James Galbraith: China and Supply Chains – The White House Review’s Focus on US Dependence

Yves here. Jamie Galbraith provided a detailed and insightful recap of a new White House report, Building Resilient Supply Chains, Revitalizing American Manufacturing and Fostering Broad-based Growth. Even though it focuses on only four important sectors, the study belies its cheery title. It might be more accurately called Revitalizing American Manufacturing: Why We Can’t Get There from Here. Oh, and of course, the position of China is a big reason, but the story is more complicated than you might think.

We’ve said repeatedly that the US has ceded far too many skills for “reshoring” manufacturing to happen in anything less than the time frame of a generation. Just look at rare earths. The US has plenty, but we got out of that business because mining is environmentally nasty. As Galbraith describes, we now have a circular problem: a dearth of experienced mining supervisers/managers, a lack of interest among students to develop the needed know-how due to the present lack of employment, and a lack of programs to teach them due to lack of student demand.

Changing these dynamics would require the open adoption of industrial policy, something to which America is allergic (we do have it by accident, via given preferred sectors like real estate, finance, and health care lots of tax breaks and other bennies). And even if an Administration were to get religion and implement a broad swathe of ambitious programs, there’s no assurance they would not be wound down under the next Administration.

Reshoring would also require the US to operate as more of an autarky near-term, which would mean imposing higher costs in the targeted sectors on consumers and businesses.

And on the autarky point, Galbraith flags another impediment were the US to try to reduce or hedge its exposure to fragile supply chains: China is now a bigger market than the US for many important inputs.

By James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government and Business Relations, University of Texas at Austin. Originally published at the Institute for New Economic Thinking website

In January 2013, the Obama White House released a White Paper on “National Strategy for Global Supply Chain Security: Implementation Update.” It was a short document, only 22 pages, almost wholly focused on the security of transport – of ships, air freight, the mails – against terrorism and other threats. What traveled through the supply chain, and from where, does not appear to have been a major concern.

In June 2021, the Biden White House published a “100-day review” entitled “Building Resilient Supply Chains, Revitalizing American Manufacturing and Fostering Broad-based Growth.” It is focused on a very different concept of what the “supply chain” is; the term now encompasses the entire spectrum of upstream production. The Biden review takes these up in four areas: semiconductors, high-capacity batteries, critical minerals, and pharmaceuticals.

One might ask, why these four areas and not others? There is no clear answer, and it may be that choice was mainly bureaucratic. The review was compiled from separate reports by four cabinet departments: Commerce, Energy, Defense, and Health and Human Services. Had the Department of Agriculture been asked, or the Department of Transportation, one might have gotten different choices. Petroleum comes to mind. Or natural rubber – the linchpin of World War II in the Pacific.

If there is an Ariadne’s thread to these four areas, it is the trading and competitive relationship with China. The reports do not focus solely on China and give what is largely a fair-minded and wide-ranging assessment of vulnerabilities in each sector. For the reader not previously immersed in the structures of semiconductor production or the technology of electrical storage, this document, at 250 pages, is a mine of information. But China lurks in each section, sometimes looming large, in other places only in the background.

The global semiconductor industry is here described in fascinating detail. It is a paragon of extreme specialization, relentless technological improvement, economies of scale, and global division of labor. US firms dominate in semiconductor design and integrated production; Japan produces the wafers; Taiwan and (to a much smaller degree) South Korea do high-end fabrication in “contract foundries,” while China handles a substantial share of low-end chips and of “packaging” – a term that covers the placing of chips into circuit boards including, of course, the assembly of smartphones. American-based production is only 12 percent of the world’s capacity, roughly a third of what it was in the 1990s.

To characterize broadly, the semiconductor supply chain is a network of unique nodes, in which a given firm has one upstream supplier for many major components and perhaps just one downstream customer, creating a web of bilateral monopolies operating in extreme interdependence. Thus a breakdown anywhere along the line can disrupt the entire system. This is, by the way, very much the classic problem of Soviet-style industrial structure, designed to maximize efficiency at each node (in the Soviet case, a matter of scale), but fragile as events in the early 1990s showed.

The review calls attention to several specific events that have led to recent and ongoing shortages in semiconductor supply. These include a fire in March at a facility in Japan and the freeze in February in Texas which took a trio of Austin facilities off-line for up to a month. But the most important was not itself a natural event but rather the reaction to one. As Covid-19 took hold, key figures in the industry shifted capacity to household applications. They failed to anticipate how quickly demand for vehicles would recover as the pandemic waned.

The problem is that chip production takes a lot of time; it is characterized to an extreme degree by what economists of the Austrian school call “roundaboutness.” The multiple steps (etching, doping, and so forth) are repeated “hundreds of times”; producing a single chip “can take up to 26 weeks.” So once locked into a program, the industry has the margin of maneuver, roughly, of the Ever Given in the Suez Canal. Meanwhile, the automakers who have designed a hundred or more distinct chips into their new cars must sit and wait. This accounts, no doubt, in part for the surging prices of used vehicles and the current scarcity of rental cars.

What then is the “China threat” to the semiconductor supply chain? The most important one is stated very plainly. China is the world’s largest semiconductor market, both for home use and for incorporation into products sold elsewhere. The single biggest risk from China is not some nefarious disruption of components or materials. It is rather, a possible fall in the final demand. The review is clear and unambiguous on this point:

US semiconductor companies… thus have the potential to be significantly impacted by trade restrictions between the United States and China, with major potions of their revenue at risk of long-term disruption. Based on the Chinese government’s ambitions in regard to the semiconductor industry, these revenue sources may be at risk regardless, but given that their ability to reinvest is immediately dependent on sales to China, their long-term viability is immediately affected by actions that decrease sales. (p. 57.)

The review goes on to note that since much of the industry operates on the two banks of the Taiwan Strait, “Even a minor conflict or embargo could have immediate major disruptions to the United States and long-term implications for US supply chain resilience” (p. 57). In a White House document, at this moment of heated China-bashing, this is a welcome realism.

With large-capacity batteries, the principal supply-chain issue is not so much a science-driven matter of design and engineering as it is access to key materials, most notably nickel, graphite, cobalt, and lithium. With these materials, it appears reserves are not particularly scarce, although in the case of cobalt they are concentrated in the Democratic Republic of Congo, where mining conditions are tactfully described as being “outside of international practice.” The review notes that China’s advantage in materials supply results, mainly, from having invested in finding reserves on its own territory.

But, it turns out, industrial dominance in this area does not rest on the supply side. It lies rather in the development of the industry itself, driven by demand for electrical storage, which is overwhelmingly in the automotive sector. China is the low-cost producer because it is the world’s largest user, consuming 40 percent of global large-capacity battery output. Europe accounts for another 40 percent, and the United States for just 13 percent. Consider this: there are 425,000 electrically-powered buses in the world today. Of these, 300 are in the United States; 421,000 are in China. Perhaps oddly for a report on the supply chain, but not unreasonably under the circumstances, the recommendations in this section are relentless: the United States should work to bolster demand.

In the report on critical materials, prepared by the Pentagon, thirty-eight minerals are listed for which US direct import dependence is above 75 percent. Of these, China is a top supplier in eighteen cases. And why is that? Largely, as the report states, because the growth in China’s own demand for these materials has made it profitable for China to invest in the supply chain, hence to become the high-volume, low-cost producer, to whom the world turns.

The Defense Department is naturally concerned with the possible consequences of conflict, and so with the possibility that access to materials might be lost, especially where there is only one source of supply. This is particularly true in the case of “rare earths” – a grab-bag of exotic minerals – where China had 85 percent of the global market as of 2014 – even though the entire Chinese workforce in the mining of rare earths consists of only 4,000 souls, with an additional 40,000 in smelting. Perhaps understandably, not even the Pentagon has a good answer to this problem, apart from conservation, recycling, stockpiling, and being prepared to divert from routine to essential uses in an emergency. The review laments the decline of mining expertise emerging from US university systems, where educational programs have folded as mines have disappeared. But it is hard to see why students would pursue degrees, or universities provide them, in fields for which jobs no longer exist.

With pharmaceuticals, the problem is not of scarcity but of basic economics. The supply chain moved to India because costs are low as befits the low-price, low-margin, high-volume business of generic drug manufacture. Supply chain resilience would thus be a matter of maintaining a “virtual” stockpile, consisting of manufacturing equipment and precursor chemicals, to be held in reserve in case of emergencies. It is important to note that to be useful, the reserve capacity would have to be kept idle – otherwise it adds no layer of safety in the event of a disruption. The review is realistic about the prospects for this: the scale and complexity of the sector, together with the unpredictability of future biological threats, makes it impractical to maintain large reserves in all areas. In an open global market economy, drugs will be bought from where they are cheapest to produce.

In each area, the Review is critical of Chinese practices, which are said to consist of large-scale, “top-down,” “market-distorting,” public investments, subsidies to Chinese companies, state-sponsored industrial rationalization, and in the case of electric vehicles, large subsidies to consumers to spur demand. Thus we read: “The Chinese Government has focused on capturing discrete strategic and critical material markets as a matter of state policy.” (p. 174). Examples given are that in 2002 China “prohibited foreign investors from establishing rare earth mining enterprises in China” and in 2014 consolidated the business in the hands of a “handful of national champions.” Also, back in 1985, China had established a VAT rebate for rare-earth exports, “which contributed to the erosion and the elimination of US production in the global market.

In this and other instances throughout the Review, the deplorable practices of state planning and national development strategies undertaken by China are, within a few pages, pretty much exactly what the authors recommend for the United States. (The DoD recommendations on critical materials are an exception here, addressing among other things recycling, human rights issues, and environmental concerns, even though these are perhaps somewhat tangential to supply-chain issues per se.) Thus on lithium-ion batteries, we read: “As part of the American Jobs Plan, President Joe Biden has called for transformative investments to spur this demand, including $100 billion in incentives to encourage US consumers to transition to EVs” (p. 134). Similarly on semiconductors: “Consistent with the American Jobs Plan proposals, federal incentives to build or expand semiconductor facilities are necessary to counter the significant subsidies provided by foreign allies and competitors.” (p. 76). How an “incentive” differs from the Chinese practice of “subsidies” is not clearly explained. Nor does the review admit that export rebates on VAT are standard practice everywhere.

Still, from a broad reading and fair appraisal of this genuinely excellent document, two major conclusions may be drawn. The first is that the Chinese advantage – which is by no means absolute in all areas – stems from a pragmatic program of economic development, including infrastructure and human resources, in a vast country able to take advantage of a scale of production and internal market impossible anywhere else. This leads to lower costs across a wide range of industrial and engineering capacities, bolstered by being embedded (as the Review does not point out) in a system oriented toward social stability and steady growth rather than short-term profitability and financial contracts. The Chinese edge – similar to India’s in pharmaceuticals but much more broadly based – is the product of the success of China’s development approach, especially in the post-Mao era, but with roots that go back to the 1949 revolution, to the creation of the People’s Republic and to the restoration of a unitary Chinese state with full control over the nation’s land and resources. This is a fact of life and not an artifact of ruses or dirty dealing.

The second key conclusion is that in critical sectors, in the world we inhabit and from which we cannot escape, US-China interdependence is indefeasible. Rare earths are a minor example, barring new discoveries in other places. Semiconductors are a major one: without the Chinese market, the American firms that presently dominate the high-end design processes would collapse. Bringing manufacturing back to the US, we learn, would come primarily at the expense of allies, including Japan and South Korea as well as, especially, Taiwan. It is hard to see why even the most aggressive China hawk would favor stripping Taiwan of its chip foundries – but even doing that would hardly lessen the dependence of the semiconductor ecosystem on the Chinese market.

So we come to a truly remarkable third conclusion, no less powerful for having been left unstated. It builds on the fact that the integration of the global economy cannot be undone. The division of labor – hence productivity, living standards, and the advance of technologies – is limited by the extent of the market, as Adam Smith wrote in The Wealth of Nations back in 1776. China is a now-developed country with about twenty percent of the human population; its advantages are stability and scale, almost exactly as was true in the 18th century. These advantages cannot now be taken away without destroying the world as it is.

To be sure, the Chinese still, in many important advanced areas, draw from and depend on the United States. Certainly, the US can slow the inroads of Chinese firms in some cases, and certainly the US can foster, as this report recommends, its own advantages in new sectors by maintaining and expanding its research and development base. Certainly, there are many things to be done in the United States to meet urgent environmental, public health, and critical social goals.

But the US position, as an economy with only one-fourth the population, equally now depends on the Chinese market, and on downstream Chinese firms supplying applications to the world. While precautions against natural disasters and pandemics can be taken – up to a point – the central unstated message of this 100-day Review is that the greatest risk to the supply chain, in each of the four areas, is disruption of normal trade relations with China. In short, as an objective economic matter, we learn here, the United States has an overwhelming interest in peace.

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  1. skippy

    The best bit is after the white anting – of all and sundry – any big push to overcome the shortages will be facilitated by some profit driven market solution e.g. the same mentality that has crapified every once functional good or service so the maximum income could be extracted from it in the shortest time possible … all whilst consolidating each various market and thus magnifying that perspective effect.

    Hence to some peoples surprise the amount of young people trading in things like crypto ie. there are only so many life boats and if you miss yours …

    1. Lambert Strether

      > The best bit is after the white anting

      White-anting is an Australian term for the process of internal erosion of a foundation. It is often used in reference to groups such as political parties or organisations where information from group insiders is ‘leaked’ or used to undermine the goals of the group. The Macquarie Dictionary says the verb “to white-ant” means “to subvert or undermine from within”.

      White ants = termites.

  2. Christopher Horne

    Ah, Excellent article. The ‘unsaid’ part is that most major corporations
    have dropped R&D almost completely in favor of stock buybacks and bonuses for the C-Suite. I’ve often said that US companies do not produce
    airplanes, light bulbs, cars, or computers. They produce a stable, high-paid
    income for the headquarter’s executives and their secretaries. The reason
    is always the same: “If I don’t do this, someone else will.” Morality and principles are confined to the 5% tax writeoff for charity that the IRS allows.

    1. Winston

      Deindustrialization was because of “Military Keynesianism” which has not changed. Cannot have industrial policy with Military Keynesianism in place. Also, as Michael Hudson has pointed out banks raising of mortgage costs have been instrumental in decline of consumption, which has also affected corporate revenues. Combine the two and you have a recipe for what is transpiring now. Stock buybacks are a result of these two policies because investors want returns, which are not going to come from increased revenues. The petrodollar has also poisoned US because petroinvestors want returns. I think Military Keynesianism and petrodollar (which also fueled financialization) have been the 2 most damaging policies-neither of which are going be terminated willingly. See here in “War Inc” Mehlman’s discussion of Military Keynesianism and how it caused de industrialization. https://ejournals.library.vanderbilt.edu/index.php/ameriquests/issue/view/7

      1. drumlin woodchuckles

        Noooo . . . . Deindustrialization was/is because of Free Trade Agreements. These agreements were engineered in order to organize the dismantlement of thing-making within the US and the re-mantlement of that same thing-making in lower-price foreign countries.

        Military Keynesianism is just a desperate after-the-fact attempt to cover up and disguise the carefully engineered burn-down of thing-making in America.

          1. Christopher Horne

            Yas, speaking of the military, imagine how much wealthier
            and how much better the citizens would be if we hadn’t
            decided to build a military 700% bigger than the next largest
            force on the planet. At one time, the military was a ‘safe
            haven’ for a goodly chunk of people wanting stable employment in the USA. Now the troops are just window
            dressing for all the deadly toys, and wars are deliberately
            started to show potential foreign buyers that said toys
            were up to snuff in actual war situations.
            Of course it now seems the country was barking up
            the wrong tree with all the cyber attacks doing the
            destructive work of nation states.

        1. KD

          It is all these things. Being the reserve currency means your currency is strong and hurts exports.

          Free Trade Agreements, giant sucking sound.

          But the health care scam and the higher education scam loading workers up with higher costs of living without any benefits make the wage scale uncompetitive on top of everything else. Not to mention the Fed and engineered asset bubbles in real estate. Add on high taxes to fund a giant military empire and a prison system to put to shame the Gulags, and you have a failed economy.

          1. Monte McKenzie

            YES ! Add to that… the FF industries murder of cheaper “no toxic” electric generation systems for the past 60 years, of record FF profits & record polution of America’s land & water and you get a nation tettering on total colapse ! The other guys are getting 21st century infrastructure built that assure cheap pandemic recovery and grease the wheels of industriial advances in all manufacturing & delivery chains!
            The worm has turned, sue for peace, Now !

  3. Equal > Equitable

    I believe used car prices are also representative of this fact – A clear attempt by the wider public to link price more closely to utility. They could lease a new car or get a loan to make it affordable, but the level of crapification has reached irrational levels.

    1. PlutoniumKun

      My guess is that the car industry has been desperate for years to escape the low profit trap of very low margins in a very competitive market, hence the constant search to drive up the complexity of cars to make them less price dependent. Everyone wants to be BMW. Everyone wants to be the Apple of cars.

      VW let it slip a while ago that the one thing the car industry fears about EV’s is that it will lower the price of entry for new manufacturers – a little like cheap generic smart phones made it difficult to keep the prices of Apples and Samsungs too high. Hence their determination to make EV’s a high scale aspirational product rather than using the simplicity of electric powertrains to make smaller, lighter, cheaper and more reliable vehicles.

      1. Ignacio

        I see, that’s it. I was wondering why companies focus on high end cars. Another reason could be that there is, currently, a need to produce big cars because large battery sizes are required. The entry barrier for new manufacturers must be very high in any case.

        1. PlutoniumKun

          I’m not sure big batteries are the reason. BMW showed the way with its i3 which is lighter (around 1.2 tonne) than a golf even with a full battery pack. It is much lighter than the similar sized new VW ID4. I think it comes down to conservatives within the car industry that they are focusing on very powerful motors rather than making the cars much lighter.

          There BMW i3 could have been a genuine game changer in the car industry, but apparently it fell foul of internal politics within BMW – essentially, the petrolheads won and refused to put any more funding into it.

      2. vlade

        VW has an interesting relation with Skoda (part of the VW group).

        Skoda is meant to be low(er) to mid-end, and not compete with VW.

        But many people found that Skodas now are of VW quality build, at a way lower sticker price.

        VW is unhappy about it, but at the same time it’s one of their most profitable models, with only Porsche having higher margins than Skoda in the VW group, but Skoda of ourse having way higher volume.

        1. voislav

          VW has made its own bed and now has to lay in it. They pushed standardization and supply chain consolidation for each of its subsidiaries over the last 10-15 years. For example, Porche, Audi, VW, Skoda and Seat all use the same engines, 2 L gasoline engine in VW is going to be the same as the one in Skoda and Audi. These are all developed by the same design team, with work divided up across the subsidiaries, manufactured by the same supplier on the same production line. This is true for most mechanical parts.

          The only differentiator between their low cost (Skoda), mainstream (VW) and premium (Audi) brands is the vehicle interior and some niche features, like headlights for example. Even Porche vehicles use the same engines as VW mainline models, there is no difference there either.

          So, in the name of cost reduction, VW has blurred the lines between its brands and the customers are starting to notice.

        2. PlutoniumKun

          Dublin taxi drivers adore their Skodas. Outstanding reliability and value without the brand name premium of VW or Audi.

          So far as I know, VW don’t bother much in even separating manufacturing – some Skodas are churned out of the same factories as VW Jettas.

          I’ve always thought VW did a bad job when it came to giving their different brands distinctive identities. It baffled me that a lovely, distinctive Yeti was dropped for yet another boring sub-SUV design that looks exactly like every other one the company makes. Pretty much everyone knows now that a Skoda or Seat is VW quality without the cost. Although I suppose it should be welcomed that a company puts quality engineering in front of marketing.

          1. vlade

            The interesting thing on Skoda is also that it is a very unionised company, and the workers there have easily 50% more than the average CZ salary. They are the epitome of skilled, well paid, blue-collar jobs.

            They still don’t make what their German collagues do, but in terms of purchase power are probabaly not far behind – and as I wrote above, Skoda margins are still great.

            We will see how it goes, as so far Skoda setting up factories elsewhere (including China) didn’t have impact on this, but the question is what will happen when the production drops (as it did this year). So far no layoffs, and the idled workers get 80% of their average income. The official policy is that they basically stopped hiring for most positions and rely on attrition, so we’ll see

            1. Monte McKenzie

              Why care ? in three years all will be trashed as mass transit as maglev trains, bicycles & electric golf carts provide transportation everywhere for everyone! No private jets allowed to fly!

      3. Stevew

        Yes, EV can be produced inexpensively. Both China and India have done it. But the US DOT will find a way to not approve it.

    2. Lambert Strether

      > the level of crapification has reached irrational levels.

      Sort of a shame we can’t make a Chip Free™ updated VW Bug or Trabant at a similar price point. (Maybe the pollution control module would need a chip, I don’t know.)

      Of course this goes against the bloated and hyper-aggressive SUV arms race/self-licking ice cream cone, so maybe not ever.

      1. skippy

        Nissan and a few other Mfg are abandoning the sedan to redirect resources to SUV’s IMO.

      2. vlade

        This is partially due to misguided EU incentives (if you sell into the EU, it doesn’t make sens to have EU and non-EU engine, added costs). Basically, with the EU CO2 emission standards, we’re likely at the limit of what small engines can do, and w/o electronics, they would not be really achievable either.

        The margins for small cars are trivial to non-existent IIRC, so making small cars is getting harder, needs electronics, and is not profitable.

        SUVS and large luxury cars are where the margins mostly are, as well as possible engine efficiency gains. And you can stuff them full of extras with high marging, because people who buy those don’t watch the price tag that much.

        And, no, you’d really really not want Trabant. I know some people love them, but it’s a masochistic love of something that is emblematic, but really horrible. And from env perspective, you’d be hard pressed to find a car that combines more bad things (duroplast body, two-stroke engine except for P1100 which had so many VW parts most people don’t consider it a Trabant anymore).

  4. vlade

    So the US is surprised that China has acted on strategic materials and industries as if they are strategic, while the US said “market will provide”. Milo Minderbinder at his best.

    1. eg

      Yeah, it strikes me that there is a profound unwillingness to face the inherent weaknesses of the laissez faire, devil take the hindmost ethos at the rotten core of America, without which any serious strategic program is frankly impossible.

      I note also precisely zero recognition that the current state of affairs has come to pass primarily because wealthy Americans happily sold out their blue collar fellow citizens during the offshoring/deindustrialization of the past 50 years or so — see Judith Stein’s “Pivotal Decade”


      1. drumlin woodchuckles

        Without the total cancellation, abrogation , and withdrawal-from of every single Free Trade Agreement and Treaty the US is currently entrapped in, no strategic program is possible.

        Without the systematic, careful and thorough mass slaughter ( “political genocide”) of every single Free Trade supporter within the borders of the United States, however many thousands or millions of economic treason supporters that will require the extermination of, Free Trade Abolition is impossible. Which means that
        no serious strategic program is possible.

        And since no decent person will advocate the mass democide against every first, last and in-between Free Trade supporter which would be a necessary precondition for Free Trade Abolition and Hard Protectionism Restoration, Free Trade Abolition and any serious strategic program will remain impossible until the United States itself becomes impossible.

        Individuals will have to work out their own personal survival as best they can under the International Free Trade Conspiracy Occupation Regime.

        1. lance ringquist

          the homeless in california must look at the ports full of ships loaded to the gills with communist china’s cheap junk made under horrendous human and enviromental degradation and say, “we used to make that stuff here in america, it provided us with stability and a home.”

          a free trader will say they are not poor, they get cheap battery operated dvd players from bill clintons free trade utopia communist china that they can watch cheap dvd’s under their bridge or over pass, whats not to like about free trade:)

      2. Lambert Strether

        > I note also precisely zero recognition that the current state of affairs has come to pass primarily because wealthy Americans happily sold out their blue collar fellow citizens during the offshoring/deindustrialization of the past 50 years or so

        I’d like to thank all the big people who made this possible. 1%, PMC, American gentry, mainstream macro, Democrats and Republicans — take a bow.

        I’ve heard the anecdote that machine tools were sold to scrap dealer, who turned around and sold them to China. China then put them to work.

        1. Jessica

          “I’d like to thank all the big people who made this possible. 1%, PMC, American gentry, mainstream macro, Democrats and Republicans”

          Late to the parade again but,
          the only Dems who will ever get my vote are ones who say this out loud. Particularly about the PMC.

    2. Zamfir

      It may be “market will provide”, but against a background that those markets are under US strategic control, if push comes to shove. The US has less reason to focus on domestic sourcing than China, because so much non-domestic sources are part of the US sphere of control.

      No other country in the world (including China) could issue a report like this. It’s a report that takes full control over the supply chains as the expected baseline, and looks for deviations from that baseline.

      Take the semiconductors – literally every crucial part of that complicated supply chain is either based in the US itself, or in a close ally that will not deny supplies to the US but does deny them to China when the US demands. And the US worries about that, because it’s not the quite level of strategic control that it considers good enough.

      There’s surely a shift away from US power in these areas, but at the moment it’s a shift from nearly absolute control to something not quite so absolute. I understand that Americans are worried about that – they have grown used to the status quo. But it still leaves a lot of control in US hands, for quite some time to come.

      1. Kouros

        Define control here…

        Plus, as the article underscores, for semiconductors, forcing China to rely on its own will scupper the profitability of the semiconductors industry left under the US control. The US will be controlling something that few will buy…

        1. Zamfir

          Control, mostly in the sense that a supplier cannot cut you off, and preferably also that you can tell them to cut off others. There are other aspects, of course, but in the context of “strategic” supply chains it’s mostly about this.

      2. Lambert Strether

        > But it still leaves a lot of control in US hands, for quite some time to come.

        We could solve some of our chip supply problems medium-term by taxing the Internet of Things out of existence. Most of it’s crapified, and what works is dystopian.

  5. PlutoniumKun

    Just on the point about the extreme fragility of the microprocessor industry, a few years back there was a major disruption when one of the biggest Intel plants, the one in Leixlip, Ireland had to shut down. It was during a very cold spell when local Councils ran out of salt for de-icing roads. Some bright spark had the idea of spreading ammonium fertiliser on the roads. The result? contamination via the water supply shut the Intel plant down for weeks. Apparently, ammonia and microchips are not a happy mix.

    Since then, Intel have made a big deal about funding water improvement and environmental protection schemes in the upper river catchment. Its been portrayed as a good neighbour policy (and some of the schemes they’ve helped fund are really good), but I’ve long thought that the real reason is to send a message to the various Councils in the watershed that they are being watched carefully by Intel, so they don’t make a stupid mistake like that again. It also shows that the big manufacturers are increasingly concerned about one off black swan events causing catastrophic disruptions.

  6. PlutoniumKun

    On a general point about supply chains, this doesn’t just happen at the global level. South Korea, for example, has been working very hard at both ensuring that they are strategically important in a number of products, and also on-shoring crucial supply chains to protect themselves from Chinese and Japanese pressure. Just 2 years ago the Japanese stupidly tried to shut off supplies of key products (etching gases for LCD manufacture) to South Korea in an argument over wartime compensation. The South Koreans simply cut Japan out of their supply chains. The Koreans are very efficient at this, they don’t mess around.

    Even with Brexit, we saw the UK foolishly threaten to cut off some supplies to Ireland during the discussions. They quickly dropped this idea when it was pointed out that the EU had vastly more retaliatory capacity. But in a local sense even within the EU some countries (notably the French) work quite hard to maintain certain strategic industries, especially in military components.

    While historians will I think scratch their heads at how the US managed to thrown away its strategic lead in so many industries over such a short period, as Galbraith points out in his last paragraph this may inadvertently be a good thing. War becomes far less likely when all potential combatants know that they can’t fight without suffering severe domestic economic disruption. US policy may have accidentally created a situation whereby a Pacific War becomes almost impossible to contemplate, even without bring nuclear arms into the conflict.

    1. Zamfir

      I am not convinced that the US already thrown away a strategic position here.

      In particular: the US does not have to rely on domestic production, to maintain strategic control over a supply chain. The US has a strong influence over other many governments (and companies in foreign countries), to a level that is unmatched by any other country. The Korean example is illustrative – the US has enough levers on the Japanese government, that it does not have to worry much about such games. It can treat Japanese production as something resembling “domestic” production, in way that Korea or France could not.

      It’s telling how this report worries about supply situations that would be an almost unimaginable power trip for any other country. Take the semiconductors: a good chunk of all crucial suppliers are based in the US. Literally every other crucial node is based in a close ally of the US- either in Europe, or in east Asia. Those allies will not cut off the US from production. Even more, those allies do cut off China from their most advanced products, based on orders from Washington. For example, China cannot import EUV machines from the Netherlands. Partially because the Dutch government listens to the US, partially because the Dutch manufacturer is itself too tied up with the US to counteract US government wishes.

      So, the US has pretty much full access and control over every important part of the semiconductor supply web. The second most powerful country in the world controls no parts that the US relies on, is largely dependent on the US controlled parts, and is actively blocked form the best technology. And the US genuinely worries about this situation, because they would prefer more ironclad control.

      They are not wrong about that either – the US has less control than they used to have. But it also shows that the gap is immense.

      (I posted something similar earlier, but it didn’t show. Apologies if it ends up double)

      (I had a large that reply that got lost – apologies if it show again for double the fun)

    2. Andrew Watts

      I wouldn’t underestimate stupid people in large numbers. Washington DC has never been short of bad ideas that could lead to war. There’s talk of stationing an Army brigade on Taiwan which is meant to serve as a tripwire against Chinese attack.

      That development would, in reality, probably make a Sino-American war inevitable. The Chinese on the mainland will never tolerate a foreign power occupying any part of China. The opinion of any government official in Beijing wouldn’t matter if they wanted to stay in power.

    3. Susan the other

      Well, if we, the US, really have Jamie’s “overwhelming interest in peace” I’d like an explanation for why we have lately been behaving like jerks from the 1960s toward China. Clearly we counted on controlling Taiwan forever back then. If by “peace” Jamie means creating no conflict, then again what on earth is McMaster talking about with his plan for “strategic competition?” And if he’s talking about maintaining strategic profits and revenue in certain industries it would seem that the curse of Gail Tverberg is hovering over that idea from the get go because even Galbriaith above talks exactly like GT about demand being the driver of affordable productivity. China has got effective industrial policy and has sufficient domestic demand for its economy apparently – but we do not. Our lack of demand was (imo) strangled right out of us over the last 20 years. To the degree that I’m wondering if we can create a balanced demand for our own economy at all. It’s still the mindset in this country that we “live free” and make our own choices. So we are free to not demand a damn thing if we don’t want to. Including a “nice little war” here and there. The only thing we can morally demand is a job/benefits somewhere outside the MIC. Earning a living is a human right. But economic demand is a personal preference. So the whole idea, once again, that demand and consumption will drive production is not making sense. In addition to the fact that we consume too much already and we cannot maintain such a high level of consumption going into the future and must actually eliminate demand when it becomes too extractive for the planet, like already several decades ago. And etc. So. It’s almost a big can of worms to imply we can do this the old supply-demand way. We need some serious industrial policy here. Not militaristic “strategic competition” – which is probably just a face saving term that McMaster prefers.

      1. Monte McKenzie

        Good analysis S the o, did it begin when nixon pushed by the FF industry & assumed need for nukes to control world supply/resources and oil sales…
        canceled the liquid salt electric gen at oak ridge? Asuring more profits to utilityies that should have gone green without profits!
        Utilities like roads, etc. are the backbone of industrial progress!
        America’s “backbone” is too old to function in 2021!
        My prediction is… America, is the next third world country to press for help! How will the UN, view that?

    4. d w

      can you say ‘free market’ will supply every thing.

      they just forget the at a price part

  7. Eelok

    Jamie notes that the choice of sectors might be bureaucratic, but what about political? That was my immediate thought on seeing them. Semiconductors have been a hot topic in the financial press since late last year, batteries and critical minerals are discussed constantly because of the near-universal assumption that any year now, we’re going to get serious about a massive upscaling of new energy technology deployment, and concerns about the pharmaceutical industry have been a regular feature of pandemic discussions from the very beginning.

    These intense focus on political hot-buttons does not reflect a serious commitment to engaging with these supply-chain issues by taking up the kind of sweeping, generational effort towards industrial policy that would be necessary.

    For one version of what that actually takes/looks like in practice, I highly recommend the book The Code by Margaret O’Mara about how decades of partnership with and investment by the government created Silicon Valley.

  8. KD

    While precautions against natural disasters and pandemics can be taken – up to a point – the central unstated message of this 100-day Review is that the greatest risk to the supply chain, in each of the four areas, is disruption of normal trade relations with China. In short, as an objective economic matter, we learn here, the United States has an overwhelming interest in peace.

    If China has an asymmetric economic advantage from the result of war, and this means the US has an interest in peace, this suggests that China has every incentive to push the envelope as far as it can, and by the time the US “stands its ground”, China should be far enough along to be able to smash the “rules based” system and reconfigure the international order. Also, it sounds like quelling the rebellious province would result in increasing their strategic advantage in control of the world semiconductor supply chain.

    The real lesson is that the Chinese are interested in geopolitical power, and see economy as a means to power, whereas the US is interested economy (or at least, increased wealth to domestic oligarchs), and views geopolitics as a means to improve economy (e.g. rentier wealth). Thus, the US now has more billionaires than it did 25 years ago, but its relative power internationally has collapsed, and it is dependent on foreign adversaries for many strategic economic inputs, with no exit strategy that wouldn’t threaten the wealth of the oligarchy.

    1. Andrew Watts

      The logic of economic determinism has been tested with the outbreak of the Great War. When General von Moltke was confronted with the prospect of the economic consequences of any war he merely replied that he was a soldier and not an economist. I think China would be more than willing to sustain any economic damage that would result from the war.

      Which doesn’t mean I think that anybody in Beijing is eager for one.

      1. KD

        To be clear, I don’t think China wants a direct war with a fellow nuclear superpower. But if they have less cause to fear a war, then they have every reason to push in SE Asia and probably in South America and the Islands. Further, the longer they wait, the bigger their economic advantage to the US.

        Maybe some nice bases in Cuba or Venezuela?

  9. Pelham

    So China is this indispensable manufacturing giant and market. Hmm. I detect a lack of agency here. Just how did China come to be so crucial so quickly? Could it have anything to do with US industry, US finance and US representatives selling out the entire country?

    Rather than a special commission to investigate the events of 1/06, I suggest a special commission to examine the US corporate/congressional actions that led to PNTR for China, job and production offshoring and transfers of technologies developed with US taxpayer funding that, in turn, led to the events of 1/06. Then we can determine who to hold accountable.

    1. lance ringquist

      FDR and Truman had commissions, that named names to wretched policies. time we had another one. namely from 1993 on wards where most of the damage was done.

      bill clinton, his advisors inside and out side of government. bill clintons financiers. congress critters that supported bill clintons disastrous polices, their advisors inside and outside of government. congresses financiers.

      mr. galbriath over looks what adam smith said if you find yourself shackled to a country like communist china,


      “Smith explained that the government must take on the role of protector, establishing certain legal rules and structures that ensure fairness. Among those actions is the ability to create retaliatory tariffs, which are used to force open competing markets and ensure a level playing ground among merchants of different nations.

      In Book IV, Smith discussed various aspects of international trade, and he soon turns to the notion of tariffs: “As there are two cases in which it will generally be advantageous to lay some burden upon foreign, for the encouragement of domestic industry; so there are two others in which it may sometimes be a matter of deliberation; in the one, how far it is proper to continue the free importation of certain foreign goods; and in the other, how far, or in what manner, it may be proper to restore that free importation after it has been for some time interrupted.

      Tariffs and other forms of importation restrictions can harm the restricted nation and create an extreme imbalance. Either trade has to come to a complete stop with the restricting nation, or retaliatory tariffs must be put in place to prevent war from starting between the two nations.”

      However, the removal of protectionist and retaliatory measures can cause great harm if the measures are removed too quickly: “Humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection.

      Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home market, as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence. The disorder which this would occasion might no doubt be very considerable.”

      Of these cases, retaliation is the most appropriate justification for restricting free trade: “The case in which it may sometimes be a matter of deliberation how far it is proper to continue the free importation of certain reign goods, is, when some foreign nation restrains by high duties or prohibitions the importation of some of our manufactures into their country.”

      my own personal opinion is its to late to stop a war, free trade seems to always melt down into massive instability, where the world is in chaos, poverty deep into debt, so a few parasites have all the gains.

      the dim wits in washington just figured it out what they did, their answer will not be what the founders, smith, lincoln or keynes advised, they are to busy blaming us deplorable, so it will end up in war.

  10. michael hudson

    The implication (Galbraith’s Pont #3) is that the U.S. is a failed economy, and hence a failed state. Only emulating a socialist policy can make it competitive.
    But it won’t do this. It won’t “socialize medicine” to reduce its 18% share of GDP because retaining corporate responsibility for private health insurance is the key to the “traumatized worker syndrome,” by which workers are afraid to go on strike or even complain about their job, out of fear of losing their health insurance. Labor unions have lowered their wage demands in exchange for better health insurance.
    The list goes on. Thatcherism and Reaganomics turn out to let “the magic of the marketplace” make the U.S. uncompetitive in world trade.

    1. Pelham

      Yep. Including my wife and myself, I believe I can count at least a dozen people we’ve known among very small circles of friends over the years who have expressed misgivings about losing or even interrupting health insurance due to downsizings or contemplated job and career switches.

  11. weimer

    Undoubtedly, this topic is enormous; JKG’s article is almost like a teaser – so much food for thought! It could take days fully to unpack the observations, and add to them.
    So, just a couple of points: as Yves alludes to, one of the major problems has been the evisceration of skilled labor. When (greedy and short-sighted, what else) US capitalists off-shored manufacturing capacity (and not just to China; perhaps we all remember the “giant sucking sound” headed south, colorfully described by a certain presidential candidate) for a short-term profit, what they also off-shored were the skills necessary to run production lines and everything else related to efficient and innovative manufacturing. In the last 30 years, this has only gone downhill. Reversing the course – if there were will to begin with (which I do not see) – would take more than a generation. Trying to on-shore (or is it – reshore?) this lost capacity, without adequate and knowledgeable labor force seems futile. (And yes, this includes the R&D, and all that goes with it.)

    The other point – unsaid above – is that the off-shoring represents a certain element of capitalism’s “dead end,” perhaps inevitable. Because a capitalist will always look for ways to increase profit, at some point, venturing outside the borders of his/her nation state is a given. But at the moment the capitalist’s profits become less dependent on one country, she has less and less incentive to care about what happens in that particular country.

    In short, a trans-national capitalist’s interests are rarely in sync with the interests of one nation state. Capitalists need a nation state structure only to the extent that they use it to defend and prop up their interests in the international arena. Other than that, they don’t care what happens inside the state (well, at least until the pitchforks appear on the horizon).

    Writing up strategies on how to fix all this is nice, even wise, but how is the US going to make “the owners” come home?

  12. Sound of the Suburbs

    What could possibly go wrong for China?
    They are using neoclassical economics and making all the usual mistakes.

    Neoclassical economics is the economics of the Roaring Twenties, the Wall Street Crash and the Great Depression.
    Sooner or later policymakers use the economic growth model of the Roaring Twenties, which leads to a financial crisis.
    If you don’t save the banks you will then get a Great Depression.

    At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
    No one realises the problems that are building up in the economy as they use an economics that doesn’t look at debt, neoclassical economics.
    As you head towards the financial crisis, the economy booms due to the money creation of unproductive bank lending, as it did in the 1920s in the US.
    The financial crisis appears to come out of a clear blue sky when you use an economics that doesn’t consider debt, like neoclassical economics, as it did in 1929.
    1929 – US
    1991 – Japan
    2008 – US, UK and Euro-zone
    The PBoC saw the Chinese financial crisis coming and you can too by looking at the chart above.
    The Chinese were lucky; it was very late in the day.
    The Chinese had done the same thing as everyone else, but worked out what the problem was before the financial crisis.

    The Chinese have reached the end of the line with the debt fuelled, “Roaring Twenties” growth model.
    They need to find out how an economy really works.

    1. Sound of the Suburbs

      How does China lose its competitive advantage?
      They are using neoclassical economics and making all the usual mistakes.

      Davos 2019 – The Chinese have now realised high housing costs eat into consumer spending and they wanted to increase internal consumption.
      They let real estate rip and have now realised why that wasn’t a good idea.

      The equation makes it so easy.
      Disposable income = wages – (taxes + the cost of living)
      The cost of living term goes up with increased housing costs.
      The disposable income term goes down.
      They didn’t have the equation, they used neoclassical economics.
      The Chinese had to learn the hard way and it took years, but they got there in the end.

      They have let the cost of living rise and they want to increase internal consumption.
      Disposable income = wages – (taxes + the cost of living)
      It’s a double whammy on wages.
      China isn’t as competitive as it used to be.
      China has become more expensive and developed Eastern economies are off-shoring to places like Vietnam, Bangladesh and the Philippines.

  13. Jake Dickens

    There is a devastating analysis of the effects of US outsourcing which I may have found here in Jan or Feb 21. It is a powerful read, a transcript of a presentation at the European Microwave Week, held in 2021. It is about making a toaster, not microwaves. The presenter shows how the apparent simplicity of making a toaster requires layers and layers of skills that we have lost by outsourcing. It explains why we no longer have the people and ability to design and manufacture an incredibly simple device.


    1. drumlin woodchuckles

      It would take decades of militant belligerent rigid protectionism to create for America the time and space to be able to regrow these skills and the skill-bearing people.

      It would take a very bloody civil war with perhaps up to millions of casualities to exterminate the free trade supporters down to the point where they can no longer pollute American policy and pollute American culture.

      Since that won’t happen, restoring any skills or even keeping the few skills we still have won’t happen either.

      Individuals will just have to work out their own personal survival amid the wreckage of a Collapsed Fall-Of-The-USSR-type post-America. They will have to work out their own personal survival within the Former America Space . . . . our future analog of the Former Soviet Space.

  14. Senator-Elect

    This is such a great article, and good comments too. However, it remains possible for any country with its own currency, substantial natural resources and top-level knowledge to develop any industry it wants to. Yes, it will take time, but governments should be planning 100 years in advance anyway.

    Still, let’s assume Galbraith is right. Does that mean we are stuck with ridiculous global trade flows that make no sense from an environmental perspective? For example, minerals extracted in Africa get sent to China for processing and the resulting products get assembled into final products in half a dozen other countries before being shipped to the US or Europe for sale to consumers. And the only reason this doesn’t happen in a single country (or at least a continent) is nominal labour costs (and other problems with the capitalist pricing mechanism), China’s industrial policies and trade agreements.

    In other words, while the ideal division of labour may require one global market, the finite resources of the earth cannot sustain such a thing, so we must accept less than ideal “efficiency” or per-unit cost or economies of scale or whatever you want to call it. In the end, whether an iPhone or EV is made by a highly paid worker in a small factory in the US, using US natural resources, or by a low-paid worker in a massive plant in Shenzen, using minerals from across the globe, it will still take the same amount of the worker’s time and the same amount of those finite resources, dollar “cost” be damned.

    I’m probably missing something important here, so I hope someone will enlighten me. Otherwise, I think human civilization may need some reordering.

  15. Carolinian

    Just now getting around to this great article. Given the facts presented the Trump and now Biden hostility toward China is hard to understand. Trump at least had the excuse of using offshoring as campaign red meat. Whereas with Blinken et al it just seems to be about promoting the MIC by supplying a new enemy. Those of us in flyover are perfectly aware that practically everything we buy is made in China these days and that isn’t likely to change. Nor did Trump change it.

    Is the current China bashing perhaps the most extreme example of the DC bubble? It’s all very puzzling.

  16. The Rev Kev

    At this point, I can’t see the US reversing course as it would essentially mean turning back the economic clock a coupla decades. Would it benefit average Americans to bring home essential manufacturing and upskilling people? Of course it would but we all know that it will not happen. It would disturb the status quo for the elite and their enablers, even if that status quo works for nobody else. Without even thinking about it too, I could list ten reforms that would really help out America such as making illegal stock buybacks again but again the elite will now allow that. They make too much money from it. So what is to be done?

    At the moment, the US is trying to build up the narrative of the world being divided up into ‘democracies’ and ‘autocracies’. And a lot of American manufacturing is being done in allied countries like Japan as has been pointed out in comments here. So this may be the answer that the elite has come up with. There will be no renaissance of American industry as all manufacturing will be shifted from so-called ‘autocratic’ countries (like China) to the ‘democratic’ countries under American control/influence. And that is essentially it. Those areas that the Biden report concentrates on – semiconductors, high-capacity batteries, critical minerals, and pharmaceuticals – are probably listed as those are the areas that America is most vulnerable to China in.

    But it does not mean that they will be re-homed in the US. Critical minerals for example will most probably come from countries friendly to Washington going forward. So rare earths for example may just come from countries like Australia instead of China. In other words, Washington is merely going to double down.

  17. Lambert Strether

    > United States has an overwhelming interest in peace

    In politics, at least, I’ve been betting on the stupidest possible outcome with some success. So….

  18. Jeremy Grimm

    The title of the Biden administration’s report uses the phrase “resilient supply chains”. There also the phrases “revitalizing American manufacturing” and “fostering … growth”. I belief these goals bear little relation to each other. I think the last of these goals can be dismissed as political window dressing. The first goal, resilience, should immediately condemn single source supply chains with multiple single points of failure, large distances between supply nodes, and limited inventories nodes … no matter where or by whom the production is done. I believe resilience also implies actions to eliminate monopoly and monopsony consolidations in the supply chain.

    The goal of “revitalizing American manufacturing” seems quixotic in light of the multi-decade American war efforts dedicated to the total destruction of American manufacturing capability. Before attempting to rebuild, perhaps the Government might do something to stop that destruction. Congress could pass some fitting laws and the Department of Justice could enforce them along with the many existing laws that have gone unenforced and when exercised at tort, actively gutted by the US Courts whenever possible.

    This post suggests one source of China’s ‘play’ in this bundle of issues is the Chinese market — “in a vast country able to take advantage of a scale of production and internal market impossible anywhere else”. That used to be the American advantage. A billion people with no purchasing power is not a vast consumer market, just as 320 million people with vanishing purchase power is not much of a market — compared to what it was.

    I do not agree with two of Galbraith’s three conclusions. The Chinese advantages do indeed result from a rational and pragmatic program of economic development — which of course contrasts most unflatteringly with American economic policies during the same era as China’s rise. The second conclusion — that US-China interdependence cannot be reversed is less tenable. That conclusion only holds if we — quite reasonably — assume There Is No Alternative to the current ways of business and economics. China broke the ‘rules’ to hamstring us in our own Neoliberal stupidity. The third conclusion — that the “global economy cannot be undone” — is highly problematic. All nations will need to trade with other nations, but all nations do not need to trade with other nations under the current trade arrangements. Those trade agreements are not written in stone, and neither is the current global economy. To my way of thinking, the conclusion that the global economy cannot be undone is wishful. I believe Climate Chaos is already working to undo the global economy.

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