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USA – Experts React: Assessing the White House 100-Day Supply Chain Review (CSIS)

On June 8, 2021, the Biden administration released the findings of its 100-day review of U.S. supply chain vulnerabilities mandated under President Biden’s Executive Order 14017 issued in late February. In a 250-page report and accompanying fact sheet, the White House laid out the analysis and recommendations of four federal agencies—the Departments of Commerce, Energy, Defense, and Health and Human Services—that had been tasked with assessing supply chain vulnerabilities in four critical sectors:

  • Semiconductor manufacturing and advanced packaging
  • Large capacity batteries
  • Critical minerals and materials
  • Pharmaceuticals and advanced pharmaceutical ingredients (APIs)

The report includes wide-ranging recommendations to strengthen the resilience of supply chains in these areas, including investing in domestic production and innovation capabilities, leveraging the government’s role as a purchaser of critical goods, and working with allies and partners to decrease vulnerabilities in global supply chains. According to the White House, the goal of strengthening U.S. supply chains is to “promote economic security, national security, and good-paying, union jobs here at home.”

Below, CSIS experts discuss the findings of the supply chain review and its implications for U.S. economic policy and national security.

A New Innovation Policy Stressing Resiliency over Efficiency

William Alan Reinsch
Senior Adviser and Scholl Chair in International Business, CSIS

The Covid-19 pandemic has accelerated a reexamination of U.S. supply chain resiliency that began earlier, driven by China’s dominant position in critical sectors like rare earth minerals and its demonstrated willingness to use trade policy as a means of responding to criticism or furthering its foreign policy goals. Manufacturing in some critical sectors has long been declining in the United States, along with investment in basic research. The challenges posed by China and the pandemic have been a wake-up call, to which the Biden administration has responded with a 250-page report on supply chain resiliency in four key sectors:  semiconductors, batteries, critical minerals, and pharmaceuticals.

The 23 recommendations in the report represent a return to what used to be called industrial policy and might now best be described as innovation policy—a greater role for the government in promoting research in essential areas and, if necessary, promoting either onshore production or the development of secure supply chains based on relationships with trusted partners. The United States has done this before, and it is good at it. If it is done correctly, the result will be more resilient supply chains and a more secure America.

There remain unknowns. While the report acknowledges that it is neither possible nor optimal for the United States to make everything it needs, the Buy America and reshoring policies recommended may ultimately make achieving greater supply chain resilience more difficult and more expensive. The old adage, “Don’t put all your eggs in one basket,” comes to mind. One of the best ways to promote resiliency is to diversify sources of supply. While the report demonstrates an understanding of that, some of its proposals run counter to it. There has long been a tension between resiliency and efficiency in constructing supply chains, and the report clearly favors resiliency. It remains to be seen whether the administration has drawn the line in the right place.

Building Back Better—While Reconciling Tensions

Matthew P. Goodman
Senior Vice President for Economics, CSIS

The White House report is breathtaking in scope and ambition. It puts meat on the bones of President Biden’s campaign and governing slogan, “Building Back Better.” In addition to offering tangible recommendations to address a number of real vulnerabilities exposed by the Covid-19 pandemic and resulting economic disruption, the report in its overall thrust rightly emphasizes domestic economic strength as the foundation of U.S. national security.

However, the report also includes a number of tensions in the proposed approach. Bill Reinsch has highlighted one of these: the trade-off between resiliency and efficiency of supply chains. Another is between the report’s prioritization of investment in domestic innovation and production and its call for working with allies and partners to strengthen global supply chain resilience. The incentive for allies to work with the United States to secure supplies of critical materials or products, or to fight unfair trade practices, could be undermined by a U.S. preference to “buy American.”

The report lays out a number of worthy public policy objectives, including strengthening national security, creating good-paying jobs for Americans, and combating climate change. The Biden administration will need to be careful to ensure that policies aimed at these different objectives don’t work at cross purposes. In particular, it should remain clear in its focus and messaging that a strong, secure economy at home is consistent with openness and mutually beneficial economic engagement with other countries.

Making the United States More Competitive in Chips

James Andrew Lewis
Senior Vice President and Director
Strategic Technologies Program, CSIS

Semiconductors are the ultimate “foundational” technology. The United States led in semiconductors for decades but now faces significant pressure from a hostile China. The United States still leads in global market share, chip design, and semiconductor manufacturing equipment, but it lags in chip fabrication. This lag creates risk.

The semiconductor industry is globally distributed. This global supply chain faces two challenges. The first is a result of the pandemic. Many countries became uncomfortable when they realized that critical supplies were only available from foreign sources. They want to move some critical production back. This includes chips. The United States and the European Union are taking a harder look at reshoring. The European Union’s “Digital Compass” strategy calls for doubling European chip production by 2030. China has always pursued self-reliance and has invested billions (not always wisely) in chip-making.

China is the second challenge. It makes no secret of its intent to displace the United States and uses subsidies, espionage, and foreign acquisitions to achieve this. When globalization was in full bloom, a distributed supply chain that included China made economic sense. It no longer makes sense for national security.

The 100-day supply chain review offers seven recommendations to respond to these challenges and strengthen the United States’ chip industry. These include a call to fully fund the CHIPS for America Act, which has been languishing in Congress. A 2019 Organization for Economic Cooperation and Development (OECD) report found that all countries with significant chip industries except the United States used subsidies. A failure to subsidize helps explain why chip fabrication moved offshore. Other recommendations include building the STEM workforce, using export controls to protect technology, and working with allies to harmonize policies on research and development and China. Investment, research, workforce, and partnerships are the core elements for a successful semiconductor strategy.

The hardest task is addressing the chip shortage. The chief cause of the shortage was miscalculation by auto companies. They, like many others, failed to account for pent-up demand and canceled chip orders. In response, chip makers shifted to producing for items suddenly in hot demand, such as streaming, gaming, computing, and phones. Just-in-time supply left car makers with no reserves. The recommendation for better information flows can reduce the risk of future miscalculation and encourage investment in more production capacity.

Chips are the strategic industry of the twenty-first century. The recommendations in this review, particularly if combined with congressional action on funding and bills like the Innovation and Competition Act, will keep the United States strong in this strategic technology.

Batteries: Bolstering Biden’s Climate and Manufacturing Agenda

Jane Nakano
Senior Fellow
Energy Security and Climate Change Program, CSIS

The battery supply chain review led by the Department of Energy (DOE) is the first-ever federal government articulation on the why and how of its leadership in securing the supply chains for the domestic electric vehicle (EV) battery sector. Its call for stimulating demand, electrifying the transportation sector, and expanding EV charging infrastructure echoes some key elements of the American Jobs Plan, while its recommendations reflect key administration themes such as the revitalization of domestic manufacturing base and the just transition. The Biden administration appears ready to unleash the federal authority in purchasing and investing through public financial institutions like the Export-Import Bank of the United States and DOE’s Loan Program Office, while ensuring that taxpayer dollars translate into domestic manufacturing.

Of numerous highlights, several are particularly noteworthy. DOE’s openness to the modernization of mining regulations and the domestic extraction of lithium stood out amid more nuanced discussion of domestic mining. Otherwise, the emphasis on highest standards and stakeholder consultations reflects the continued tension over domestic mining.

Some in-depth discussion on the wage differential between those working in the new battery industry and those working in the gasoline engine industry, as well as workers’ right to unionize, are emblematic of the Biden recipe to simultaneously advance his climate and economic recovery agendas. How wage increase and unionization may affect employer behaviors and decisions is far from clear, however. Also, without effective measures to fend the domestic market off cheaper imports, high labor cost would likely undercut the administration’s effort to revitalize domestic manufacturing; this underscores how the energy transition is opening up a new frontier for trade tensions.

Finally, by repeatedly warning how a piecemeal investment in one supply chain segment could undercut the value of investment in another segment, the report makes a strong case for strategic investment in all segments of the EV battery value chains. The next step should be for the administration to provide clear direction on how to align and sequence investment along the supply chains.

Pharmaceuticals: Is Deep Structural Change Really Feasible?

Stephen Morrison
Senior Vice President and Director
Global Health Policy Center, CSIS

The supply chain report acknowledges the major changes already underway as the U.S. government makes extensive use of its authorities to shape the industry’s response to the pandemic. However, what the federal government does with respect to vaccines is fundamentally separate and different from what it might do with respect to APIs and small molecule drugs. This is what prompts the report to bluntly acknowledge the United States’ acute level of external dependence on pharmaceuticals and APIs, concentrated in China and India. That reality is rooted in the modern global design of the industry, a long-term, massively complicated, and ultimately very expensive reality to change. It is also rooted in basic economics: the big API firms in Asia which specialize in building blocks for global production processes simply drive unit costs down to where no other firms are competitive. Changing the very structure of the industry to place more basic capacity on U.S. soil will be difficult, slow, and expensive. The report contains no estimate of true costs.

The report proposed enhancing transparency, expanding emergency capacity, and investing in domestic production. The emphasis on transparency is a blunt acknowledgement of just how impaired U.S. policymakers have been during this period of pandemic disruption, lacking reliable data and real-time visibility into a global marketplace that is often opaque and confusing. Enhanced emergency capacity is a sound idea. Investing in domestic production is potentially a major change.

The United States will soon see the creation of “a public-private consortium for advanced manufacturing and onshoring of domestic essential medicines production,” charged with selecting “50-100 critical drugs” to be “the focus of an enhanced onshoring effort.” The report proposes modest seed funding: $60 million in Defense Production Act resources “to develop novel platform technologies to increase domestic manufacturing capacity for API.” That level of resources is not likely to accomplish much, in and of itself, but might trigger bigger plans. Investing in companies is to be calculated in the billions of dollars, not millions.

The Biden administration is well advised to make this issue a priority in multilateral diplomacy with the European Union and other partners with similar concerns and deep stakes in the global pharmaceutical market.

A Roadmap for the Private Sector

Pamela Passman
Senior Associate (Non-Resident)
Economics Program, CSIS

The nation’s commercial industrial foundations are central to U.S. economic and national security. In addition to a review and set of recommendations for the four key products, the administration in its supply chain review outlined a series of actions to be taken across the federal government to support supply chain resilience, workforce development, production and innovation, and strong sustainability and labor standards at home and abroad. These measures and their attendant funding, investing, and purchasing streams, data collection, standards setting, and systems building have the potential to “rebuild the U.S. industrial base and innovation engine.”

The private sector is critical in ensuring that these unprecedented investments by the federal government will actually strengthen supply chains and shore up domestic production. Sustained collaboration across the federal government and with businesses, higher education, research centers, start-ups and incubators, and the investment community must be prioritized. This is the long game, not a four-year initiative or Chinese-style “five-year plan.”

The U.S. private sector should heed the calls to action and meet its responsibilities to:

  • Build more robust domestic manufacturing capability and innovation capacity.
  • Diversify international suppliers and reduce geographic concentration risk.
  • Support small, medium-sized, and disadvantaged businesses in gaining access to every stage of the innovation, commercialization, and manufacturing cycles.
  • Engage in industry-led standards setting efforts to ensure “high-road business practices” domestically and globally.
  • Prioritize cyber resilience in internal operations and those of supply chain partners.
  • Invest in quality, sustainability (decarbonization), and long-term productivity.
  • Collaborate with labor and educational institutions to create multiple pathways to quality jobs.
  • Use data and analytics to better monitor and predict risks and vulnerabilities and to embed systems that focus on supply chain resilience.

This is just the Biden administration’s opening salvo on building more secure and resilient supply chains. The next phase, focusing on six critical industrial base sectors, has the potential to go broader and deeper in ensuring U.S. economic security, national security, and technological leadership.

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