Why Does Everyone Suddenly Care About Supply Chains?



Chad P. Bown and Douglas A. Irwin | New York Times

Globalization may have lifted hundreds of millions of people out of poverty, but to its critics, it has long been a dirty word. They associate it with enhancing corporate power, reducing the wages of workers and deepening divides between the wealthy and everyone else.

During the pandemic, globalization has also been blamed for putting the United States into a position of excessive dependence on foreign supplies as varied as medical equipment and semiconductors.

This has led many politicians — Democrats and Republicans — to a subject that was also for a long time a dirty term: industrial policy. They seek a bigger role for the U.S. government in shaping what gets made where. The idea has been championed by Presidents Donald Trump and Biden and members of Congress from conservatives like Marco Rubio and Josh Hawley to progressives like Alexandria Ocasio-Cortez and Elizabeth Warren.

But this enthusiasm for directing billions of dollars at certain industries may not work in today’s globalized economy. If the point is to focus on clearly defined and agreed-upon goals — including some that may involve sacrificing a bit of economic efficiency to achieve national security or pandemic preparedness — then an industrial policy that is entirely domestic may actually backfire.

Instead, to succeed, it will take what we think of as a hybrid industrial policy. This would integrate some of the good aspects of globalization, preserve competition and coordinate policy with like-minded countries to achieve common objectives.

A couple of examples suggest the opportunities — and potential pitfalls.

Personal protective equipment and semiconductors
The main argument for an American industrial policy in both P.P.E. and semiconductors is the risk that foreign sources of supply are too concentrated geographically.

For P.P.E., when the coronavirus hit, the lack of hospital gowns and masks globally — let alone in the United States — set off alarm bells among policymakers. There was extra global supply, but it was stuck mostly in China.

To remedy that, the Defense Department spent nearly $1.2 billion. Dozens of American companies now make N-95 respirators, surgical masks, hospital gowns and gloves, and even some of the key raw materials the supply chain needed to ensure production could be secured in the United States.

For semiconductors, no one seemed to care just over a year ago about U.S. dependence on high-end chips made in Taiwan and South Korea. But with the global shortage, we all do now — automakers in particular.

Both countries are geopolitical hot spots and not immune to droughts, typhoons and other natural disasters that can disrupt supply. Congress is using the situation to push ahead bipartisan legislation for upward of $50 billion in federal subsidies for the American semiconductor industry.

But the objective should not be national self-sufficiency at any cost. When the pandemic recedes, there will be less demand for some of these products, and prices will come down.

For P.P.E., that means budget-conscious hospitals will look to buy cheaper, non-American-produced options. The U.S. companies will want continuing subsidies or protection from imports. In fact, a group of small companies have already organized into the American Mask Manufacturer’s Association to complain that foreign-made masks are being “dumped” in the U.S. market, and they may seek tariffs to stop imports. But duties would raise costs for a health care system that is already extraordinarily expensive.

The industrial-policy goal should be to preserve the right amount of domestic capacity to be at the ready for the next health emergency with the equally important objective of keeping medical costs low. Targeted government subsidies, as well as regulations that medical distributors, states and hospital systems hold more emergency inventory than they did heading into the pandemic, would be better industrial policy than blunt trade restrictions and blank checks.

For semiconductors, congressional efforts to shift capacity to the United States through subsidies pose additional challenges. The potential good news is that the bulk of the subsidies might be one-time payments that provide equal opportunity to leading-edge manufacturers — not just American businesses but also some abroad, like Taiwan’s T.S.M.C. and South Korea’s Samsung. Yet there is no guarantee that the foreign companies would start making their leading-edge products on American soil. In fact, they are less likely to do so if Washington continues to adopt unilateral export-control policies that can limit where American-made semiconductors can be sold — i.e., not China.

And there are also downsides to bringing back production. The United States is not immune to geographically concentrated risks, as February’s Arctic storm in Texas revealed when a disruption to the electrical grid temporarily shuttered a cluster of semiconductor plants. And if the costs of chips made in America are too high for automakers, keeping those product lines going may require more than just those one-off payments to companies.

A better “Made in America”
For both economic and security reasons, more geographic diversification is needed. A better “Made in America” policy would allow for globalized production chains, particularly with trusted suppliers in like-minded countries.

This implies that, if the goal is to diversify away from China — or, for certain items like semiconductors, Taiwan or South Korea — the United States and its allies should take a coordinated approach. That requires setting limits on government payments to industry and working out who in the supply chain does what — a high level of policy cooperation.

Without such coordination, even like-minded countries might end up in bidding wars by giving ever larger subsidies to lure semiconductor manufacturers to their shores. That could result in industry excess capacity, trade disputes and tariffs that close off markets.

This is not a fanciful scenario. The United States and the European Union have long fought over counterproductive agricultural subsidies, and the two sides recently resolved a costly, long-running battle over subsidies to Boeing and Airbus that also included tariffs on completely unrelated goods, like wine and cheese.

Furthermore, at the same moment that the United States is working with the other major economies to eliminate tax havens and impose a global minimum tax on multinational corporations, governments should not be competing to hand tax revenue back to those companies some other way.

The Biden administration seems willing to try this coordinated approach. At the Group of 7 summit in June, the administration agreed to a proposal highlighting both P.P.E. and semiconductors that aspired to achieve “open, diversified, secure and resilient supply chains.” In a summit in September, the administration and the European Union agreed to try to avoid a semiconductor “subsidy race and the risk of crowding out private investments that would themselves contribute to our security and resilience.”

Cooperating on the details will prove hard. A hybrid industrial policy is extremely difficult to achieve, but it is also the one most likely to work. It accepts for security reasons some costs to moving some production away from where it is currently abroad but without requiring self-sufficiency and a complete unraveling of international production chains that give Americans access to the best products at reasonable prices. It accepts that some coordination with allies is necessary but seeks to avoid managed trade or government-protected cartels that reduce competition. In short, it relies on a sound economic strategy in the service of national security.

Chad P. Bown is a senior fellow at the Peterson Institute for International Economics. Douglas A. Irwin is an economics professor at Dartmouth.

To read the full commentary by the New York Times, please click here.