Loren Thompson
President Trump has been criticized for highlighting the Chinese origins of the current coronavirus crisis. Whether such comments are constructive or not, the crisis has provoked a broader debate about the role that China plays in the American economy.
In the two decades since Beijing was admitted to the World Trade Organization, it has gradually eclipsed America’s preeminence as a manufacturing nation. For instance, the U.S. had two dozen aluminum smelters within its borders when the new century began; by the time President Trump took office, only five remained of which two were functioning at full capacity.
Chinese smelters have no inherent pricing advantage, so critics have correctly concluded that China became the world’s largest producer (and exporter) of aluminum through the use of subsidies and other trade-distorting practices. A similar pattern prevails in steel, which explains why both industries became early targets of Trump tariffs.
More broadly, China has tended to dominate production of every new technology in recent years, from smart phones to wind turbines to solar panels to commercial drones. U.S. officials are unanimous in agreeing that at least part of the reason China has become the world’s biggest manufacturing center is traceable to the kind of mercantilist practices supposedly banned by WTO rules.
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What brought coronavirus into this discussion was Washington’s realization early in the pandemic of how dependent the U.S. has become on Chinese sources of drugs. The South China Morning Post reported in December that almost all of the ibuprofen and hydrocortisone, and most of the acetaminophen, consumed in the U.S. originates in China. So do many generic prescription drugs; even when they are manufactured in India or other countries, they often require active ingredients made only in China.
The U.S. Food and Drug Administration admits it lacks the capacity to track the supply chain of imported drugs. The value of those pharmaceutical imports, at $350 million per day, exceeds the value of cell phone imports. The U.S. thus may have developed vulnerabilities in the availability of drugs needed during wartime without knowing it.
This is not a xenophobic fantasy. The last penicillin producer in the U.S. closed over a decade ago after facing price competition from heavily subsidized Chinese companies. The South China Morning Post found 80% of antibiotics consumed in the U.S. are made in China.
There is no indication this occurred with a military purpose in mind, but that doesn’t mean Beijing wouldn’t leverage what one author calls its “global chokehold” on drugs and their constituent compounds in a conflict.
But drugs are just the beginning of the problem. The U.S. has relinquished leadership in so many industries over the last two decades that it now incurs non-energy merchandise trade deficits bigger than those of any other nation in history. Numerous vulnerabilities in militarily-relevant technologies are hidden in the statistics, and increasingly those vulnerabilities result from over-reliance on Chinese sources. Here are just three of them.
Shipping. In its bicentennial year of 1976, the United States was the biggest builder of commercial oceangoing vessels in the world. Dozens of ships were under construction at domestic shipyards. The Reagan Administration wiped out the industry (and 40,000 jobs) by eliminating construction subsidies without seeking reciprocal action from other shipbuilding nations.
That was a self-inflicted wound. But then in 2006, Beijing designated commercial shipbuilding as a strategic industry and began channeling massive state subsidies to the sector. End result: China has become by far the biggest producer of commercial ships in the world, while fewer than 200 ships in the global fleet of 44,000 oceangoing vessels are American.
The U.S. today barely manages to rank among the top 20 commercial shipbuilding nations (it’s number 19), and all of the oceangoing ships built recently in America were for use on protected domestic routes. Industry experts say without that protection, the commercial shipbuilding sector and the U.S. merchant marine would literally cease to exist.
The collapse of U.S. commercial shipping has created a looming shortfall in sealift for moving military supplies in wartime. China has secured control of numerous foreign ports as its maritime footprint expands (including at both ends of the Panama Canal), and shippers in other nations have increasingly declined to carry U.S. military cargo for fear of offending Beijing. Meanwhile, U.S. allies such as Japan and South Korea are consolidating their shipyards to meet the challenge posed by subsidized Chinese yards.
Semiconductors. Semiconductors such as memory chips and processors lie at the heart of modern electronic hardware. The U.S. leads the world in semiconductor design and fabrication, including development of equipment for manufacturing chips. However, the shift from analog to digital technology was accompanied by a migration of electronics manufacturing to Asia. According to The Economist, most of the world’s electronic manufacturing capacity now resides in China.
As a result, U.S. chip companies like Intel and Qualcomm are heavily dependent on China for their revenues and returns. In 2018, 36% of U.S. semiconductor sales were to Chinese customers, with revenues exceeding $80 billion. The Trump Administration’s efforts to limit Huawei’s role in implementing 5G technology around the world have provoked fear that U.S. semiconductor makers could be cut off from a vital source of income.
Although the U.S. is ahead of China in many 5G technologies, it does not have a domestic provider for key hardware. Thus, if U.S. chip companies are shut out of the China market, their role in global adoption of 5G will be limited. That would have major military implications, given the myriad ways in which 5G can be applied to communications, logistics, robotics and other activities.
China has accelerated efforts to expand its indigenous semiconductor sector, with an eye to replacing U.S. suppliers. In 2017 plans were announced for a $30 billion semiconductor factory, and Huawei is investing heavily in developing chips for its smart phones. As these initiatives unfold, the outlook for the U.S. semiconductor industry will dim.
Batteries. Lithium-ion batteries are arguably the most important technology used in designing and building electric vehicles. The same technology figures prominently in smart phones and laptop computers, thanks to the unique conductive properties of lithium. Relative to size, the batteries are efficient and affordable ways of storing energy, a fact well recognized by military planners.
This is another cutting-edge industry that Beijing has subsidized in pursuit of market dominance, and the assistance—which began in 2013—has worked. Forbes senior contributor Robert Rapier noted in an August 4 commentary that 73% of global lithium cell manufacturing capacity is located in China. The United States is in second place with 12%. Even if China was not a leading producer of lithium, this disparity in market shares would guarantee its industry a pricing advantage.
China’s edge will likely grow with time, because the country’s electric vehicle market is bigger than America’s and growing faster. If recent patterns in the adoption of new technology repeat, U.S. car companies will be tempted to turn to Chinese sources for their batteries rather than sustaining domestic production that lacks economies of scale. That is what has happened in other industries.
Perhaps the most surprising thing about all of the aforementioned vulnerabilities—drugs, ships, chips and batteries—is that they emerged without most of official Washington noticing. President Trump is the first chief executive to see the growing gap between Chinese and American manufacturing capabilities as a strategic challenge requiring long-term policy changes. He said as much in an executive order issued on July 21, 2017.
Tariffs may not be the optimum response, but it is no coincidence that America’s rise as an industrial colossus unfolded behind the highest tariff walls in the world—walls first erected by Abraham Lincoln that remained in place until after World War Two. With a defense posture grounded in the assumption of technological superiority, it is hard to see how America can remain a military superpower if current industrial trends continue.
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