Securing the Supply Lines

By Alan W. Dowd, ASCF Senior FellowMAY 2020—As the public-health crisis spawned by COVID19 recedes and America begins to wade through the economic wreckage, a glaring threat to the nation’s health and security has been exposed: our dependence on China for critical materials, equipment, technologies, products and medicines. It is not a new threat, as some of us have been pointing out for years (see here, here and here), but it finally appears policymakers are ready to address the dangers of our dependency on China.

DangersThe vulnerabilities—and dangers that flow from them—are too numerous to list. But here are some of the most worrisome.In the area of medical equipment and medicines, the Congressional Research Service (CRS) reports that 49.8 percent of our medical gauze and bandages; 35.9 percent of antibiotics, including 90 percent of Tetracyclines, 93 percent of Chloramphenicol, 51.8 percent of Penicillin and 43 percent of Heparin; and 19.9 percent of ultrasonic scanning equipment originate in China. Among what CRS calls COVID19-related equipment: 71.7 percent of textile facemasks, 77.2 of plastic gloves, 54.8 percent protective eyewear, about half of all protective garments, 15 percent of hand-sanitizer, 17.7 percent of medical ventilators and artificial respiration equipment, and 75 percent of paper bed sheets originate in China.A biopharmaceutical trade group adds that China accounts for “95 percent of U.S. imports of ibuprofen, 91 percent of U.S. imports of hydrocortisone, 70 percent of U.S. imports of acetaminophen.” Citing Senate documents, Politico reports 80 percent of active pharmaceutical ingredients (APIs)—essential precursors to medicines—are produced overseas, most in China and India. And to underscore how perilous this is for America, congressional documents note that the “Xinhua News Agency, an official mouthpiece of the Chinese government, published an article threatening to cut off medical supply exports to the United States and ‘plunge [the United States] into the mighty sea of coronavirus.’”

America’s vulnerabilities are not limited to medical equipment and medicine.

A U.S.-China Economic and Security Review Commission report concludes that China accounts for 73 percent of Microsoft’s, 60 percent of HP’s, more than 60 percent of Dell’s, almost 40 percent of Cisco’s, nearly 50 percent of Unisys’s and nearly 50 percent of IBM’s inbound supplies. These are the federal government’s top IT suppliers.

In late 2017, President Donald Trump issued an executive order directing the Pentagon and other agencies to develop a strategy to secure “mineral commodities…vital to the nation’s security.”  Many of these critical minerals are known as rare-earth elements (REEs). They are essential to the manufacture cell phones, flat-panel televisions, hybrid engines, computers, light bulbs, lasers, industrial magnets, batteries, MRI equipment, fiber-optics and superconductors. More specific to national security, REEs are used in the navigation system of M1A2 tanks, missile-guidance systems, fighter-jet engines, missile-defense systems, satellites, night-vision equipment and military communications gear.

CRS reports that China is “a dominant or near-monopoly producer” of REEs and critical commodities, including: overall REEs (80 percent), yttrium (99 percent), gallium (94 percent), magnesium metal (87 percent), tungsten (82 percent), bismuth (80 percent), arsenic (91 percent) and germanium (58 percent). In fact, “The United States is 100 percent import-reliant on 14 minerals on the critical minerals list.”

Beijing has manipulated the REE market by slowing and in some cases halting export of these materials. In fact, after a 2010 dispute with Japan, China stopped supplying REEs to Japanese customers and reduced global exports 72 percent.Add it all up, and there’s no mystery as to why CRS concludes, “Supply-chain security could affect wartime reliability of…weapons as well as the ability of the U.S. industrial base to build replacement precision-guided munitions in a timely manner.”

SolutionsThe good news is that COVID19 has awakened America and key allies to these vulnerabilities and spurred them into developing policies that will reduce dependence on China. The evidence exists on both sides of the political aisle and both sides of the Pacific and Atlantic.

“What happens if you're in a war and you have a supply chain where half of your supplies are given to you by other countries?” Trump recently fumed. “It doesn't work.”

Sen. Charles Schumer, Democratic leader in the Senate, says he’s “greatly concerned by the strategic vulnerability created by our reliance on China, a strategic adversary, for the APIs used to manufacture a very wide range of life-saving drugs that are vital to our healthcare system.”Sen. Josh Hawley concludes, “Never again should the American people find themselves vulnerable to the Chinese Communist Party for critical medical supplies and industrial components in a moment of crisis.” Hawley is pushing legislation that will provide economic assistance to “firms that onshore production…in response to global supply-chain disruptions.”Indeed, there are 59 bills percolating in Congress related to supply chains and China. One would require that medicines purchased by federal agencies “contain 60 percent or more” of their active ingredients from countries other than China. Another, noting that “Russia and China seek to steal sensitive defense information…through the use of blended espionage operations in the supply chain,” would create a federal watchdog to monitor and prevent threats to supply chains.

The market is way ahead of the policymakers. Battered by COVID19, firms of every kind and nationality are shifting supply chains away from China. As Forbes reports, even before the COVID19 crisis, “the threat of disrupted China imports” prompted companies to begin diversifying supply chains. COVID19 has accelerated this trend, forcing firms to develop supply-chain “resilience.” Citing a Bank of America survey, the Los Angeles Times reports that major firms in industries as diverse as semiconductors, cars and medical equipment “have shifted, or plan to shift, at least part of their supply chains from current locations” in China.“These movements are tectonic,” according to Ethan Harris, global economist at Bank of America. Emerging-markets expert Kenneth Rapoza adds, “China’s days as the go-to manufacturing hub for the Western world are over.”

Governments are beginning to assist industries in supply-chain diversification. Prime Minister Shinzo Abe is calling on Japanese companies “to relocate high added value items to Japan.” Nikkei Asian Review reports Tokyo has committed more than $2.2 billion to help Japanese companies move production out of China, relocate to Japan and diversify production operations across Southeast Asia.

SafetyEven free-traders recognize that certain industries and products need to be protected from malign actors—and that free trade has its limits. In fact, none other than the father of free trade, Adam Smith, concluded, “When some particular sort of industry is necessary for the defense of the country,” it is appropriate “to lay some burden upon foreign for the encouragement of domestic industry.”

The father of our country would agree. “A free people ought not only to be armed, but disciplined,” President George Washington declared. “Their safety and interest require that they should promote such manufactories as tend to render them independent on others for essential, particularly for military, supplies.”

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