[In the absence of more attention to the supply chain, the U.S. is
becoming even more reliant on Beijing—and ‘friendshoring’ often
increases that dependence.]
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BREAKING UP (WITH CHINA) IS HARD TO DO  
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Robert Kuttner
February 14, 2023
The American Prospect
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_ In the absence of more attention to the supply chain, the U.S. is
becoming even more reliant on Beijing—and ‘friendshoring’ often
increases that dependence. _

An employee at work at a Shanghai pharmaceutical company, December
12, 2022, ImagineChina via AP Images

 

Despite all of President Biden’s efforts to contain China and bring
production home, there is more interpenetration of the two economies
today than ever. Recently released 2022 trade statistics show that
U.S. imports of products from China totaled $536.8 billion in 2022, a
6.3 percent increase from 2021. U.S. exports to China grew far
less—by 1.6 percent to $153.8 billion. And these figures may
understate the imbalance, because they don’t capture the entire
supply chain of inputs made in China.

LOCKED UP IN CHAINS

There are several parts to this dependence. First, U.S. producers that
rely on Chinese production for inputs are insufficiently committed to
diversifying sources of supply. A prime offender is Apple, which
contends that it’s just too difficult to relocate production.
Apple’s main assembly plant in Zhengzhou makes about three-quarters
of the world’s iPhones.

But Apple’s main cellphone competitor proves that Apple’s story is
nonsense. South Korea–based Samsung, which once also relied on
China-based production, has successfully diversified. According to
the _Financial Times_
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Samsung closed its Chinese plants in 2019, and now builds more than
three-quarters of its cellphones in six countries, from Argentina to
Vietnam.

A more urgent example is the pharmaceutical industry. When the COVID
pandemic broke out, face masks and hospital gowns were suddenly in
short supply. Americans who had never given much thought to supply
chains learned that China was the prime supplier of all this vital
stuff; and China had given priority to its domestic needs. Eventually,
easy-to-make products like face masks materialized from China and
elsewhere.

_MORE FROM ROBERT KUTTNER_
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Far more alarming is America’s continued dependence on China for the
ingredients that go into drugs. American pharmaceutical giants
dominate drug production, but at least half of all the chemical
ingredients for these drugs, known as APIs (for “active
pharmaceutical ingredients”), come from China. And this figure
probably understates the dependence, since there are no reliable
statistics. APIs that appear to originate elsewhere may in fact
originate in China. This dependence has not diminished since the
pandemic began.

Barry Lynn, author of the prophetic book _End of the Line_, which
warned of a potential supply chain catastrophe, says that the U.S.
would run out of vital prescription drugs in about a week if China
withheld exports of APIs in an escalated crisis or another COVID
shutdown—and that mass panic would result. The administration has no
plan either to deal with such an emergency or to revive domestic API
production.

Once, U.S. companies made nearly all of the APIs that went into
domestically produced drugs. Then, most of this production shut down
as Big Pharma found it cheaper and more profitable to outsource it to
China. Despite the risks, there is little industry interest in
bringing this production home.

Unlike semiconductors, manufacture of APIs is pretty much basic
chemistry. There are remnants of API production in some regional
clusters, around Richmond, Atlanta, and northern New Jersey, and some
state-level efforts to increase production as economic development,
but nothing remotely adequate to the need if the goal is to secure
national supply.

A related problem is the lack of reliable data on supply chains. The
government doesn’t collect it, and industry treats sources of supply
as trade secrets, as do the suppliers. Compounding the dearth of
transparency, there are often several tiers of suppliers. The supplier
in tier two may not, and often doesn’t, know where her vendor in
tier three sources his supplies. It may look as if there is plenty of
diverse sourcing, but all roads may lead to tier four—in China.

THE MEXICAN TROJAN HORSE

A separate problem is China’s use of third countries as platforms
for increased exports to the U.S., using inputs designed, financed,
controlled, and produced in China. These can be quasi-satellite Asian
economies such as Vietnam, or countries on America’s doorstep,
notably Mexico.

When the U.S. negotiated the North American Free Trade Agreement
(NAFTA), later revised to the U.S.-Canada-Mexico Agreement (USMCA)
after extensive back-and-forth between congressional Democrats and the
Trump administration, the goal was not to give China a tariff-free
launching pad for exports to the U.S. But that’s what is occurring.
The “C” in USMCA, which officially stands for Canada, is turning
out to stand for China.

Chinese companies, encouraged by both the Xi government and Mexico’s
federal and state governments (which welcome the economic
development), have massively increased their investment and production
in Mexico. Since late 2021, the Mexican border state of Nuevo
León has gained $7 billion in new capital investment
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of which 30 percent is from China. Maquiladoras producing for the U.S.
market, which were once U.S.- or Mexican-owned, are now increasingly
Chinese-owned. And all of their supplies come from China.

To make matters worse, Mexico, with the support of the Chinese
government, brought a complaint to the trilateral dispute settlement
body under USMCA that would allow products with a larger fraction of
Chinese content to qualify as North American content. As I wrote in a
recent post
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the Biden administration is considering how to oppose this.

Lately, there has been a huge buzz about “friendshoring” or
“nearshoring,” as the more trade-friendly alternative to a more
explicit commitment to produce in America. A lot of the enthusiasts
fail to look beneath the surface of the slogan. It makes sense to
diversify sources of supply and to give tariff preference to nations
that share our values. But when friends such as Mexico and even some
of our European allies are cavalier about their own supply chains,
friendshoring becomes a euphemism for China-sourcing.

CHINESE PRODUCTION MADE IN USA

Exhibit C is the strategy of encouraging foreign companies to produce
within the U.S. Manufacturing here and creating American jobs would
make them eligible for Biden’s subsidies, tax credits, and tariff
favoritism. This may be good policy when it leads Taiwan’s TSMC or
Korea’s Samsung to build large factories in Arizona. But it’s much
trickier when it comes to Chinese companies.

In Boston, nearly a decade ago, state and local leaders made a deal
with a Chinese company, CRRC, to build a factory in Springfield to
revive the railcar industry in western Massachusetts and build an
initial 340 subway and trolley cars for Boston’s transit authority,
the MBTA. Even better, the hundreds of new local jobs would all be
union.

The result has been a disaster. Cars have been late and defective.
According to a recent investigative piece by _The Boston Globe_
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only about 90 have actually been delivered, and the MBTA has
repeatedly had to pull cars out of service because of a variety of
serious defects, including a battery explosion
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brake bolts
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and hazardous electrical arcing
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It’s been compelled to temporarily replace them with antiquated cars
that were mothballed a decade ago.

It turns out that this strategy of encouraging Chinese companies to
produce in the U.S. is fool’s gold. Most of the value added stays in
China. The U.S. gains only final assembly, has no control over the
engineering, and thus doesn’t really capture manufacturing
advantage. And of course, China gets to produce inside U.S. tariff
walls.

Worse, as anyone who has purchased, say, sweaters made in China knows
all too well, the product looks good at first glance but often turns
out to be shoddy. In the case of the MBTA railcars, everybody now
looks bad, from the MBTA management to the union labor, and nobody has
adequate leverage over Chinese quality control.

Los Angeles is a variant on the theme. In one of the earliest such
deals, dating to 2008, a Chinese company based in Shenzhen agreed to
build a new factory in Lancaster, California, to turn out electric
buses for the L.A. transit district. The American subsidiary was named
BYD, for Build Your Dreams.

But when the first buses rolled off the line in 2015, they turned out
to be plagued with defects, ranging from failing to meet
specifications on range to wheels falling off. According to
an investigation by the _L__.__A.__ Times_
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internal emails show that agency staff called them unsuitable, poorly
made, and unreliable for more than 100 miles.

In 2017, after negotiations with unions and the community group Jobs
to Move America, BYD agreed to go union. With more worker feedback and
a community benefits agreement that includes apprenticeship and
pre-apprenticeship training, the defects began to improve, according
to Hector Huezo, California director of Jobs to Move America.

We need to create a truly domestic railcar and electric bus industry
from the ground up, not one based on Chinese transplants. And that
need extends to a number of other industries.

While Biden’s several industrial policies are a good start, they
don’t solve the problem when the U.S. has lost production and
engineering capacity altogether. In the case of industries such as
railcars or the chemicals for pharmaceuticals, we may need to look to
the World War II example, where government sometimes partnered with
existing companies as contractors and sometimes created industries
from scratch.

The Defense Production Act potentially gives government that
authority. And in California, the state has gone into the business
of manufacturing generic insulin
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The Biden administration has changed the direction of policy and
ideology. But if we are serious about containing China and rebuilding
domestic production, the challenge has just begun.

_ROBERT KUTTNER is co-founder and co-editor of The American Prospect,
and professor at Brandeis University’s Heller School._

_Read the original article at Prospect.org
[[link removed]]. Used
with the permission. © THE AMERICAN PROSPECT
[[link removed]], Prospect.org [[link removed]], 2022.
All rights reserved. 
 
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* Trade
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* United States
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* China
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* Economy
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* cell phones
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* pharmaceuticals
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* Supply Chains
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