Resiliency or Gosplan?

On February 24, President Biden signed an executive order requiring broad and deep studies of U.S. supply chains. While broadly welcomed at the time, I think that once people understand its full scope, they may have second thoughts. The policy expressed is hard to criticize:

The United States needs resilient, diverse, and secure supply chains to ensure our economic prosperity and national security . . . Resilient American supply chains will revitalize and rebuild domestic manufacturing capacity, maintain America’s competitive edge in research and development, and create well-paying jobs.

More resilient supply chains are secure and diverse — facilitating greater domestic production, a range of supply, built-in redundancies, adequate stockpiles, safe and secure digital networks, and a world-class American manufacturing base and workforce. Moreover, close cooperation on resilient supply chains with allies and partners who share our values will foster collective economic and national security and strengthen the capacity to respond to international disasters and emergencies.

The order requires two sets of reviews. The first is a 100-day look at four critical sectors:  semiconductors, batteries, critical minerals like rare earths, and pharmaceuticals.

The second is a one-year review of supply chains for six broad sectors: the defense-industrial base, public health and biological preparedness, information and communications technology, energy, transportation, and agriculture and food.

This second set concerns me because of the breadth of its coverage—a significant part of our economy—the scope of each study, and the amount of data that will be required to complete them. Each study is supposed to examine 21 different elements, including:

The defense, intelligence, cyber, homeland security, health, climate, environmental, natural, market, economic, geopolitical, human-rights or forced-labor risks or other contingencies that may disrupt, strain, compromise, or eliminate the supply.

These studies will also review:

         . . . the manufacturing or other needed capacities of the United States, including the ability to modernize to meet future needs . . . gaps in domestic manufacturing capabilities, including nonexistent, extinct, threatened, or single-point-of-failure capabilities . . . supply chains with a single point of failure, single or dual suppliers, or limited resilience, especially for subcontractors . . . the location of key manufacturing and production assets, with any significant risks . . . posed by the assets’ physical location . . . exclusive or dominant supply of critical goods and materials . . . by or through nations that are, or are likely to become, unfriendly or unstable . . . the availability of substitutes or alternative sources for critical goods and materials . . . current domestic education and manufacturing workforce skills for the relevant sector and identified gaps, opportunities, and potential best practices in meeting the future workforce needs for the relevant sector . . . the role of transportation systems in supporting existing supply chains and risks associated with those transportation systems . . . the risks posed by climate change to the availability, production, or transportation of critical goods and materials.

Finally, the studies must also make policy recommendations, which may include:

         sustainably reshoring supply chains and developing domestic supplies, cooperating with allies and partners to identify alternative supply chains, building redundancy into domestic supply chains, ensuring and enlarging stockpiles, developing workforce capabilities, enhancing access to financing, expanding research and development to broaden supply chains, addressing risks due to vulnerabilities in digital products relied on by supply chains, addressing risks posed by climate change . . .

This appears to apply to every supply chain identified in the sectors listed, which will probably run into the thousands, and it will require enormous amounts of data to be supplied by companies that are in those supply chains. The executive order does not specify the statutes that authorize collecting such data, and I would not be surprised if the order is challenged in court.

The objective here is noble and important. Covid-19 reminded us of the importance of supply chain resiliency, and the technology challenges that China presents warns us of the security risks if we do not address these issues proactively. A particularly good example is the current semiconductor shortage, which is an important reminder that in high-tech sectors, gaps cannot be eliminated in a few weeks, unlike the great toilet paper shortage last year.

However, I see two problems. One is the enormous amount of work that will be required to complete these studies and the burden on the private sector in providing data. The other is where the results lead. Experience suggests government planning is not the best way to eliminate gaps, and some of the possible recommendations would amount to that. Telling companies they need to reshore, develop alternative supply chains that exclude certain parties, or create stockpiles, could easily move beyond “here is some good advice” to “here is what we want you to do, even if it costs more or makes you less competitive.” The United States has thrived when government intervention in the economy has been targeted, limited, and constructive. If that is what happens this time, we will end up better off. But if it becomes a giant exercise in intrusive government planning, it will leave us worse off, not better.

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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