COVID-19 has revealed something many of us already knew: our supply chains reflect a precarious dependence on the People’s Republic of China. We don’t have enough testing kits; we don’t have enough masks; we don’t have enough ventilators. And as Congress is well aware, we are dependent on the PRC for all sorts of essential medicines.
That, of course, is just the tip of the iceberg. Those who took the time to stroll through the Section 301 testimony were astonished to learn of the litany of products we cannot make here – or anywhere else. The products range from Bibles to prom dresses to robotics.
How Did We Become So Dependent on a Hostile Authoritarian Power?
This didn’t happen through comparative advantage. Just as we used to believe in Santa Claus and the Tooth Fairy, we must face reality and recognize that the concentration of supply chains in China has nothing to do with David Ricardo, and everything to do with the unholy marriage of corporate short-termism and CCP opportunism.
Where manufacturers saw only carrots — a billion consumers and a billion cheap workers — the CCP saw carrots and sticks. The Wall Street Journal explained how this happened in the lithium ion battery market; but the strategy started more than a decade ago, and it is happening with the products on the Made in China 2025 list now. Disconcertingly, few people are familiar with the list – including Members of Congress with major interests in those products in their own states.
We Should Be Diversifying
The Section 301 tariffs aren’t popular, but they have done one thing we should all be happy about: they’ve forced companies to diversify their supply chains. If you don’t think that’s a good idea, then you haven’t been paying attention to the increasingly menacing attitude of PRC apparatchiks. Xinhua said we all owe a big thank you to the PRC for not cutting off our access to medicines and plunging us into “the mighty sea of coronavirus.” It’s the global equivalent of a ransomware threat — and we are just now realizing we didn’t back up our files. Life or death files.
In the meantime, the CCP has somehow taken its initial mismanagement of the virus and deployed it to its advantage, as only an ace propagandist can do. When Italy asked for help, the PRC pitched itself as the savior of the Italians, delivering masks and other essential goods to a suffering population. Remember when we thought China was in short supply, and we encouraged American manufacturers to take advantage of the opportunity to export there?
But we ourselves don’t make many of these products anymore, and that means we aren’t in a position to supply essential goods in a time of crisis. Neither are the Europeans, who find themselves in something of a zero-sum game for life-saving equipment. That opened the door for the Chinese to swoop in again, this time with Serbia. The Serbians, longtime Russian allies who nominally aspire to join the European Union, were induced by this “largesse” to condemn European solidarity as false, and to praise China instead. In the meantime, the PRC is peddling conspiracy theories that the United States started the virus, further diminishing our status in the world as we struggle to lead in the response and instead focus on executing arbitrary border policies.
Totalitarian regimes don’t have to weigh the benefits to their own people versus the geopolitical advantage of pitching themselves as a global savior. We really don’t know whether the virus has leveled off in China, and whether Chinese citizens need this equipment as badly as everyone else. But the CCP isn’t accountable to its own people.
Speaking of accountability: we have done this to ourselves. Our intellectually ossified trade policy has repeatedly failed to consider the consequences of letting a totalitarian power have this much control over just about everything that’s made. The hue and cry of “gee, we never saw this coming!” is an exculpatory canard for those who pushed unfettered globalization and labeled as protectionist anyone who had doubts. You didn’t need a crystal ball to figure this out: you only had to look at the rules, or know your history, or listen to those who rang the alarm bells and turned out to be Cassandra.
We and the Europeans and other democracies would be in a position to lead the way if we hadn’t allowed our collective manufacturing base to atrophy. We had a mutual desire to save democracy after World War II; but because of our lack of capacity to produce these goods today, we’ve drifted from cooperation into something approaching the Lord of the Flies.
Cooperation is better.
The PRC is Consolidating
As if this gross and self-inflicted predicament isn’t bad enough, the CCP has been so emboldened by its dominance as a goods supplier that it has revived the unthinkable – government-run forced labor camps, at the Uyghurs’ expense. It feels as if we’re hurtling backward 90 years. And even more recently, what started as a purge of Wall Street Journal reporters has become a mass eviction of American reporters.
And, given the PRC’s efforts to come out of the pandemic on top, It will get still worse. The last time the the marketplace failed us – in 2008 – the CCP took advantage of the crash to pump money into a range of industries, including (wait for it!) steel and aluminum. And the CCP is preparing to do it again, except it won’t just be steel and aluminum. It’ll be everything on the Made in China 2025 list and then some. As we noted almost a year ago:
The Chinese ramped up state capitalism after the {2008} financial crisis. Is it possible they saw the crisis as a reflection of U.S. “free enterprise” and said no thank you?
If we don’t fundamentally change course, we will end up with a trade policy that continues to prioritize liberalizing capital flows while implicitly endorsing state capitalism. Financiers will continue to run amok in the West, and the Chinese government will continue to run amok in the East. What happens when they collide?
If steel and aluminum are any indication, state capitalism will prevail.
If you’re not afraid of where CCP totalitarianism is headed, then read this prescient letter from Senators who are. They’re in part referring to the PRC’s social credit system, which is so disturbing that it makes it look like George Orwell lacked imagination. Couple it with the use of facial recognition, and you’ve got the makings of a digital Reign of Terror.
More Embarrassing Arguments from the Trade Lobby
The trade lobby, whom we’ve picked on before, thinks about none of this. Having offshored production and contributed to our outsized dependence on the PRC, they of course take the position that tariffs are always bad. How can they maximize profits on offshored manufacturing if they can’t export back duty-free? Yet it’s just that view of tariffs – based on a misunderstanding of history, by the way — that got us into this vulnerable spot in the first place. It paved the way for the United States to glibly offshore manufacturing, on the theory that we’d all just be more efficient at everything. Instead, the Pentagon is freaking out about our sole source dependency for critical materials from places like . . . the PRC.
The distorted thinking around tariffs and supply chains may explain why the trade lobby feels perfectly comfortable making outlandish statements like this:
We understand the Administration is considering a range of policy options to provide fast relief to offset the grave economic damage that is occurring as a result of the COVID-19 outbreak . . . . We can think of no other policy tool at the Administration’s disposal that would have such a fast and beneficial impact as the immediate and retroactive removal of these tariffs.
No other policy tool?!?! None?
How about COVID-19 tests? How about paid sick leave? How about medical insurance without surprise bills?
If you want to stay in the trade lane, how about giving small businesses and lower-income consumers the money from the tariffs we’ve been collecting? Ah, but none of that is as lucrative for the ginormous stateless enterprises that are members of the trade associations pushing for the tariff rollbacks.
Removing tariffs isn’t the answer to our economic woes. It isn’t the answer to our exposure to global ransomware. We have to abandon this naïve view that there’s some sort of global free market. We have to be able to make more things, without relying on Chinese supply chains to do it. “Global value chains” have become global value manacles. There’s no quick fix to this mess.
Simply put, it is absurd to argue that the response to a virus that has exposed our fragile dependency on the PRC is to return to the policy that made us fragile and dependent in the first place. We did not put ourselves into a position of vulnerability with the Soviet Union. The Soviet Union was not part of the global trading system. No amount of regression analysis from ideological economists who pride themselves on ignoring reality would have led to us to be dependent on totalitarian geopolitical rival for anything, let alone medical necessities. We lost our way.
(Curious minds want to know: is there any overlap between the signatories to this letter, and those identified in the Congressional report on forced labor in Xinjiang? Do any of these companies decline to provide paid sick leave to their employees – and if so, did any of them use the 2017 tax cuts to do share buybacks? When the Economist wonders why labor’s share of GDP has declined relative to capital’s, this might be a good place to start.)
Here’s a Policy Tool or Two
In World War II, we faced a shortage of critical supplies due production incapacity. We used the Reconstruction Finance Corporation to dig ourselves out of that hole. In 1950, we adopted the Defense Production Act, which is still on the books today. In the 1970s, when Nixon realized we had lost our manufacturing edge, there was bipartisan support for industrial policy. Even Alan Greenspan thought revisiting the Reconstruction Finance Corporation was a good idea. Even Pete Peterson, of the Peterson Institute, thought we needed to invest in ourselves. We didn’t do it.
The answer to our problems is indeed to invest in ourselves. Infrastructure, training workers in the skills we thought weren’t relevant anymore, making sure we have minimal capacity to produce things for our basic well-being – that is the answer to our problems, not doubling down on a strategy that is making us vulnerable to totalitarianism and diminishing our status in the world.
The Intellectual Architect of the Post-Soviet Global Economy Has Changed His Mind
Francis Fukuyama is responsible in important measure for the intellectual environment that led us to trust too much in the global marketplace. In the face of the collapse of the Soviet Union, he considered democracy and capitalism to be inexorable. He called it “The End of History.”
Yet today he has reversed course. He considers Chinese state capitalism the most salient threat to democracy:
“The Chinese are arguing openly that {their system} is a superior one because they can guarantee stability and economic growth over the long run in a way that democracy can’t… if in another 30 years, they’re bigger than the US, Chinese people are richer and the country is still holding together, I would say they’ve got a real argument.” But he cautioned that “the real test of the regime” would be how it fared in an economic crisis.
Remember that this is a man who served in the Reagan Administration. This is what he says about that:
{T}his big imbalance in both incomes and wealth . . . has emerged . . . . This extended period, which started with Reagan and Thatcher, in which a certain set of ideas about the benefits of unregulated markets took hold, in many ways it’s had a disastrous effect.
In social equality, it’s led to a weakening of labour unions, of the bargaining power of ordinary workers, the rise of an oligarchic class almost everywhere that then exerts undue political power.
And his change of heart only solidified after the last financial crisis:
In terms of the role of finance, if there’s anything we learned from the {2008} financial crisis it’s that you’ve got to regulate the sector like hell because they’ll make everyone else pay. That whole ideology became very deeply embedded within the Eurozone, the austerity that Germany imposed on southern Europe has been disastrous.
We know what the PRC did in the last crisis. They’re planning to do it again in this one.
If you’re a fan of democracy and capitalism, then going all in on our dependence on a regime that opposes both seems like a very, very bad idea.
March 18, 2020
