lambasted U.S. multinational companies for powerfully aiding and abetting China’s rise to the status of economic great power status – and of surging threat to U.S. national security and prosperity. In fact, the dangers posed by China’s activities and goals have become so obvious that even the American political and policy establishments that on the whole actively supported the policies – and that permitted money from this corporate Offshoring Lobby to drive their decisions – are paying attention.

If you still doubt how these big U.S. corporations have sold China much of the rope with which it’s determined to hang their own companies and all of America (paraphrasing Lenin’s vivid supposed description of and prediction about the perilously shortsighted greed of capitalists), you should check out the latest report of the U.S-China Economic and Security Review Commission (USCC). As made clear by this study from an organization set up by Congress to monitor the China threat, not only have the multinationals’ investments in China figured “prominently in China’s national development ambitions.” They also “may indirectly erode the United States’ domestic industrial competitiveness and technological leadership relative to China.”

Worst of all, “as U.S. MNE (“multinational enterprise) activity in China increasingly focuses on the production of high-end technologies, the risk that U.S. firms are unwittingly enabling China to achieve its industrial policy and military development objectives rises.”

And a special bonus – these companies’ offshoring has greatly increased America’s dependence on China for supplies of crucial healthcare goods.

Here’s just a sampling of the evidence presented (and taken directly by the Commission from U.S. government reports):

> U.S. multinationals “employ more people in China than in any other country outside of the United States, primarily in the assembly of computers and electronic products.” Moreover, this employment skyrocketed by 574.6 percent from 2000 to 2017.

> “China is the fourth-largest destination for U.S. MNE research and development (R&D) expenditure and increasingly competes with advanced economies in serving as a key research hub for U.S. MNEs. The growth of U.S. MNE R&D expenditure in China is also comparatively accelerated, averaging 13.6 percent yearon-year since 2003 compared with 7.1 percent for all U.S. MNE foreign affiliates in the same period. This expenditure is highest in manufacturing, particularly in the production of computers and electronic products.”

> “U.S. MNE capital expenditure in China has focused on the creation of production sites for technology products. This development is aided by the Chinese government’s extensive policy support to develop China.”

> The multinationals’ capital spending on semiconductor manufacturing assets “has jumped 166.7 percent from $1.2 billion in 2010 (the earliest year for which complete [U.S government] data is available) to $3.2 billion in 2017, accounting for 90 percent of all U.S. MNE expenditure on computers and electronic products manufacturing assets in China.”

> “China has grown from the 20th-highest source of U.S. MNE affiliate value added in 2000 ($5.5 billion) to the fifth highest in 2017 ($71.5 billion), driven primarily by the manufacture of computers and electronic products as well as chemicals. The surge is especially notable in semiconductors and other electronic components.”

> “[P]harmaceutical manufacturing serves as the largest chemical sector in terms of value-added [a measure of manufacturing output that seeks to eliminate double-counting of output by stripping out the contribution of intermediate goods used in final products]…” And chemicals – the manufacturing category that include pharmaceuticals – has become the second largest U.S-owned industry in China measured by the value of its assets (after computers and electronic products).

Incidentally, the report’s tendency to use 2000 as a baseline year for examining trends is no accident. That’s the year before China was admitted into the World Trade Organization (WTO) – and the numbers strongly reenforce the argument that the multinationals so avidly sought this objective in order to make sure that the value of their huge planned investments in China wouldn’t be kneecapped by any unilateral U.S. tariffs on imports from China (including those from their factories). For the WTO’s combination of consensus decision-making plus the protectionist natures of most of its members’ economies created a towering obstacle to Washington acting on its own to safeguard legitimate American domestic economic interests from Chinese and other foreign predatory trade and broader economic activity.

At the same time, despite the WTO’s key role in preserving the value of the multinationals’ export-focused China investments, the USCC study underestimates how notably such investment remains geared toward exporting, including to the United States. This issue matters greatly because chances are high that this kind of investment (in China or anywhere else abroad) has replaced the multinationals’ factories and workers in the United States. By contrast, multinational investment in China (or anywhere else abroad) that’s supplying the China market almost never harms the U.S. domestic economy and in fact can help it, certainly in early stages, by providing foreign customers that add to the domestic customers of U.S.-based manufacturers.

There’s no doubt that the phenomenal growth of China’s own consumer class in recent decades has, as the China Commission report observes, generated more and more American business decisions to supply those customers from China. In other words, the days when critical masses of Chinese couldn’t possibly afford to buy the goods they made in U.S.- and other foreign-owned factories are long gone.

But the data presented by the USCC does nothing to support this claim, and the key to understanding why is the central role played by computer, electronics, and other information technology-related manufacturing in the U.S. corporate presence in China. For when the Commission (and others) report that large shares of the output of these factories are now sold to Chinese customers, they overlook the fact that many of these other customers are their fellow entities comprising links of China-centric corporate supply chains. These sales, however, don’t mean that the final customers for these products are located in China.

In other words, when a facility in China that, for example, performs final assembly activities on semiconductors sells those chips to another factory in China that sticks them into computers or cell phones or HDTV sets, the sale is regarded as one made to a Chinese customer. But that customer in turn surely sells much of its own production overseas. As the USCC documents, China’s consumer market for these goods has grown tremendously, too. But China’s continually surging share of total global production of these electronics products (also documented in the Commission report) indicates that lots of this output continues to be sold overseas.

Also overlooked by the USCC – two other disturbing apects of the multinationals’ activities in China.

First, it fails to mention that all the computer and electronics-related investment in China – which presumably includes a great deal of software-related investment – has contributed to China’s economic and military ambitions not only by transferring knowhow to Chinese partners, but by teaching huge numbers of Chinese science and technology workers how to generate their technology advances. The companies’ own (often glowing) descriptions of these training activities – which have often taken the form of dedicated training programs and academies – were revealed in this 2013 article of mine.

Second, the Commission’s report doesn’t seem to include U.S. multinationals’ growing investments not simply in high tech facilities in China that they partly or wholly own, but in Chinese-owned entities. As I’ve reported here on RealityChek, these capital flows are helping China develop and produce high tech goods with numerous critical defense-related applications, and the scale has grown so large that some elements of the U.S. national security community had been taking notice as early as 2015. And President Trump seems to be just as oblivious to these investments as globalist former President Barack Obama was.

These criticisms aside, though, the USCC has performed a major public service with this survey of the multinationals’ China activities. It should be must reading in particular for anyone who still believes that these companies – whose China operations have so greatly enriched and therefore strengthened the People’s Republic at America’s expense – deserve much influence over the U.S. China policy debate going forward.

Im-Politic: On Biden’s New Plan for Medical & Other Supply Chain Security

Tags

alliances, Biden, CCP Virus, China, coronavirus, COVID 19, Defense Department, Defense Production Act, DPA, election 2020, health security, healthcare goods, Im-Politic, manufacturing, offshoring, Pentagon, pharmaceuticals, PPE, supply chains, tariffs, taxes, Trade, Wuhan virus

Joe Biden’s plan for rebuilding U.S. supply chains to ensure American access to critical products like healthcare goods came out yesterday, and any fair reading would have to conclude that these proposals are about as serious as the presumptive Democratic Presidential nominee’s proposals in related areas – like China policy. That is to say, they’re not terribly serious at present.

As with China policy, the first concern entails credibility. In 2011, when Biden was Barack Obama’s Vice President, the Commerce Department issued a report detailing all sorts of dangerous vulnerabilities in U.S. supplies of all manner of vital healthcare goods. The “Obama-Biden administration” did absolutely nothing in response – unless you count avidly pursuing offshoring-friendly trade deals, like the Trans-Pacific Partnership (TPP) that were bound to worsen these vulnerabilities. You could also throw in a record of continually coddling the trade and broader economic predation practiced by China, which surely fostered similar results.

As a result, it’s legit to ask whether any of these proposals will survive Day One of a Biden presidency.

In this vein, it’s more than a little disturbing that Biden proposes to use the Defense Department’s policies to minimize supply chain vulnerabilities as his model for addressing such problems for a wide variety of products –not just healthcare-related goods. These include “energy and grid resilience technologies, semiconductors, key electronics and related technologies, telecommunications infrastructure, and key raw materials.”

Unfortunately, the principal lessons taught by the Defense Department’s record on supply chains are how to duck the problem or define it out of existence, and the administration in which Biden served was no exception. Some of the biggest specific problems (as made clear in this Obama administration report):

>The Pentagon’s overall assessments prioritized financial metrics, not specific domestic production capabilities, as measures of the defense manufacturing base’s health.

>Its treatment of globalization’s challenges placed major emphasis on taking “advantage of emerging capabilities, regardless of where they originate,” not maximizing domestic production capabilities.

>Although specific vulnerabilities – and the related need to maintain or rebuild adequate domestic capabilities – were acknowledged, this vulnerabilities were consistently portrayed as isolated holes that could somehow be plugged without taking into account the dependence of these narrowly defined products on their own supply chains. Indeed, Biden’s new plan seems to reveal a similar flaw when it describes itself as “a set of targeted proposals to ensure the United States has the domestic manufacturing capacity necessary for critical supply chains.”

>Moreover, the Department has long supported objectives such as interoperability with allies’ armed forces and maintaining traditional – pre-Trump – global systems of what it defined as free trade, both of which often clashed with the goal of incentivizing domestic production. These goals were explicitly stated in this George W. Bush administration report, and here’s no evidence that the Obama-Biden Pentagon ever disagreed.

Indeed, the new Biden blueprint indicates that the former Vice President’s definition of supply chain security is pretty global, instead of national, as well:

“Instead of insulting our allies and undermining American global leadership, Biden will engage with our closest partners so that together we can build stronger, more resilient supply chains and economies in the face of 21st century risks. Just like the United States itself, no U.S. ally should be dependent on critical supplies from countries like China and Russia. That means developing new approaches on supply chain security — both individually and collectively — and updating trade rules to ensure we have strong understandings with our allies on how to best ensure supply chain security for all of us.”

If America’s allies were proven reliable suppliers of these products themselves, Biden’s perspective would make sense. But the list of countries that have recently hoarded medical goods for themselves as soon as the CCP Virus pandemic’s full dangers became apparent included most of these allies – meaning that the U.S. vulnerability problem far exceeds “China and Russia.”

Nor is it entirely evident how clearly Biden has thought though the tax policy provisions of his plan. Tax policy’s role is clearly viewed as crucial, as the plan emphasizes that

“Pharmaceutical offshoring has been heavily driven by tax code provisions that have encouraged companies to locate pharmaceutical production in low-tax countries even where those countries have labor and other costs comparable to the U.S.”

Consequently, Biden says he will “eliminate Trump Administration tax incentives for offshoring and pursue other tax code changes that will encourage pharmaceutical production in the U.S.”

At the same time, Biden favors raising the overall U.S. corporate tax rate from the 21 percent to which it has recently been lowered to 28 percent, along with a 15 percent “minimum tax” on large corporations. So good luck to drug companies – or any other companies making goods deemed critical by Biden – gleaning clear reshoring or domestic production ramping signals from this combination.

Perhaps any confusion will be cleared up by other alleged Biden measures to boost U.S.-based production – like “new targeted financial incentives, including tax credits, investments, matching funds for state and local incentives, R&D support, and other incentives to encourage the production of designated critical materials such as semiconductors in the United States”? At best, business will surely need to see many more details along these lines before committing the needed capital.

Unless maybe as President, Biden will simply mandate that the needed new facilities will be built when all else fails (as well as in tandem with those other policies)? That’s obviously the implication of his promise to use the Defense Production Act (DPA) “to its fullest extent to rebuild domestic manufacturing capacity in critical supply chains, using the lessons learned from the COVID-19 pandemic and applying them to our national needs.”

Or does Biden actually view the DPA as his primary tool for “generating the domestic mobilization we need”? That seems like a reasonable conclusion, especially given that it’s the first specific measure he mentions. Maybe instead he’s really talking about using the Act simply “to direct U.S. companies to ramp up production of critical products that will be needed over the near-term.”

Regardless of Biden’s real intentions, though, it’s anything but clear how Biden believes the DPA can be used to increase U.S. production in many of the industries he mentions as vital where such output has largely migrated overseas That’s especially true for the “semiconductors, key electronics and related technologies, [and] telecommunications infrastructure” he specifies. It’s sure going to be far more difficult than, say, ordering auto companies, to make ventilators.

It’s just as unclear how these Biden’s ideas can succeed without a much stronger trade policy dimension – and specifically, continued and even expanded tariffs. And it shouldn’t be limited to straightening out the muddled views mentioned above. 

Specifically, maintaining levies on chronically subsidized and dumped products like metals, along with sweeping tariffs on systemically protectionist China (and on other similar countries) would send the all the companies and sectors concerned an invaluable message. Bipartisan endorsement of these protections would demonstrates that they really can have confidence that new investments won’t be decimated by trade and broader economic predation. Just as important, an enduring commitment to tariffs would help convince overseas competitors (domestic and foreign owned) that if they want to sell the products in which they have big edges to Americans, they’ll need to make these products in America.

The good news is that at least some of these mysteries may be cleared up “soon,” when this Biden plan promises the former Vice President will release his “comprehensive strategy to create American jobs through modern American manufacturing.” The bad news is that if he what he’s said and written so far is any indication, he’ll have a lot of rewriting to do.

(What’s Left of) Our Economy: U.S. Manufacturing Keeps Gaining Independence

Tags

Commerce Department, decoupling, GDP-by-industry, health security, healthcare goods, manufacturing, manufacturing production, manufacturing trade deficit, Obama, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

Like a strike-shortened sports season’s champion, the conclusion in today’s RealityChek post needs an asterisk. The conclusion stems from this morning’s Gross Domestic Product (GDP) by Industry report from the Commerce Department, which shows that U.S. domestic manufacturing continues to become ever more self-reliant. In other words, it’s reducing its dependence for growth on foreign-made industrial goods of all kinds generally speaking.

The asterisk is needed because the new data covers the first quarter of this year, and therefore it includes March – when much of the U.S economy was shut down by government order or recommendation due to the CCP Virus. As a result, a chunk of the results say nothing about how manufacturing or the rest of economy would have performed in normal times.

Still, this morning’s evidence that U.S.-based industry is becoming more autonomous comes from several different findings calculable from the GDP by Industry’s raw data.

For example, again, due partly to the shutdowns’ effects, the report shows that according to a widely followed measure called value-added, domestic manufacturing’s output dipped by 0.99 percent between the first quarter of 2019 and the first quarter of this year. At the same time, the manufacturing trade deficit during this period shrank by 7.31 percent – more than 13 times faster. During the last comparable period (fourth quarter, 2018 to fourth quarter, 2019), manufacturing production grew by 0.70 percent, and its trade gap narrowed by 7.59 percent – a somewhat better performance on both scores.

At this point it’s vital to note that these growth rates are by no means good. In fact, they’re the worst by far since the final year of the Obama administration – when on a calendar year basis, domestic industry shrank by 1.19 percent. Yet during that same year 2016, despite this contraction, the manufacturing trade shortfall expanded by 4.66 percent. So if you value self-sufficiency (as you should in a world in which the United States has found itself painfully short of many healthcare-related goods, and in which dozens of its trade partners were hoarding their own supplies), it’s clear that during 2016, the nation was getting the worst of all possible manufacturing worlds.

Also important: there’s no doubt that the same Trump administration tariffs and trade wars with which domestic manufacturing has been dealing over the past two years have slowed its growth. In other words, industry has been adjusting to policy-created pressures to adjust its global, and in particular China-centric, supply chains. That’s bound to create inefficiencies.

If you don’t care about significant American economic reliance on an increasingly hostile dictatorship, you’ll carp about paying any efficiency price for this decoupling from China (and other unreliable countries). If you do care, you’ll recognize the slower growth as an adjustment cost needed to correct the disastrous choice made by pre-Trump Presidents to undercut America’s economic independence severely.

Moreover, during the last year, domestic manufacturing output was held back by two developments that had nothing to do with President Trump’s trade policy: the strike at General Motors in the fall of 2019, which slashed U.S. production both of vehicles and parts, and of all the components and materials that comprise dedicated auto parts; and the safety problems at Boeing, which resulted in the grounding of its popular 737 Max model worldwide starting in March, 2019, and in a suspension of all that aircraft’s production this past January.

Also encouraging from a self-reliance standpoint. During the first quarter of 2019, the manufacturing trade deficit as a percentage of domestic manufacturing output sank from just under 43 percent in the fourth quarter of 2019 (and 43.36 percent for the entirety of last year) to 37.27 percent. That’s the lowest level since full-year 2013’s 35.82 percent.

These figures should make clear that the manufacturing trade deficit’s share of manufacturing output kept growing during the final Obama years and into the Trump years. Indeed, on an annual basis, this number peaked at 47.01 percent in the third quarter of 2019. To some extent, blame what I’ve previously identified as tariff front-running (the rush by importers throughout the trade war to bring product into the United States before threatened tariffs were actually imposed) along with those supply chain-related adjustment costs.

To complicate matters further, as suggested above, that very low first quarter result stemmed partly from the nosedive taken by manufacturing and other U.S. economic activity in March. Since that level is clearly artificially low, it’s probably going to bob up eventually – but hopefully not recover fully.

In all, though, the first quarter GDP by Industry report points to a future of more secure supplies of manufactured goods for Americans. And unless you believe that domestic manufacturers have completely lost their ability to adjust successfully to a (needed) New Normal in U.S. trade policy, the release points to a return of solid manufacturing output growth rates as well.