Resilience vs. Efficiency
Last week, the Biden administration produced its report on supply chains in four critical sectors: semiconductor chips, batteries, critical minerals, and pharmaceuticals. Two hundred and fifty pages and 23 recommendations in 100 days is a significant accomplishment, and the administration deserves some respect simply for finishing it on time. The report is important because it addresses four areas that everyone agrees are critical from a national security perspective, although that is not the only reason why they are important. Still to come are longer, year-long studies covering major parts of the U.S. economy—agriculture, transportation, energy, the defense industrial base, public health, and information and communications technology. The breadth of these studies suggests they could have a major impact on our economy, depending on what they recommend.
Last week’s report was prompted by two developments: the Covid-19 pandemic, which made us acutely aware of supply chain gaps and vulnerabilities in sensitive sectors, and China’s continuing dominance in production in some of these sectors. The latter is not new, but concern has been growing because of China’s dominant position in some areas like critical minerals processing and its demonstrated willingness to use denial of access as a means of responding to criticism or to further its foreign policy goals. In fairness, the United States probably weaponized trade before they did through our many sanctions programs, but when the shoe is on the other foot, it turns out it does not fit very well.
These developments have also made us acutely aware that our own efforts have been lagging. Manufacturing in some critical sectors has long been declining in the United States, as has our investment in basic research. In fiscal year 2019, federal spending for research and development (R&D) was 0.6 percent of GDP in the United States, the lowest in over 60 years. These challenges are acknowledged deficiencies and have been a wake-up call, to which the Biden administration has responded, first with its Build Back Better program and now with this report.
The 23 recommendations in the report represent a return to what used to be called industrial policy and might now best be described as innovation policy—a greater role for the government in promoting research in essential areas and, if necessary, promoting either onshore production or the development of secure supply chains based on relationships with trusted partners. The United States has done this before, and we are good at it. If we do it correctly, the result will be more resilient supply chains and a more secure America.
Whether their roadmap is the correct one, however, remains uncertain. Many of the recommendations address the need for pouring additional resources into our innovation efforts. Republicans have often opposed these policies in the past as government meddling in the economy and “picking winners and losers.” They may well do so again, particularly if their leadership adopts the position of opposing everything the president recommends, but this time the debate is taking place in the context of national security. We need to up our game, not just because it’s a nice idea, but because our security and ability to compete effectively with China demands it. Republicans in Congress who have taken a hard line on China—and criticized the president (incorrectly) for being too soft—may have difficulty opposing measures intended to do precisely what they have been demanding. More likely, as also happened last week in the Senate, they will moan, whine, delay, and tweak but in the end support ambitious innovation policy programs.
A more complicated question is how these measures interact with trade policy. While the report acknowledges that it is neither possible nor optimal for the United States to make everything it needs, the Buy America and reshoring policies recommended may ultimately make achieving greater supply chain resilience more difficult and more expensive. The old adage, “Don’t put all your eggs in one basket,” comes to mind. One of the best ways to promote resiliency is to diversify sources of supply. While the report demonstrates an understanding of that, some of its proposals run counter to it. There has long been a tension between resiliency and efficiency in constructing supply chains, but the report basically pretends it isn’t there. Resiliency means more redundancy and having secure sources of supply, but secure sources are often not the cheapest, particularly if you compare domestic costs to foreign-sourced costs. Partly for that reason, CSIS has recommended a “trusted partner” approach which seeks to develop deep economic relations with reliable and secure foreign partners rather than trying to achieve autarky as much as possible. The report acknowledges this approach, but it remains to be seen if it is lip service or if a genuine effort to develop those partnerships will occur.
One clue about that is that the administration’s goals include creating jobs domestically and providing more rewards to our workers. Those are also noble goals, but they are not entirely compatible with either resiliency or efficiency. U.S. production will probably be more expensive and in the long run this may make our industries less globally competitive. In some circumstances like semiconductors, that is a price worth paying but in others perhaps not.
It would be helpful as the report’s recommendations are implemented if the administration did two things: first, recognize the tension between resiliency and efficiency rather than pretending we can have our cake and eat it too; and second, undertake the difficult task of defining which industries are essential to our national security. It has long been axiomatic in export control circles that if you try to protect everything you end up protecting nothing. The administration would be wise to take that to heart in its supply chain policy. If everything is critical, then nothing is critical. The essence of a smart supply chain policy is to set clear priorities.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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