Which Biden plan to bring tech manufacturing home is wrong

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During her trip to South Korea this summer, US Treasury Secretary Janet Yellen touted “friend-shoring,” the practice of moving critical parts of the supply chain from rivals and adversaries of the United States. United towards partner countries and allies. Russia’s continued attempts to blackmail Europe by cutting off natural gas supplies are a stark reminder of how dangerous it is to rely on hostile nations for the supply of essential goods and services. Although the United States no longer depends on other countries for energy, there are other sectors, particularly technology, where China still plays an unduly dominant role in the American supply chain.

Initiatives are underway to relocate some of this manufacturing to the United States by revitalizing the country’s industrial base. The latest example is the Chips and Science Act, which the US Congress recently passed to stimulate domestic research, development and manufacturing of semiconductors. Emphasis has also been placed on “near-shoring”, which involves moving the supply chain to neighboring countries such as Mexico or parts of Central and South America. These markets have competitive labor costs, reduce lead times due to their proximity, and provide the United States with greater security of supply.

Relocation and outreach efforts are laudable, but they alone cannot solve supply chain security issues. Not all manufacturers can move to the Americas. For many good reasons, Asia will remain central to the US supply chain. Some raw materials and components are only available in Asia. Certain types of complex manufacturing, particularly those related to semiconductors and other technological materials, require a workforce with a specialized skill set that exists at scale in only a handful of countries. .

During her trip to South Korea this summer, US Treasury Secretary Janet Yellen touted “friend-shoring,” the practice of moving critical parts of the supply chain from rivals and adversaries of the United States. United towards partner countries and allies. Russia’s continued attempts to blackmail Europe by cutting off natural gas supplies are a stark reminder of how dangerous it is to rely on hostile nations for the supply of essential goods and services. Although the United States no longer depends on other countries for energy, there are other sectors, particularly technology, where China still plays an unduly dominant role in the American supply chain.

Initiatives are underway to relocate some of this manufacturing to the United States by revitalizing the country’s industrial base. The latest example is the Chips and Science Act, which the US Congress recently passed to stimulate domestic research, development and manufacturing of semiconductors. Emphasis has also been placed on “near-shoring”, which involves moving the supply chain to neighboring countries such as Mexico or parts of Central and South America. These markets have competitive labor costs, reduce lead times due to their proximity, and provide the United States with greater security of supply.

Relocation and outreach efforts are laudable, but they alone cannot solve supply chain security issues. Not all manufacturers can move to the Americas. For many good reasons, Asia will remain central to the US supply chain. Some raw materials and components are only available in Asia. Certain types of complex manufacturing, particularly those related to semiconductors and other technological materials, require a workforce with a specialized skill set that exists at scale in only a handful of countries. .

Friend-shoring in Asia must therefore become a more important pillar of Washington’s security strategy. Yellen gave his speech in South Korea, which, along with Japan and Taiwan, is a very important market for the manufacture of high-tech products essential to the American economy. The United States should continue to strengthen the role of these countries. From a cost perspective, however, Japan, Taiwan and South Korea will not always be suitable alternatives to China. And of course, Taiwan presents its own set of potential supply chain risks, given the ever-escalating tensions in the Taiwan Strait.

South and Southeast Asian countries including the Philippines, Vietnam, Indonesia, India and Bangladesh have large populations and capabilities that can play a valuable role in the supply chain world, and some, like Vietnam, have already become destinations for US manufacturers looking to diversify their supply chain away from China. But so far, Congress and the White House have not particularly focused on proactive measures to encourage the relocation of friends to these areas. In fact, some of the lawmakers leading the charge on Capitol Hill for supply chain resilience are lukewarm at best about relocating friends to Asia. For one thing, creating domestic jobs and subsidizing U.S. companies there are far better talking points than moving production from one foreign country to another. Lawmakers also cite the risk that Southeast Asian countries, such as Indonesia, Vietnam and the Philippines, will be co-opted by China over time and become equally supply chain nodes. unreliable.

But this line of reasoning sets him back. Part of the reason why countries in the region are vulnerable to Chinese influence is precisely due to the insufficient economic engagement of the United States. If the United States deliberately gives even less economic attention to itself in order to maximize outsourcing in its own hemisphere, it will only help China further tighten its grip on trade and investment in the region, strengthening thus inevitably relations with China to the detriment of the United States.

The United States can ill afford for all these countries to end up in China’s camp. Many countries in South and Southeast Asia are located along vital trade routes. They can play a key role in helping to balance and contain an increasingly aggressive China. The US military understands this, of course, which is why it seeks to strengthen defense cooperation with countries like the Philippines and Indonesia and expand US military access to seaports and area airstrips. These demands will be much more palatable and evolving security partnerships much more enduring if the United States also has something tangible to offer, such as large-scale trade and investment to counter China’s proactive economic engagement.

The good news is that despite the lack of concerted efforts by the US government, major corporations are already beginning to shift some of their core business out of China to friendly Asian countries. This month, Apple announced that it would manufacture the just-released iPhone 14 in India as well as China. Around the same time, Google announced it was moving some of its smartphone manufacturing from China to Vietnam. Discussions of these kinds of supply chain reconfigurations are also taking place in many other meeting rooms, as companies seek to build resilience in the face of seemingly endless Chinese coronavirus lockdowns and tightening US regulations on the activities of American companies in China.

Washington could dramatically accelerate these trends with concrete policies to support the relocation of friends to Asia. Tariffs and export controls that make it harder and more expensive for American companies to manufacture in China are only one side of the coin. Equally important are specific incentives that would entice companies to move their supply chain to desired jurisdictions. This includes the reduction or elimination of tariff and non-tariff barriers, as well as the protection of intellectual property. Much of this could have been accomplished through the Trans-Pacific Partnership, the free trade agreement the United States negotiated but refused to ratify under the Trump administration.

The Biden administration is now trying again via the Indo-Pacific economic framework. The problem is that this framework is much weaker than the trade deal that Washington abandoned, and without the carrot of free access to the US market – which has become difficult to defend due to bipartisan antipathy towards new trade agreements – Asian countries may not be willing to make significant concessions. On the other hand, the prospect of attracting serious US investment in manufacturing may be enough to spur countries to lower their own barriers and provide necessary protections for US companies.

In addition, the United States should better leverage and target its other instruments of economic influence. For example, the Development Finance Corporation is a $60 billion US government agency that focuses on financing US companies that invest overseas. It should put in place a specific program to support American companies that are supporting their supply chain. Ideally, the Development Finance Corporation could form a joint initiative with the Export-Import Bank, a US government agency that facilitates trade with emerging markets. Such a move could take inspiration from Japan, which has set up a pool of public funds to provide grants and low-interest loans to Japanese companies wanting to move the supply chain from China to other places. Asian countries.

Securing US supply chains will take continued effort and focus, as well as a well-designed, multi-pronged strategy. Hopefully Yellen’s speech, along with recent moves by US tech companies, are signs that relocating friends to Asia is finally getting some serious attention in Washington.

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