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Supply Chain News: National Security at Stake in Decoupling from China, Researcher Says

 

Coronavirus Laid Bare Healthcare Dependence on China, but It Goes Far Beyond that

 

July 21, 2020
SCDigest Editorial Staff

Will the Corona virus turn out to be the key inflection point that will drive a true reshored Made-in-America revival?

Maybe - but it will take a different strategy and approach than the current one to get there.

So says Arthur Herman, a senior fellow at the Hudson Institute, writing as a guest columnist this week in the Wall Street Journal.

Supply Chain Digest Says...

Herman notes that a 2019 Congressional Research Service report found that India and China together made up nearly 70% of foreign students enrolled in STEM courses in the US.

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The reality is that despite some anecdotal stories of companies reshoring production to the US, they certainly aren't finding their way into the numbers. For example, the index of US Manufacturing output released monthly from the Federal Reserve had been basically flat for many years, even before the pandemic hit and sent the index plummeting.

In February, for example, the index was at a level of 104.9 - meaning it was just 4.9% above the baseline year of 2012 – meaning annual growth of well under 1% now eight years later. While Chinese imports to the US have gone down a bit, most of that volume appears to have simply moved to other low cost countries such as Vietnam and India.

Here in 2020, manufacturing makes of just over 11% of the US economy. More than five million American manufacturing jobs have been lost since 2000.

The virus pandemic early on highlighted the fact that the US was hugely dependent on Chinese supply for pharmaceuticals, with an amazing 97% of antibiotics imported from China – a huge medical risk to the country.

China manufacturers also have a huge share of US supply for face masks, ventilators and other critical healthcare products.

According to the Los Angeles Times, more than 60 bills are pending in Congress to change one aspect or another of our economic relationship with China, many specifically targeting healthcare security.

But while the pharma sector received the bulk of the US media and public attention relative to Chinese domination, it's far from the only one that is both critical to US national security and hugely dependent on Chinese imports.

And, probably surprising to many, that includes aerospace and defense products.

Herman cites a 2018 White House Office of Trade and Manufacturing Policy study that noted that since 2000, more than 20,000 US-based manufacturing companies have left the defense sector.

"As the work those companies once did domestically has shifted overseas, much of it has gone to China," Herman says, adding that "from rare-earth metals and permanent magnets to high-end electronic components and printed circuit boards, the Pentagon has slowly become dependent on Chinese industrial output."


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In some cases extremely so. Asia produces 90% of the world's circuit boards - more than half of them in China. The US share of global circuit-board production has fallen to 5%. That's a national security threat that is hard to overestimate.

Herman also says that the US must find a path for more technology companies to reduce dependence on China and instead reshore production. For example, a single Chinese company, DJI, makes nearly 80% of the commercial drones currently in use in the US and Canada.

There are more problems. For example, Herman cites a 2015 study by consulting firms Strategy& and PwC found that US companies were increasingly moving their research-and-development centers to China to be closer to production, suppliers and engineering talent.

In late 2019, SCDigest reported on research on this same topic by Dr. Sridhar Kota and Tom Mahoney. Kota is a professor at the University of Michigan and executive director of MForesight, an independent, federally funded public-private research consortium on advanced manufacturing. Mahoney is associate director of MForesight.

The two said that once manufacturing departs from a country's shores, engineering and production know-how leave as well, and innovation ultimately follows. "It's become increasingly clear that 'manufacture there' now also means 'innovate there,'" – and that is not good for the economic future of the US," they said.

To address this situation, Herman says "Washington should identify commercial-sector technologies that may be crucial to national security. Artificial intelligence, robotics, quantum technologies and nanotechnology all need a strong domestic manufacturing base."

He adds that "Any reshoring strategy that ignores the people who will perform vital research and engineering, now and in the future, is doomed to failure."

Herman notes that a 2019 Congressional Research Service report found that India and China together made up nearly 70% of foreign students enrolled in STEM courses in the US.

"Many of those Chinese grads will bring their training home to benefit Beijing's military-industrial complex," Herman says.

The US will never be able to make all security related goods on shore. But instead of China, the US needs to develop more friendly sources in Japan, India, Korea and others to make these vital products.

"If the US remains dependent on Chinese imports, the next pandemic could end up being far worse than Covid-19," Herman concludes, adding that "The country may not survive a military conflict if its vital logistical sources are spread willy-nilly around the world, or controlled by a hostile power. Decoupling from China and reshoring manufacturing are America's most pressing challenges."

 

What do you think of Herman's analysis? Let us know your thoughts at the Feedback section below.

 

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