Fake Toughness On China: Supply Chains



Derek Scissors | American Enterprise Institute

It’s frequently said there is bipartisan consensus on China. If so, the consensus is to talk tough and do little. For years. The most puzzling inaction may concern supply chains. The PRC’s behavior in 2020 put critical goods at risk for millions of Americans, yet the Trump and Biden administrations have done almost nothing since. Two very different examples suggest many policymakers still don’t take supply chains seriously.

The first receives a lot of attention. A prolonged battle to pass more comprehensive legislation has prompted calls for Congress to split off then quickly consider a narrower bill providing subsidies to locate some semiconductor production in the US.

If supply chains were taken seriously, this bill and others like it would bar China-controlled entities from participating in any aspect of manufacturing and distribution. Otherwise, the PRC will subsidize its way into part of the chip chain, likely in assembly, packaging, and testing, and make our shiny new semiconductor capacity subject to interruption by Beijing.

Related, American companies receiving the subsidies will inevitably be offered Chinese subsidies. Take US government money for a plant here then, a few years later, take Chinese government money for a competing plant there. Unless the US coughs up more, of course. Companies accepting American subsidies should be banned for an extended period from expanding related China business.

Technology companies oppose such restrictions, part of a pattern of harming the national interest. And if Congress and the Biden administration just want to subsidize chip output, they can. But, if the PRC can easily choke new production, this is hardly the US competing. It’s like saying running up debt for infrastructure spending represents tough competition. They might be good ideas, but they have little to do with China.

The second example may be a surprise. The US is the world’s biggest agriculture exporter, the PRC the biggest importer. We have more arable land with a much smaller population. Yet our food supply chains are vulnerable to Beijing.

Animals providing meat, milk, and eggs require feed. Feed, in turn, is fortified with vitamins primarily made in China. Global supply and American imports of B1, B6, and B12, for example, are dominated by the PRC. As is D3, which is important for animal feed because exposure to sunlight is falling with rising food demand.

The situation didn’t arise out of a Chinese plot. The Communist Party is understandably worried about food security and its economic interventions usually result in overcapacity. Due to subsidies, too much is produced for use at home, with the excess sold on foreign markets at low prices.

If Beijing can dictate market conditions, though, it does. The Chinese government admitted in US court to ordering predatory pricing of vitamin C here, before a later, bizarre court ruling allowed the PRC to continue breaking American law. With an assist from our judges, more predatory Chinese behavior is guaranteed, keeping supply chains vulnerable.

Even where it has no comparative advantage, the PRC can subsidize its way to a position of market power. There are many examples of Chinese dominance in products important to supply chains, from rare earth elements to shipping containers to active pharmaceutical ingredients (where the PRC supplies the US both directly and indirectly through India).

Australia’s recent experience hints at one risk. Australia signed a trade agreement with China, then later criticized Beijing’s behavior with regard to COVID. The PRC blocked various Australian exports, presenting a list of 14 demands that would have been laughable if they didn’t come with a price tag. The trade deal meant nothing.

The US could face worse. If the Biden administration backs the claim that genocide has occurred in Xinjiang with sanctions, for instance, that would be far more provocative than the Australian case. An obvious Chinese response would be to interrupt selected supply chains and see if the administration can handle the resulting angry lobbying.

There’s also outright conflict. It would be painfully ironic if new American chip plants open just in time to be closed by Chinese aggression in the Taiwan Straits. In a Taiwan contingency, a shut off of many drugs and vitamins for animal feed is certain. The first step in protecting these and other supply chains is to determine where we’re most vulnerable. But that will mean nothing unless we’re prepared to act, not just talk.

Derek Scissors is a senior fellow at the American Enterprise Institute (AEI), where he focuses on the Chinese and Indian economies and on US economic relations with Asia. He is concurrently serving on the US-China Economic and Security Review Commission and as the chief economist of the China Beige Book.

To read the full commentary from the American Enterprise Institute, please click here.