Ensuring the resilience of the U.S. supply chain dominated a detailed discussion during a U.S.-China Economic and Security Review Commission hearing Thursday.
Panelists included John VerWey, East Asia national security adviser for Pacific Northwest National Laboratory; Jan-Peter Kleinhans, project director of technology and geopolitics for Stiftung Neue Verantwortung; Kristin Vekasi, an associate professor of political science at the School of Policy and International Affairs at the University of Maine; and Harry Moser, president of Reshoring Initiative.
VerWey defined a supply chain as “a network of people, processes, technology, information and resources that delivers a product or service. He said supply chain risk management (SCRM) is the management of risk to the integrity, trustworthiness and authenticity of products and services within a supply chain.
“Historically the primary focus of SCRM has revolved around maintaining cost, schedule and performance," he said. "Private sector SCRM efforts prioritize delivery of products and services on time, at reasonable cost, and to specifications. However, for national security systems, SCRM also focuses on security. The term “security” encompasses concepts like trust, traceability, integrity and resilience, among others. SCRM draws on many disciplines and requires participation from subject matter experts in acquisition, information assurance, logistics, analysis, and risk.”
He said at a most basic level, U.S. government SCRM efforts attempt to answer the question, “Can we trust who we’re buying from to deliver products and services on time, at cost, to spec, securely?”
The goal is to increase the overall resilience of the supply chain to prepare for unexpected events, respond to disruptions, and recover from them. This can be challenging as critical technology supply chains are often entirely commercial and outside government control and limited data is available at the multiple tiers of vendors in adversary countries.
VerWey said in order to increase critical technology supply chain resilience, the U.S. needs interagency coordination and harmonization of supply chain initiatives. It must “harmonize” definitions, directives, mapping and best practices.
“The intelligence community, the Department of Defense, and the National Institute of Standards and Technology have developed a series of directives, instructions and best practices related to supply chains and supply chain risk management,” he said. “This work should be increasingly coordinated by these, and other, executive branch agencies."
VerWey said in addition to agencies with obvious supply chain equities such as the Departments of Defense and Energy, the U.S. Geological Survey, the U.S. International Trade Commission, and the Environmental Protection Agency all have important roles to play in mapping supply chains, characterizing chokepoints/U.S. import dependence, and determining the viability of mitigation [such as identifying regulatory hurdles to domestic mining production expansion] respectively.
“Increasing their participation in ongoing SCRM efforts would be valuable,” he said.
Kleinhans said to understand the global semiconductor value chain, it was important to note the different production steps (including the supplier markets), the business models and the different types of semiconductors.
They are chip design, wafer fabrication and assembly, test and packaging. The three important supplier markets for semiconductor manufacturing (apart from the EDA tool vendors and third-party IP vendors) are equipment, chemical, and wafer suppliers, he said.
In order to build resilience into semiconductor supply chains, Kleinhans recommended increasing knowledge by coordinating with allies and manage risks stemming from interdependencies with China’s chip ecosystem.
“The U.S. and allied governments need a deep and holistic understanding of the global semiconductor value chain,” Kleinhans said.
He also urged a deeper understanding of the long-term impact of export restrictions on the industry.
“If the ultimate goal is to curb the technological advancements of China’s semiconductor ecosystem at all costs, it makes sense to exploit the dominance of U.S. [and allied] equipment vendors and EDA vendors through export restrictions,” Kleinhans said. “However, this comes with potentially significant downsides.”
It’s also crucial to understand that the semiconductor industry is highly research and development intensive, he said.
Kleinhans offered this recommendation to be made to Congress.
“This is a marathon, not a sprint. If policymakers, both in the U.S. and Europe, are serious about strengthening the resilience of the global semiconductor ecosystem, it will take much more than a decade of continuous and consistent engagement with the semiconductor industry and end-customer industries to elaborate goals, build trust, and understand industry needs."
Vekasi focused on the rare earth sector.
She said risks arise from high environmental externalities, high levels of technological expertise needed for separation and refinement and information failures. China has effectively used market intervention, industrial policy, and investment in expertise over the long-term to become the major global player in rare earths.
“Supply chain vulnerabilities arise from the market concentration in China," Vekasi said. "In coming years, China will be unable to meet their own rising domestic demand nor global needs, particularly for neodymium and other key rare earths needed for permanent magnets."
She offered three policy recommendations:
- Full supply chain resiliency. The U.S. government can help ameliorate supply chain vulnerabilities in rare earths by diversifying along the supply chain. While a focus on the mining stage is tempting, attention to the midstream is likely to yield greater results.
- Solving information failures. The U.S. government should direct the Department of Commerce to increase information transparency in rare earths by developing an international price index, preferably in cooperation with China. While known market prices for all 17 elements would be beneficial, spot prices for neodymium and praseodymium are particularly pressing.
- Public-private cooperation. The U.S. should emulate Japan’s model of public-private funding for new mining and separation facilities that help overcome initial political and environmental risks in the rare earth sector. Even with public funding, it is likely that private companies will need to lean on Chinese expertise to develop a resilient business model. The United States should recognize China’s technical leadership in this sector and not prohibit private-sector cooperation with Chinese commercial entities in order to be eligible for opportunities.
“Otherwise, work will flow from China to Southeast Asian factories, often owned by the same Chinese companies. China will be hurt moderately,” he said. “The U.S. will be less dependent on China, but still vulnerable to disruption and militarization of the western Pacific and U.S. manufacturing will not be strengthened.”
Moser said the biggest obstacles to reshoring are the same forces that drove offshoring, including uncompetitive manufacturing cost, a shortage of skilled workforce and the failure of companies to source based on total cost of ownership. The objective should be to reshore a broad range of industries by reducing these obstacles, he said.
He said it’s important to remember that the U.S. remains the largest market in the world.
“If the government were as clearly committed long-term to solving our supply chain imbalance as the Fed was to achieving stability during COVID-19, companies would rush to reshore,” Moser said. “The federal government needs an industrial policy instead of what has been, in effect, a deindustrialization policy.”