The First Step in Improving Supply Chains

Key Points

• Greater output of final products does not improve supply-chain resilience. Manufacturing more with the same supply chains could even create more vulnerabilities. New policies must address full supply chains, not just the final stage.
• Companies selling in the US should be responsible for knowing their suppliers, through the full extent of the chain. For products deemed critical, Chinese participation at any point in the supply chain should be restricted. 
• The single weakest link in many supply chains is constitutive materials, since these enable the next stages of production and are often sourced overseas. The US must quickly determine where projected materials demand exceeds reliable supply.

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Introduction

There’s been a great deal of talk about supply chains, yet the US government has done little.¹ There are in fact good reasons for inaction: Shifting supply chains is costly, there are many chains to consider, and each involves equipment that has its own chain. Global supply chains serving the US have been allowed to be opaque for decades, which is a mistake that cannot be quickly corrected.

COVID-19 and Russia’s invasion of Ukraine have shown the pressing need for resilient chains, with the higher costs needed to achieve them offset by greater availability of goods under stress. An indispensable step in building supply-chain resilience is transparency: Policymakers must have information concerning the supply-demand balance and who is participating in the chain. Information improves the operation of markets, and in general, critics’ objections to government acquisition and provision of information are unreasonable.

In February 2022, seven US cabinet departments released supply-chain papers.² Unfortunately, this was only a small step, as the agencies acknowledged a great deal of data were absent, even after a year of work. The cabinet departments should have identified where data gaps were, provided plans to close them, and highlighted where the government needs assistance. But this was largely not done,³ delaying actions that will take considerable time to be effective even when implemented. As a result, Americans will be unnecessarily vulnerable to supply-chain shocks.

The most valuable missing information concerns areas where the US is not self-sufficient—exactly where demand most exceeds reliable supply. No actual supply-chain improvements can occur without knowing where supply shortfalls exist. Further, the most important part of chains is usually at or near their start.

It follows that the first of many steps in strengthening supply chains is identifying where America faces current or prospective shortages in materials constitutive to production. If sufficient quantities of such materials are not available, plans for improvement further down the chain are built on sand. Of particular interest are instances in which China plays a large role, since that is the primary way the US can be coerced in supply chains. This report is thus in the same spirit as a June 2022 effort by the House Armed Services Committee to project vulnerability in antimony demand.⁴

The information task alone is not easy. Materials are both imported in raw form and embedded in imported products. Saying these materials are valuable means little; policymakers must know the quantitative extent of US dependence on them, and they must know it on an ongoing basis.

The cabinet papers show the most important ways available information falls short. In particular, the government does not know the current and projected excess demand of silicon metal and wafers for semiconductors, key starting materials (KSM) for recently designated essential medicines, and constitutive materials used in oil and gasequipment. Until these shortages are measured, they cannot be addressed properly. And until they are addressed, boosting production later in supply chains provides no security and can even deepen dependence.

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Notes

1. Small Business Innovation Research, “Pharmaceutical Supply Chain Vulnerability,” May 6, 2020, https://www.sbir.gov/node/1696615.
2. White House, “The Biden-Harris Plan to Revitalize American Manufacturing and Secure Critical Supply Chains in 2022,” press release, February 24, 2022, https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/24/the-biden-harris-plan-to-revitalize-american-manufacturing-and-secure-critical-supply-chains-in-2022.
3. As an illustration, see US Department of Health and Human Services, Public Health Supply Chain and Industrial Base: One-Year Report, February 2022, 9, https://aspr.hhs.gov/MCM/IBx/2022Report/Documents/Public-Health-Supply-Chain-and-Industrial-Base%20One-Year-Report-Feb2022.pdf.
4. Bryant Harris, “The US Is Heavily Reliant on China and Russia for Its Ammo Supply Chain. Congress Wants to Fix That.,” Defense News, June 8, 2022, https://www.defensenews.com/congress/budget/2022/06/08/the-us-is-heavily-reliant-on-china-and-russia-for-its-ammo-supply-chain-congress-wants-to-fix-that.