Im-Politic: Crucial New Info on U.S. Pharmaceutical Supply Chain Weaknesses

Tags

active pharmaceutical ingredients, Bain & Company, CCP Virus, China, coronavirus, COVID 19, Cytiva, FDA, Food and Drug Administration, health security, Im-Politic, offshoring, pharmaceuticals, supply chain, Wuhan virus

Here’s a post full of data that should be of more than a little interest to folks who aren’t data geeks. That’s because it presents information shedding light on the likelihood of America getting caught dangerously short of key medical supplies – in this case, pharmaceuticals – when the next pandemic hits. As usual with CCP Virus-related info nowadays, it contains some good news and some findings that aren’t so encouraging.

First, some background. The surveys cited here underscore just how much offshoring of drugs and their chemical building blocks has taken place in the years – and possibly decades – before the pandemic. A poll of pharmaceutical executives the world over conducted by the U.S. life sciences company Cytiva found that 51 percent of the former “say that drug shortages increased in their domestic market during the pandemic, although 33% say that the issue had been increasing over the past five years.”

In other words, a series of “underlying issues around supply chain resilience…have been exacerbated — but not caused — by the pandemic.”  

In this vein, Cytiva also found that fluctuating demand is only part of the shortage problem: “About half of the executives and policymakers surveyed (47%) say their country is moderately or highly dependent on the import of drugs,” and nowhere is this problem more worrisome than with those drug building blocks, since “China and India in particular have become the epicentres of production for the generics and active pharmaceutical ingredients (APIs) that form so much of the industry’s output.”

Moreover, according to a study last fall by the American consulting firm Bain & Company, the API production picture is increasingly dominated by China. All by itself, the People’s Republic accounted for 39 percent of global output last year, up from 17 percent ten years ago. Meanwhile, the North American share has fallen from 23 percent to 19 percent.

Bain also draws a direct link between the shift of drug industry output to the developing world and the frequency of U.S. shortages:

“The transfer of pharma sourcing and manufacturing to Asia has directly affected supply chain reliability. FDA [U.S. Food and Drug Administration] data shows an increase in drug shortages [shown in the chart above] resulting from several factors, including quality issues and disruptive events, such as the 2017 fire at a Chinese API producer that led to a global shortage of piperacillin/tazobactam.”

And indirectly responsible for these shortages have been industry features like “The winner-take-all generic pharmaceutical bidding process in Germany….” This system has “produced drug shortages by reducing the number of producers or bidders over time. In some cases, for example, the winners were sales offices dependent on foreign third-party manufacturers incapable of delivering high drug volumes.”

This finding, in turn, adds to the evidence that the pharmaceutical supply chain security issue predates the current pandemic, and that the industry has been slow to respond. In fact, Bain specifies that the CCP Virus outbreak and its effects weren’t “the first warning. Tsunamis wrecked pharma manufacturing facilities in Asia in 2011 and 2012, and in 2017, Hurricane Maria knocked out Puerto Rico’s electricity supply, disabling many of the nearly 50 pharmaceutical plants on the island for months.”

Moreover, RealityChek readers might remember the post reporting that in 2011, a U.S. Commerce Department study discovered not only that troubling pharmaceutical supply chain vulnerabilities had developed, but that the companies themselves were pretty blasé about the problem.

Like I said at the outset, however, the pharmaceutical supply chain news is by no means all discouraging. The Cytiva survey found that 59 percent of the executives “say that the era of offshoring drug manufacturing to low-cost countries is over, and 67% say that the manufacturing of biopharma staples such as biologics would dramatically increase in their own countries over the next three years.” And given the U.S. industry’s global prominence, it seems safe to assume that many of these executives work at American-owned firms.

In addition, the Biden administration has designated improving health security as a high priority – although as I’ve reported, the President’s plans so far seek to treat as reliable suppliers many countries that have curbed or outright banned exports of medical supplies during the height of the pandemic. And these nationalistic impulses clearly are alive today in the pandemic era’s current “vaccine phase”

Finally, a big shout out to the Cytiva folks for including a URL for the aformentioned FDA shortage database – which I’ve been trying to find for months. It’s not only searchable, but it’s updated daily.

Making News: New Article Spotlights America’s Second-Rate Semiconductor Manufacturing

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Asia-Pacific, China, globalism, innovation, Intel, Making News, manufacturing, offshoring, semiconductors, Taiwan, Taiwan Semiconductor Manufacturing Company, technology, The National Interest

I’m pleased to report that a new article of mine has just been published in the November-December, 2020 issue of The National Interest. The focus: America’s loss of its longtime global lead in manufacturing semiconductors. Given the central role played by microchips to the constantly acclerating information technology revolution, this setback threatens both the nation’s prosperity and its security — especially since the world’s most advanced semiconductors are now produced a grand total of 100 miles from China.

Click here to read.

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

Making News: National Interest Post Examines Biden’s Often Head-Scratching Manufacturing Plans

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2020 election, allies, Barack Obama, China, Joe Biden, Making News, manufacturing, offshoring, reshoring, tariffs, taxes, Trade

I’m pleased to announce that my latest article for an outside publication is now on-line.  It’s an analysis of Democratic presidential nominee Joe Biden’s proposals to revive American domestic manufacturing, and it leads off this morning’s edition of The National Interest.  Here’s the link.

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

(What’s Left of) Our Economy: A Backfiring Attack on Trump’s Trade & Manufacturing Policies

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Barack Obama, CCP Virus, coronavirus, COVID 19, Economic Policy Institute, election 2020, EPI, Great Recession, Joe Biden, manufacturing, offshoring, Trade, Trump, Wuhan virus, {What's Left of) Our Economy

For the record, the Economic Policy Institute (EPI) has done terrific work over decades on the domestic economic impact of U.S. trade policy decision and trade flow, and it’s been great to stand shoulder-to-shoulder with its economists and ther staff during many major trade policy battles starting with the North American Free Trade Agreement (NAFTA).

Which is why I have been absolutely baffled by a recent EPI report that shows signs of furnishing some major trade policy talking points for Democratic nominee Joe Biden’s presidential campaign.

Most puzzling of all: a table in the August 10 study purporting to show that (a) “President Trump’s erratic, ego-driven, and inconsistent trade policies have not achieved any measurable progress” in reversing the offshoring of U.S. manufacturing jobs and the related ,”decline of American manufacturing”; and in fact (b) that “Offshoring and the loss of manufacturing plants have continued under Trump, notwithstanding U.S. Trade Representative Robert Lighthizer’s claim that the administration’s trade policy is helping U.S. workers.”

Here are the main table figures that cover the first two Trump years and the record of its predecessor, the Obama administration (whose Vice President of course was Biden). I started with 2010 because during 2009, the first year of the Obama presidency, the nation was mired in a Great Recession for which he deserves absolutely no blame. In addition, EPI stops the table at 2018 because factory numbers afterwards aren’t yet available. (The gross output figures have been added by me to make further comparisons possible.)

             Change in factory #s            Change in mfg jobs        mfg real gross output

2010:            -11,283                               -755,000                        +5.37 percent

2011:              -5,155                              +222,000                        +2.89 percent

2012:             -2,938                               +223,000                        +1.93 percent

2013:             -4,220                               +101,000                        +2.86 percent

2014:             -4,056                               +121,000                        +0.79 percent

2015:             -2,129                               +192,000                        +0.54 percent

2016:                -999                                 +33,000                        +0.04 percent

2017:                -782                                 +50.000                        +0.99 percent

2018:             -1,005                               +216,000                        +2.31 percent

The first point that needs to be made is that, as must be obvious, these numbers show absolutely no consistent relationship between the annual change (and in this case, decline) in the number of the nation’s “manufacturing establishments” (what these official figures call factories) and the annual change in manufacturing payrolls.  

For example, in each of these years, lots of factories kept closing, yet manufacturing employment kept rising. It’s true that rates of annual change have varied for both categories during this period. But these variations don’t seem to hold any significance, either. If they did, why would the number of closures fall notably between 2011 and 2012, while those years’ manufacturing workers’ numbers rise by almost exactly the same amount? And why the big difference between the number of closures in 2011 and 2012 on the one hand, and in 2018, on the other, and the close resemblance of the employment gains for each of those years?

Further, although it’s true that factory closures continued during the first two Trump years, the annual rate of closures slowed dramatically. Indeed, from 2010 through 2016, the average annual closure rate was 4,397. For 2017-18, this rate was 893.5. That’s not progress? And let’s be fair and not count 2010, because the manufacturing job losses of the Great Recession continued through its early months. The 2011-16 annual average factory closure number was still much higher (3,249.5) than during the Trump years.

Not weird enough for you? According to these EPI figures, despite factories closing at a much faster rate during the Obama years than during the Trump years, manufacturing employment grew faster. From 2011 through 2016, manufactring jobs grew by an annual average of 148,670. The comparable number for the first two Trump years was only 133,000.

At the same, time, this seemingly paradoxical relationship between numbers of factories and numbes of workers isn’t so completely paradoxical after all.  For example, new kinds of machinery and other efficiencies have surely enabled many domestic manufacturers to consolidate their physical footprint, and actually boost production and hiring. Alternatively, manufacturing companies can increase their capacity by expanding existing plants rather than build new facilities.        

Speaking of production, if we’re going to talk about the decline of American manufacturing, we need to talk about output levels and their changes, too. After all, it’s tough to boost or even maintain manufacturing workers’ numbers if production isn’t rising. Yet the annual growth numbers I’ve added to the table (which represent inflation-adjusted gross output), don’t show much of a relationship with closure numbers or employment numbers, either – and that’s the case even leaving out the quasi-manufacturing recession year 2010.

Still, don’t the EPI figures make clear that manufacturing hiring during the first two Trump years was weaker than during the Obama years? They sure do. As mentioned above, from 2011 through 2016, manufacturing payrolls grew by an average of 148,670 each year versus the Trump annual average in 2017 and 2018 of 133,000.

But are the EPI numbers the right numbers? I decided to check since the 50,000 manufacturing jobs increase presented for 2017 seemed way off to me. And there’s strong evidence that my suspicions were justified. Here’s what I found on the Bureau of Labor Statistics website. They represent December-to-December changes, and they’re seasonally adjusted. But the unadjusted numbers aren’t terribly different:

2011:    +207K

2012:    +158K

2013:    +123K

2014:    +209K

2015:     +70K

2016:        -6K

2017:   +185K

2018:   +264K

According to these data, the average annual manufacturing employment increase during the Obama years was 126,830 (again, recession-y 2010 is left out) and the annual average for the first two Trump years was 224,500. So advantage Trump here. The current administration enjoys a big edge even adding in 2019, when industry’s payrolls rose by only 59,000. That performance brings the Trump annual average down to 169,330 – still considerably higher better than the Obama years’ performance.

The EPI report correctly notes that 2020 has been much worse so far for manufacturing employment, and reasonably argues that even though the CCP Virus pandemic has been mainly responsible, “If President Trump wants to take credit for the job growth at the tail end of a decade of recovery from the Great Recession, then he must also own this collapse, thanks to his administration’s mismanagement of the pandemic.”

But if we’re going to start blaming non-trade policy-related factors for changes in manufacturing performance measures, let’s at least be consistent. For manufacturing hiring and growth (1.30 percent) undoubtedly were held down in 2019 by the safety woes experienced by aerospace giant Boeing – and therefore by its vast domestic supply chain – and by the six-week strike at General Motors.

Combine those developments with the inevitability of manufacturing inefficiencies as companies and entire industries adjust to a dramatically different trade policy environment, and the Trump record looks remarkably good. Unless EPI (and other Trump critics) believe that a painless way to transform U.S trade and manufacturing policies (which the institute strongly supports) has ever been possible?

President Trump was clearly (though anything but disastrously) mistaken when he claimed in early 2018 that trade wars are “easy to win.” Let’s hope that the EPI report isn’t a sign that a Biden administration and other critics would peddle the same pipe dreams.

Glad I Didn’t Say That! Middle Class Meg?

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Democratic National Convention, election 2020, establishment Republicans, Glad I Didn't Say That!, Hewlett-Packard, Jobs, Joe Biden, Meg Whitman, offshoring, STEM workers, tech jobs

“Joe Biden…has a plan that will strengthen our economy for working people and small-business owners. For me, the choice is simple. I’m with Joe.”

– Former Hewlett Packard CEO Meg Whitman, one of four leading Republicans chosen to speak on opening night of the Democratic National Convention, August 17, 2020

“The IT services market has continued to change and put more pressure on HP to reorganise its operations, for instance by increasing the proportion of its services workforce in lower-cost, offshore centres to 60 per cent.”

–Then Hewlett Packard CEO Meg Whitman, September 15, 2015

(Sources: “Former GOP gubernatorial candidate Whitman endorses Biden at DNC,” by Carla Mainucci, Politico, August 17, 2020, https://www.politico.com/states/california/story/2020/08/17/former-gop-gubernatorial-candidate-whitman-endorses-biden-at-dnc-1309809 & “HP to slash up to 30,000 jobs ahead of split,” by Richard Waters, Financial Times, September 15, 2015, https://www.ft.com/content/ff029c82-5bec-11e5-a28b-50226830d644 )

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

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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.

Im-Politic: What Even Barr Has Missed About the China Threat

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Center for Strategic and International Studies, China, idea laundering, Im-Politic, Jeanne Whalen, lobbying, Mary E. Lovely, multinational corporations, offshoring, Peterson Institute for International Economics, Scott Kennedy, Steven Zeitchik, think tanks, Trump, Washington Post, William P. Barr

As masterly as Attorney General William P. Barr’s Thursday speech about China’s sweeping “whole-of-society” challenge to the United States was – and “masterly” is an entirely fitting description – it still missed one key danger that’s been created by big Americans businesses’ determination to advance China’s agenda. And conveniently, the nature and importance of this danger was (unwittingly, to be sure) made clear by the Washington Post‘s coverage of Barr’s alarm bell-ringing.

The Attorney General’s address was unquestionably a landmark – and a badly needed one – in the history of U.S.-China relations. The decisive break of course was Donald Trump’s election as President. For decades, American administrations had permitted and even encouraged U.S. multinational corporations and their recklessly shortsighted offshoring- and tech transfer-happy agenda to dominate policymaking toward China. (See here for the Bill Clinton-era origins of this approach.) Sometimes raggedly to be sure, the Trump administration has been reversing decisions that had exponentially increased China’s wealth and therefore military to the detriment of U.S. prosperity and national security.

But Barr’s speech indicates the launch of a new phase in this America First strategy – not only spotlighting corporate activities that keep endangering America, but naming and shaming some of the leading perps.

Especially important was the warning about Chinese leaders “and their proxies reaching out to corporate leaders and inveighing them to favor policies and actions favored by the Chinese Communist Party.” As Barr explained:

“Privately pressuring or courting American corporate leaders to promote policies (or politicians) presents a significant threat, because hiding behind American voices allows the Chinese government to elevate its influence and put a “friendly face” on pro-regime policies.  The legislator or policymaker who hears from a fellow American is properly more sympathetic to that constituent than to a foreigner.  And by masking its participation in our political process, the PRC avoids accountability for its influence efforts and the public outcry that might result, if its lobbying were exposed.”

In other words, Barr was talking about a form of “idea laundering” – the practice of pushing proposals that would benefit special interests first and foremost in ways meant to disguise their source of sponsorship and funding.

I identified one variety of idea laundering way back in 2006 – when I testified to Congress about how prevalent it had become for these offshoring-happy multinationals to pay think tanks to create the illusion that their self-serving objectives were also strongly supported by disinterested experts solely dedicated to truth-seeking. Barr has now pointed out that the multinational executives who have been funding idea laundering through think tank studies and op-eds and the like have also begun serving themselves as lobbyists-on-the-sly for China. In addition, he usefully warned them that they risk running afoul of U.S. laws requiring transparency from any individual or entity shilling for foreign interests.

But I wish Barr had mentioned the think tank version of idea laundering because a reminder of its perils came the day after he spoke, in the form of that Post coverage. Reporters Jeanne Whalen and Steven Zeitchik described and cited verbatim most of Barr’s indictment of corporate behavior. They rightly sought and received reactions from some of the companies fingered (Apple and Disney).

But then they played into the hands of the idea launderers when they claimed that “The attorney general’s warnings drew criticism from some economists, who said he at times exaggerated the threat China poses and downplayed benefits American industry has gained by trading with China….”

That’s surely the case, but the two individuals whose views the Post presented were hardly just any old economists. In fact, one – Scott Kennedy – isn’t even an economist, in the sense that he holds no academic degree in economics. Far more important, though, is that both of these authorities work for and get paid by think tanks that are heavily funded by offshoring multinationals – the Center for Strategic and International Studies (which employs Kennedy) in the academic-y-sounding position of “Senior Adviser and Trustee Chair in Chinese Business and Economics” and Mary E. Lovely, who is an economist (at Syracuse University) but who’s also a (academic-y-sounding) “Senior Fellow” at the Peterson Institute for International Economics.

Moreover, it’s crucial to note that both the Center for Strategic Studies and the Peterson Institute are also financed both by foreign multinational companies and even foreign governments with stakes in returning to the pre-Trump U.S. China trade and global trade policy status quo just as great as that of U.S.-owned multinationals. In fact, the Center even lists a contribution in the $5,000-$99,000 annual range from the Shanghai Institutes for International Studies, which, like all Chinese think tanks, is an arm of the Chinese regime. (It receives U.S government funding as well – in the greater-than-$500,000 annual neighborhood.)

To repeat a point I’ve made…repeatedly… there is nothing intrinsically wrong with any of these individual think tankers, the think tanks themselves, businesses, or even foreign governments trying to influence U.S. public policy. But as Barr has noted, there is everything wrong with these activities being conducted deceptively, which is the case with both forms of idea laundering. And the dangers to American democracy and U.S. interests are greatly compounded when journalists who should know better (and the two Washington Post reporters named above are hardly the only examples) help sustain this charade.

Making News: Podcast On-Line of National Radio Interview on U.S.-China Relations & the Biden Manufacturing Plan

Tags

Biden, China, election 2020, Europe, European Union, innovation, Joe Biden, Making News, manufacturing, Market Wrap with Moe Ansari, offshoring, technology, Trade, trade war, Trump

I’m pleased to announce that a podcast is now on-line of an interview I did yesterday on Moe Ansari’s nationally syndicated radio show.  Click here and then scroll down a bit to the segment with my name on it to listen to a timely, informative session on the CCP Virus’ impact on U.S.-based manufacturing; on U.S.-China relations and President Trump’s trade war (which could include Europe), and on presumptive Democratic Presidential nominee Joe Biden’s plan for reviving American industry. The segment comes on at about the 23:50 mark.

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

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

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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.