China poses a major challenge to the United States, but it is one that can be met and overcome, according the sentiments voiced during a U.S.-China Economic and Security Review Commission hearing Thursday.
It discussed competition between the United States and China in global supply chains, one of four topics reviewed during the meeting. The USCC is a bipartisan commission created by Congress to monitor and report on trade, economic and defense issues in the U.S.-China relationship.
Commissioner Bob Borochoff read an opening statement to begin the sixth hearing of the commission’s 2022 annual report cycle.
“This hearing comes at a pivotal moment as global supply chains continue to face disruptions and effect everything from parts for your dishwasher, to microchips used to manufacture new automobiles, to our military’s supply of anti-aircraft missiles,” Borochoff said. "It’s no secret that American families and businesses are experiencing firsthand the consequences of a diminished manufacturing base in the United States, which instead depends on foreign suppliers, including China, for some of the most critical materials and parts.”
He said while globalization has lowered costs for consumers through outsourcing production, it created more complex and vulnerable supply chains that rely heavily on China.
Commissioner Carte Goodwin, in his opening statement, said China’s emergence in manufacturing and international trade has resulted in it serving a dominant role in global supply chains.
“As with much of China’s economic rise, the Chinese Communist Party has sought to put its finger on the scale in multiple harmful ways, through various subsidies, market access restrictions and broader strategic moves designed to encourage the localization and concentration of global value chains and supply networks in mainland China,” Goodwin said. “Today, many of our most critical materials and consumer goods — from pharmaceuticals, to rare earths, to smart phones and laptops — are sourced almost exclusively from China. Many other critical supply chains, such as those for semiconductors, run through East Asia."
He said Beijing is increasingly aggressive and has displayed a willingness to weaponize its economic position, which is concentration of critical U.S. supply chains in and around China’s borders. This presents a growing risk to the United States.
The first panel examined China’s position in global supply chains and Chinese Communist Party leaders’ views of supply chain security.
Among those giving testimony were David Bulman, the Jill McGovern and Steven Muller assistant professor of China studies and international affairs at the Johns Hopkins University School of Advanced International Studies, Willy Shih, the Robert and Jane Cizik professor of management practice in business administration at the Harvard Business School, and Mark Dallas, an associate professor of political science and director for Asian studies at Union College as well as an international affairs fellow for Tenured International Relations Scholars, Council on Foreign Relations.
Bulman said China’s supply chain dominance has arisen largely from natural comparative advantages. Its central policymakers increasingly employ targeted industrial policies to achieve dominance or reduce vulnerability in specific sectors, but these policies have only been partially effective given distorted implementation by local governments.
“The broadest recommendation for U.S. policymakers that arises from these conclusions: do not overestimate the threat that China’s GVC dominance poses,” he said. “There may be very good reasons to engage in domestic industrial policy, impose taxes on outsourcing or directly pay firms to ‘reshore’ and bring manufacturing production back to the U.S. These good reasons could include concerns about American job creation and climate change. But the threat from China should not be a key motivation.”
Bulman offered three policy recommendations.
First, identify vulnerable sectors and generate targeted policy responses. Key policy and business communities should develop lists of key inputs that have no domestic sourcing, as DOD has already done. There is no reason to focus solely on China.
Second, use trade pressure and trade carrots to shape Chinese policy, WTO reform and regional PTAs. In the medium term, the U.S. and the world would benefit from China’s greater adherence to international trade norms.
Third, maintain the U.S. innovation edge by staying open to Chinese students and scientists. Human capital is the most important advantage the U.S. has in high-tech, innovation-based sectors. Our universities are the best in the world, Bulman argued, and attract the greatest minds from abroad, including from China.
Shih said China was late to industrialize, relative to the U.S., Europe, and other East Asian countries, but it features what some authors call the “late-comers’ advantage.”
“When [China] built its electric grid, its communications network, and a fair amount of its manufacturing capacity, it didn’t have a lot of existing [and older] infrastructure that was already paid for and fully depreciated, or maybe state-owned enterprises [SOE] didn’t have to worry about concepts like depreciation schedules,” he said.
Shih said China’s position in global supply chains is much more pervasive than many people realize. It had a virtually unlimited low-cost workforce with both the discipline and the ambition to get ahead.
“Workers there were willing to do things that American workers were not, and they did it for a tenth the cost or sometimes even less," he said. "While many people focus on the high-profile products like lithium ion batteries, computers, communications equipment, or pharmaceuticals, we actually have broad dependencies that run much deeper than most Americans realize. The pandemic revealed a lot of surprise dependencies, and I guarantee there are many more.”
But he remains optimistic that the United States could meet this challenge.
“I believe in America, and I believe in our system of market-based competition," Shih said. "Importantly we foster a competition of ideas, we can accept failure and the idea that people should be given another chance. If you believe, as I do, that we have a superior system, then let’s address some of the imbalances that occur at the interfaces with other less-than-market systems. As for China their leadership believes in their system. There’s a side of me that says step aside and see how their top-down model will work facing the challenges in the years ahead. Their zero-COVID-19 strategy provides a lot of insight, as does the way they have treated their private education industry and their tech sector.”
He said the solution is to address our weaknesses and penchant for watered-down short-term solutions.
“I have told this commission before that a little long-term planning would benefit us all,” Shih said.
Dallas, using what he termed an “empirical deep dive,” said supply chains “raise thorny policy challenges for all countries,” with complex, enormously varied and unique features across products and each production process.
“Furthermore, many of these features change rapidly," he said. "As such it is often impossible to discuss ‘supply chains’ in generic terms, and impossible to create one-size-fits-all frameworks or policy solutions. Supply chains also force countries to confront new vulnerabilities that have arisen as both innovation and production have become more globalized. Most fundamentally, these new realities compel us to seriously rethink some foundational concepts, including our understanding of ‘economic and national security,’ ‘critical infrastructure,’ ‘dual-use,’ and other commonly used policy concepts.”
Dallas said China is deeply integrated with global supply chains, which creates both interdependencies between countries and new vulnerabilities.
“Our key task, as I see it, is not to cut China out of global supply chains that intersect with the United States, but to understand which circumstances create unacceptable risk, and which create tolerable or benign risk,” he said.
He said China although China possesses some key capabilities that expose America and its allies to vulnerabilities, China’s dependency on the U.S. and U.S.-allied countries is far greater.
“As such, China’s sense of vulnerability and insecurity is substantially elevated,” Dallas said.