Securing Our Supply Chains Requires 'Big Picture' Thinking - The Hill

By Robert Rosenberg - The Hill - October 21, 2020

In late September, the Trump administration imposed new sanctions on China’s largest chipmaker, Semiconductor Manufacturing International Corporation (SMIC), due to the risk of diversion to military end-uses, hampering the company’s ability to acquire U.S. manufacturing equipment and software vital to its operations.

The measures followed recent restrictions on Huawei, marking yet another escalation in U.S.-China relations but also highlighting their economic interdependencies in a critical sector — thus further fueling debates of a destined “decoupling” and the need for self-sufficiency.

There is an undoubted trend towards returning great power competition. Although a full economic schism is unlikely due to the sheer cost and instability it would create in the international system, global supply chains are becoming the new arenas for both sides to influence the technological and economic landscapes of the shifting global paradigm.

To remain competitive — while maintaining an eye towards both economic needs and national security — the U.S. must undertake a concerted effort to address its supply chain vulnerabilities and dependencies in critical areas. These include the sourcing of goods, but also their flow through complex international trade systems. Here are five recommendations for the U.S. to accomplish these goals:

Risk-based prioritization: The U.S. needs to understand the challenges it faces. Almost all industries are at risk of supply chain disruption. However, global trade dynamics make it infeasible for the U.S. to repatriate every production process, nor should it. While areas of interest have been identified to prioritize certain materials, a dynamic risk assessment-based approach to continuously evaluate and re-prioritize which critical supply chains to focus on — without loss of economic efficiency with mitigating their aggregated risk — is critical to resolve the current issues and protect against future vulnerabilities.

The level of essentialness, concentrations of production, ownership (in terms of organizations and locations), and logistical concentrations should be core to this analysis. Each interlocking layer builds on a broader picture of the risks associated with each critical supply chain. Moreover, any assessment must be recurring due to the dynamic nature of supply chains and evolving technologies and needs.

As the U.S. transitions its capacity, strategic stockpiles for critical goods and materials are essential to providing short term cushions against future shocks — whether from a global pandemic or escalating geopolitical tensions.

Targeted investment and R&D: In the 1980s, the U.S. launched SEMATECH to revamp its semiconductor industry, successfully regaining its competitive edge against Japan. Developing similar programs for identified critical industries and increasing investment in advanced manufacturing can help the U.S. maintain a technological and competitive edge. Existing programs, such as the U.S. International Development Finance Corporation (DFC) use of the DOD’s Defense Production Act, provide ready-made tools to begin these efforts.

Leveraging the tax code: After identifying critical supply chains, the U.S. can begin strategically delegating its resources to alleviate risks. Tax incentives for Puerto Rico made it a leading center of pharmaceutical manufacturing until their repeal dispersed capacity across the globe — mostly to China and India. Using targeted tax programs, as well as taking advantage of programs such as Opportunity Zones, can encourage domestic capacity in key industries while directing resources to underserved areas and helping revitalize former industrial-based communities.

International supply chain coalition: Australia, India, and Japan are undergoing talks to form a Supply Chain Resilience Initiative in response to growing Chinese economic and military antagonism. The EU also recently launched a Raw Materials Alliance to diversify its access to critical raw materials away from its dependency on China, while the U.S. and Australia formalized a bilateral partnership to create alternatives to Chinese dominance of essential rare earth elements.

The U.S. can build on these international initiatives to distribute the costs and risks of rebalancing its supply chains, benefit from the comparative advantages of close partners, and increase mutual economic security. Joining with like-minded countries and coordinating investment can also provide a counterbalance to China’s attempts to further distort and reorient the international trade system through Belt-Road and other programs.

WTO reform: U.S. leadership in multilateral organizations will be critical. The WTO is the only international organization shaping and enforcing global trade rules. China has long taken advantage of its benefits without adhering to its principles. The U.S. should continue to push for organizational reform. It can also strengthen its diplomatic backing for parallel U.S.-EU-Japan efforts to “pluralize” rules that address abuses by China and others.

The U.S. should move quickly to address urgent near-term concerns.

However, for most vulnerabilities, the U.S. will need a concerted, long-term approach in its investment decisions to take a strategic outlook that involves both domestic and international tools and partnerships to rebalance and diversify its supply chains.

If the U.S. is to address its pressing supply chain vulnerabilities, it must use the full array of domestic and international policy tools at its disposal.

Rob Rosenberg is president and CEO of NTELX, Inc. and a nonresident fellow at The Stimson Center, a nonpartisan research center located in Washington, D.C.