China’s COVID-19 policies are throwing global supply chains into yet greater disarray. Major Chinese cities ranging from Shanghai to Shenzhen have implemented strict lockdowns as caseloads rise. Those lockdowns have shut down manufacturing facilities and shipping sites, causing logjams in the immediate likely to be compounded by longer-term production shortages. Moreover, Chinese cities are increasingly imposing quarantines and PRC testing requirements on truck drivers seeking to enter their municipalities: Even if goods are being made and can be shipped abroad, they risk facing literal roadblocks in transportation from point A to point B.
In the immediate, this is an enormous headache for companies and consumers that depend on Chinese production. A tremendous share of key electronics suppliers for both Apple and Tesla are based in Kunshan, where manufacturers are shutting down as lockdowns continue; Volkswagen has closed a factory outside of Shanghai after running out of materials. And this is just the beginning.
But in the longer term, the disruptions of China’s COVID-19 debacle could be precisely the impetus the US needs to get serious about rebuilding supply chains. These should provide markets a prod to start pricing in the real costs of offshoring – and Washington justification for dedicated, emergency investments in domestic industry. For years, the water has been boiling around the frog of US domestic industry. Now, the temperature just got a whole lot hotter, overnight: This is the push, the opportunity that the US needs to jump out of the pot.
“For years, the water has been boiling around the frog of US domestic industry. Now, the temperature just got a whole lot hotter, overnight: This is the push the US needs to jump out of the pot.”
US industry leaned into offshoring production because markets determined that it was the cost-effective solution. Based on a here-and-now profit calculus, and a set of assumptions about globalization and international stability, markets resolved that moving manufacturing to emerging economies would help US companies’ bottom lines. In the short-term, that worked. But in the longer-term, it destroyed US control over its industrial base and with it American economic security. It cannibalized good US jobs and opportunities for future growth. Offshoring also granted rising, non-market players like China the opportunity to acquire both leverage over the US and valuable American technology.
But even as those dangers have been recognized over recent years, there has been little room to change course: The here-and-now calculus has held. It has remained cheaper, on any given day, to manufacture in China. And while doing so might come at the cost of a company’s future prospects, and those of the United States, markets don’t think in terms of long term prospects.
Except that now, this very moment, the here-and-now calculus has changed. COVID-19’s rampage and China’s response are revealing the very real costs into the offshoring formula. So are Russia’s invasion of Ukraine, geopolitical tensions between the US and its authoritarian challengers, and continued international shipping logjams.
Here, then is the chance to change course. Short- and long-term interests are suddenly aligned. The market needs to realize that, now. And in realizing that, in pricing in the newly tangible costs of offshoring, it needs to push companies to invest in domestic production. The way to make a profit is to make in the US.
“The way to make a profit is to make in the US.”
Washington can help with this realization. Industrial policy might not be the US government’s forte, but security policy is. The president has at his disposal a host of emergency and war-time measures that can be re-purposed for this industrial emergency. Already on April 4, President Biden invoked the Defense Production Act to encourage critical mineral production. That invocation should be expanded across critical nodes in strategic supply chains, ranging from polysilicon to microelectronics. During World War I, the US set up a War Industries board to coordinate purchase of war supplies. Today’s global crisis justifies, and demands, a supply chain War Industries Board – supraordinate to existing government agencies — to develop and operationalize a prioritization framework for investment in US and allied industry. Historical security threats to the US have also paved the way for adjustment of taxation and other regulatory frameworks: Today’s crisis should be grounds for government-imposed costs on those that continue needlessly and recklessly to offshore critical production, at the expense of US security and prosperity.
Since 2020, China’s official COVID-19 policy has oriented around turning crisis into opportunity. It’s time for the US to do the same.