20 May 2020

Should the United States Reduce Its Dependence on China?

Gabriel B. Collins and Andrew S. Erickson, “Should the United States Reduce Its Dependence on China?” Policy Matters podcast, Baker Institute for Public Policy, Rice University, Houston, TX, 19 May 2020.

The Covid-19 pandemic has reignited the debate about our national dependence on Chinese raw materials and manufactured goods. Why should we be concerned about such dependence? What are our key areas of vulnerability? What policies should we introduce to address these vulnerabilities? And how is China likely to respond to these policies?

This episode’s guests are Gabriel B. Collins and Andrew S. Erickson. Collins is the Baker Botts Fellow in Energy & Environmental Regulatory Affairs at Rice University’s Baker Institute for Public Policy. Erickson is Professor of Strategy at the Naval War College’s China Maritime Studies Institute. They have recently co-authored a Baker Institute report entitled “Economic Statecraft: Options for Reducing U.S. Overdependence on Chinese-supplied Materials and Medications.” It is available on the institute website.

 

FURTHER INFORMATION ON REPORT:

Gabriel B. Collins and Andrew S. Erickson, Economic Statecraft: Options for Reducing U.S. Overdependence on Chinese-supplied Materials and Medications (Houston, TX: Baker Institute for Public Policy, Rice University, 23 April 2020).

This policy report explains how specific tools of economic statecraft can be applied to reduce risks caused by dependence on People’s Republic of China-dominated supply chains for critical goods. It offers foundational building blocks for the formulation and implementation of a larger strategy to reduce American vulnerabilities to China.

  • We have previously argued that it is “Time to Curb America’s Manufacturing Dependency on China.”
  • The present report suggests actionable pathways to facilitate and accelerate manufacturing sector onshoring for those goods most critical to U.S. national and economic security.
  • It explains critical scenarios, identifies key weak points, and suggests 12 potential countermeasures.
  • While employing these tools will be neither easy nor cheap, the coronavirus already reveals the alternative: mounting costs in American economic wellbeing, strategic resilience, and lives.

From the outset, we want to be crystal clear about a core premise of our thinking: the United States will—and decidedly should—remain closely connected to the global economy. But the corporate quest over the past 25 years to cut supplier costs, with insufficient concern for resilience, has saddled the nation with gaping strategic vulnerabilities in the supply chains for certain critical materials, medications, and technology inputs. Our analysis describes what it will take to begin reclaiming U.S. security and strategic autonomy in those areas.

Our list prioritizes pressing weaknesses that Beijing would likely exploit to gain leverage against Washington during a crisis, as well as pharmaceutical vulnerabilities that are already adversely affecting Americans’ health. It should therefore be viewed as a “living document” to be updated and revised as events and initial policy formulation and implementation unfold. … …

Gabriel B. Collins, J.D.Baker Botts Fellow in Energy & Environmental Regulatory Affairs

Andrew S. Erickson, Ph.D, Professor of Strategy, China Maritime Studies Institute, Naval War College

 

RELATED PRESENTATION:

Andrew S. Erickson, “Energy Dimensions of the Evolving U.S.-China Strategic Relationship,” Center for Energy Studies, Baker Institute for Public Policy, Rice University, Houston, TX, presentation in webinar via Zoom, 8 May 2020.

Click here to watch the webinar on YouTube.

Gabriel Collins of the Baker Institute’s Center for Energy Studies and Andrew Erickson of the U.S. Naval War College address tensions between the United States and the People’s Republic of China that could profoundly influence global energy markets.

WEBINAR: ENERGY DIMENSIONS OF THE EVOLVING U.S.-CHINA STRATEGIC RELATIONSHIP

Intensifying strategic tensions between the United States and the People’s Republic of China stand to profoundly influence global energy markets throughout the coming decade. Gabriel Collins, the Baker Botts Fellow in Energy & Environmental Regulatory Affairs; Steven W. Lewis, the C.V. Starr Transnational China Fellow; and guest speaker Andrew Erickson from the U.S. Naval War College will address multiple hot button issues, including  (1) places in the global energy system where the U.S. and China interface with each other, (2) how geostrategic tensions may potentially manifest themselves in the energy dimension, (3) potential cooperation in certain energy and environmental matters, (4) how technological advances could shift the ways the U.S. and China deal with each other in the macro energy landscape, and (5) key energy sector uncertainties as Washington and Beijing enter the 2020s.

This event is sponsored by the Center for Energy Studies. Follow @CES_Baker_Inst on Twitter and join the conversation online with #BakerEnergy.

FEATURED SPEAKERS

Gabriel Collins, J.D.
Baker Botts Fellow in Energy & Environmental Regulatory Affairs, Baker Institute

Steven Lewis, Ph.D.
C.V. Starr Transnational China Fellow; Jesse Jones Leadership Center Summer Intern Program Coordinator, Baker Institute

Andrew Erickson, Ph.D.
Professor of Strategy, U.S. Naval War College’s China Maritime Studies Institute

 

ADDITIONAL ANALYSIS:

Gabriel B. Collins and Andrew S. Erickson, “Time to Curb America’s Manufacturing Dependency on China,” China SignPost™ (洞察中国) 101 (24 March 2020).

Coronavirus Crisis Offers an Opportunity to Revitalize U.S./North American Manufacturing, Restore Regional Partnerships, Reduce Dependence on Beijing

Whether between people or countries, co-dependency relationships rarely work well over time when the understandings undergirding them erode. It’s thus unsurprising that the unfolding coronavirus pandemic raises two fundamental strategic and industrial policy questions:

  • Should American consumers have to rely so heavily on Chinese factories as a virtual sole source of key antibiotics, heart medications, and other potentially life-critical goods?
  • Have we reached a point at which the People’s Republic of China (PRC) has become sufficiently unreliable as a strategic economic partner that it is time to rebuild key portions of the industrial base in our own hemisphere?

A growing body of evidence suggests the answers are “no” to question 1 and “yes” to question 2.

Key Point 1: Bringing High-End Supply Chains Home Can Help Repair America’s Social Fabric

Crises present unique opportunities to forge long-needed changes. It’s time for federal, state, and local leaders to seize the moment. Policies crafted in response should be based on the core principle of bringing much more of the most vital, sensitive supply chains—for pharma, apex technologies, and other high-end goods back onto American soil, as well as into our two great neighbors. If PRC manufacturers continue to dominate manufacturing of low-end items, that is fine. But the more technologically advanced and life-essential items increasingly should be manufactured at home or just across our southern or northern borders by amicable neighbors easily accessible by a panoply of efficient, resilient transportation links.

This view will attract some pushback, in part based on the idea that even if items are assembled abroad, the lion’s share of value capture still occurs in the U.S. For an iPhone7 sold in 2016, roughly 42% of the device’s total $649 value would have been effectively captured at Apple’s corporate level, according to the 2017 World Intellectual Property Report. But, as the peculiar blanket reopening of Apple stores in China even as they remain closed elsewhere suggests, resting on the current value distribution is a strategic mistake. An enduring reality of industrial development is that “innovation in manufacturing gravitates to where the factories are.” There is a symbiosis and gravitational attraction between the two activities and combining the two within a country becomes a natural driver of jobs and economic growth.

Moving key industrial value chains back onshore will take considerable money, effort, and time. But it also should be viewed as a re-investment in the fabric of economic opportunity that forms the interstitial tissue of the United States’ political system at the local, state, and federal levels. Revitalizing the U.S. industrial base and manufacturing sector can address many of the economic justice concerns that represent central issues in the 2020 presidential election. Overall, a healthy, more balanced economy sets the stage for a more robust society.

In the context of America’s global role, a healthy society at home translates into sustainable projection of positive influence abroad. In the simplest terms, pulling more of our supply chain out of China ultimately helps empower the U.S. and her allies and partners in the contest of systems now unfolding between Washington and Beijing.

Furthermore, as globalism cedes ground to regional realities, our home hemisphere beckons. Given the existing cross-border industrial ecosystems linking the U.S., Canadian, and Mexican economies, an American-led reboot of high-end manufacturing here can begin repairing and deepening key relationships with our vital neighbors. They are already among our greatest trading partners. Indeed, in a time when trade agreement of any kind tends to be elusive, a new “NAFTA 2.0” free trade accord has already been ratified by all three countries: the Agreement between the U.S., Mexico, and Canada (USMCA). Neither Canada nor Mexico will ever attempt to threaten or undercut the U.S. the way China already has. North America is well-placed to do more business, effective immediately!

Key Point 2: The Time is Right for Action

The broader American political climate is likewise ripe for bringing truly critical supply chains home. Growing calls to re-structure our economic and strategic relationships with China are the latest iteration in a disturbing pattern of Beijing regularly reneging on promises and dashing expectations. But this time, a growing rift has generated irreconcilable differences. During prior upsets, disenchantment with China was primarily restricted to specialist communities in Washington, DC, while commercial firms consistently bubbled with anticipation at the chance to enhance and retain access the vast China market. That division led business interests to lobby to restrain the Washington defense and security community’s rising desire to counter worrisome behavior by China. Moreover, well into the early 2000s China was far from being a core public concern with voters. No longer.

China is now a systemic global player in multiple dimensions. Its actions suggest a desire to displace the United States as the pre-eminent power in the Asia-Pacific region (and perhaps beyond) and there carve out a zone excluded from international laws and norms. China’s state-sponsored industrial development policies helped hollow out multiple key portions of the U.S. manufacturing base, including many of the areas now worst affected by the opioid epidemic (and where fentanyl, one of the most lethal synthetic opioids, largely originates from China). U.S. business executives, meanwhile, have recognized that China’s web of policy barriers mean that for most firms it will remain a vast theoretical market that rarely delivers returns commensurate with what was promised.

Beijing’s actions on the military, economic, industrial policy, and technology transfer fronts have created an unprecedented bipartisan consensus whereby U.S. Defense professionals, businesspeople, and lay voters now increasingly agree that China poses a multidimensional challenge that needs to be confronted more directly and decisively. To capitalize on the shift, Washington needs to proactively offer other countries, whether in the EU, ASEAN, or Western Hemisphere, positive economic, investment, and ideological alternatives to a PRC worldview centered on coercion and control.

Legislative stimulus will be a key part of this process. To that end, the Pharmaceutical Independence Long-Term Readiness Reform Act (H.R. 4710) introduced in October 2019 gives a preliminary taste of what after the coronavirus is likely to become a much larger flow of legislative action.

Key Point 3: U.S. High-End Manufacturing Renaissance Can Offer Other Countries a Strategic Economic Alternative to Dependence on China

The global strategic opportunity before us is masked now by the fact that neither Beijing nor Washington are handling all of their key relationships deftly, particularly in Europe. But the difference is stark: America’s sometimes ham-handed messaging may be readily improved, and is periodically renewed. China’s “shotgun diplomacy” in Europe, on the other hand, reflects Beijing’s institutional approach to other countries, which becomes harsher as China’s perception of its own power grows. Indeed, the Chinese Communist Party owns every single PRC policy catastrophe since 1949, and currently appears to only be doubling down. In such an environment, taking steps to ratchet down China’s importance to vital global supply chains and enhancing the availability of industrial investment opportunities outside of the PRC can in turn reduce Beijing’s ability to strong-arm and threaten.

The U.S. strategic position does not suffer if China continues to supply much of the world’s Walmart shelves. Being a world-class maker of low-end goods does not support and sustain superpower strength. But remaining a world leader in high technology, biomedical R&D, pharmaceutical production, transportation infrastructure, and other high-end manufacturing is the cornerstone of global economic leadership. Given events to date and looming future risks, leaving core portions of critical supply chains in China has become simply incompatible with core U.S. national interests. We cannot remain co-dependent with an increasingly adversarial great power. Now is the time to generate and sustain a strategic American manufacturing renaissance, closely connected to healthy hemispheric trade with our North American neighbors.

Mr. Gabriel B. Collins is the Baker Botts Fellow in Energy & Environmental Regulatory Affairs at Rice University’s Baker Institute for Public Policy. He’s a licensed attorney who runs a global research portfolio focused on China, Russia, water, energy, and a range of environmental, legal and national security issues.

Dr. Andrew S. Erickson is a Professor of Strategy (tenured full professor) in the U.S. Naval War College’s China Maritime Studies Institute. He is currently a Visiting Scholar in full-time residence at Harvard University’s John King Fairbank Center for Chinese Studies, where he has been an Associate in Research since 2008. Erickson blogs at www.andrewerickson.com.

China Signpost™ 洞察中国–“Clear, high-impact China analysis.”©

China SignPost™ aims to provide high-quality China analysis and policy recommendations in a concise, accessible form for people whose lives are being affected profoundly by China’s political, economic, and security development. We believe that by presenting practical, apolitical China insights we can help citizens around the world form holistic views that are based on facts, rather than political rhetoric driven by vested interests. We aim to foster better understanding of key Chinese developments, with particular focus on natural resource, technology, industry, and trade issues.

 China SignPost™ 洞察中国 founders Dr. Andrew Erickson and Mr. Gabe Collins have more than three decades of combined government, academic, and private sector experience in Mandarin Chinese language-based research and analysis of China.

The positions expressed here are the authors’ personal views. They do not represent the policies or estimates of the U.S. Navy, the U.S. Government, or any other organization. The authors have published widely on maritime, energy, and security issues relevant to China. An archive of their work is available at www.chinasignpost.com.