Testimony: Trade, Manufacturing and Critical Supply Chains: Lessons from Covid-19

__Testimony before the U.S. House of Representatives, Committee on Ways and Means, Subcommittee on Trade July 23, 2020.__

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Overview: Covid-19 Accelerates Pre-existing Trends

The imperative to return supply chains for products important to national defense, medical security, and competitiveness in key industrial and technology sectors is not a new one. The explosive growth of the Chinese manufacturing sector and its mercantilist challenge to the world trading system and its impact on jobs and industrial leadership in the United States is well-known and well documented. This challenge has crystallized research and spurred policies to reverse the erosion of U.S. supply chains. Millions of good paying jobs in the industrial sector have been lost in recent decades. U.S. technology leadership has been undermined by the forced technology transfer, theft of intellectual property, and subsidization of traditional and new higher technology sectors in China. In turn, the loss of global markets and manufacturing jobs have resulted in social problems of increasing devastation to communities in industrial areas.

China’s growth model depends in a historically-unprecedented way on its export model, as its domestic policy punishes consumers and savers alike and results in a cycle of overproduction, expansion of spheres of economic influence, and dumping of products abroad. In recent years the United States has begun to challenge the Chinese model, but much work remains to be done to accomplish the goal of ending the mercantilist practices, establishing a level playing field for U.S. producers, and reinvigorating domestic production. Critical supply chains for national defense and high technology leadership have become overly dependent on foreign sources, especially, but not limited to, China. The vulnerability of supply chains has been demonstrated by interruptions in supply of key materials by natural disasters and by political decisions such as China’s cutoff of rare earth metals a decade ago. This week important supplies of personal protective equipment have been interrupted by massive flooding in the interior of China. This challenge is not limited to unfair practices by China, but the Middle Kingdom is a continental economy with the ambition to displace the United States as the leader in the global economy of the 21st century and has the economies of scale to represent a serious, long term threat to U. S. leadership and markets.

The COVID-19 pandemic has accelerated these important, preexisting trends toward bringing industrial, including medical products, supply chains back to the United States. First, the cut-off of medical supplies, not just from China but from Europe and other allies to some extent, brought the vulnerabilities of relying on outside sourcing into clearer and more immediate focus. 90 countries blocked the exports of medical products during the early months of the pandemic. Second, border closures around the world, even within the European Union, added to the worries about supply chain interruptions, including for workers and logistics. 70% of the world’s points of entry restricted foreign travelers at some point as the pandemic grew. Third, border closures and supply chain interruptions increased tensions between nations, especially between the United States and China, which suffered severe reputational damage for its suppression of information at the start of the pandemic. China’s brazen imposition of a new security law in Hong Kong under the cover of a world preoccupied by the pandemic further eroded its standing in the world, especially in Europe. Fourth, the economic collapse due to the pandemic response again focused attention on the need to create more domestic jobs, including those in the hard-hit industrial sector. Finally, all of these developments led allies such as the United Kingdom, Japan and the European Union (EU) to reinvigorate thinking, and to advance concrete policy proposals, meant to bring production back to home territories. Clearly, these trends support policies to increase the resiliency of domestic production even beyond the parameters of defense and medical security.

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