Transatlantic Cooperation on Critical Supply Chain Security
House Committee on Foreign Affairs Subcommittee on Europe, Eurasia, Energy, and Cyber
January 19, 2022
China has the same attitude toward supply chains as it had toward the international economic system in the first place: if you can’t beat ‘em, join ‘em. Then beat ‘em. China will compete or subsidize its way into a supply chain, then often attempt to manipulate it for economic, political, or (conceivably) military advantage. For the US to genuinely protect against this risk will be costly. But the costs will be lower and the gains higher if the US works with its closest allies and partners, the most important of which is Europe.To succeed here, the US must establish greater credibility through more robust policies on export controls and outbound investment.
Facing China’s challenge
Possibly the most important fact regarding strengthening American supply chains, in transatlantic or other contexts, is that half-measures against predatory Chinese behavior will not work. China is economically competitive. But when it is not, it has the world’s most extensive subsidies scheme available to distort any chain the PRC considers to be a national priority.[1] No genuinely commercial business, American or European, can compete with that range of subsidies. Further, tax incentives and other support for these businesses can simply be overwhelmed – Beijing is better at subsidizing than anyone else.
If it is found to be necessary to cut the PRC out of a supply chain, production in China and by Chinese enterprises overseas must be outright banned by law, or they will find a way to continue to participate.
It may seem that the supply chain challenge is not primary about China, but about the pandemic. This is misleading. First, Beijing’s mendacity regarding the pandemic and its “zero-Covid” policy have contributed to disruptions during the pandemic. Further, risky dependence on the PRC for important goods pre-dates and will post-date Covid, given Beijing’s intent to make the world more dependent on China.[2] Pre-pandemic, Congress was rightly concerned about the dominance of Chinese chemicals in global manufacturing of active pharmaceutical ingredients (API), for instance.[3] The PRC’s attempt to dominate rare earths supply has long been a concern and is being joined by a rush of Chinese investment in cobalt and lithium,[4] both of which may be growing in importance to American and European industry.
Read the full testimony here.
[1] The most important Chinese subsidy is competition control – neither foreign nor private Chinese firms are allowed to compete with state-owned enterprises in a variety of sectors, guaranteeing high revenue and profit. See Huanxin Zhao, “China Names Key Industries for Absolute State Control,” China Daily, December 19, 2006, https://www.chinadaily.com.cn/china/2006-12/19/content_762056.htm. For a telling example of a financial subsidy, see Bloomberg Businessweek, “Huawei’s $30 Billion China Credit Opens Doors in Brazil, Mexico,” April 24, 2011, https://www.bloomberg.com/news/articles/2011-04-25/huawei-counts-on-30-billion-china-credit-to-open-doors-in-brazil-mexico?sref=bWSPFsy2. For a subsidies overview, see Usha C.V. Haley and George T. Haley, “How Chinese Subsidies Changed the World,” Harvard Business Review, April 25, 2013, https://hbr.org/2013/04/how-chinese-subsidies-changed.
[2] Steven Lee Myers and Keith Bradsher, “China Says It Remains Open to the World, but Wants to Dictate Terms,” The New York Times, November 23, 2020, https://www.nytimes.com/2020/11/23/world/asia/china-xi-jinping-globalization.html.
[3] Senate Democrats, “Leader Schumer Calls on Gao to Investigate U.S. Reliance on Chinese Pharmaceutical Import, Says Dependence Poses National Security Risk,” press release, December 12, 2019, https://www.democrats.senate.gov/newsroom/press-releases/leader-schumer-calls-on-gao-to-investigate-us-reliance-on-chinese-pharmaceutical-imports-says-dependence-poses-national-security-risk.
[4] Felix Todd, “China, Cobalt and the Congo: Why Xi Jinping Is Winning the ‘Batteries Arms Race,’” NS Energy, August 13, 2019, https://www.nsenergybusiness.com/features/china-cobalt-congo-batteries/; and Yukun Liu, “Lithium Companies Boost Investment Globally,” China Daily, November 30, 2021, https://www.chinadaily.com.cn/a/202111/30/WS61a57716a310cdd39bc78412.html.