August 2022 Article – Strategic Industries
I have written in the past about the need for the U.S. to declare certain industries as vital to the national security and support them at the federal level. During the COVID-19 pandemic, we have experienced how vulnerable the U.S. is to shortages of PPE products such as facemasks, gloves, and various medical items that were for the most part being manufactured in foreign locations. The production of these critical products has migrated to countries in Asia, much of it to China, a country not exactly friendly with the U.S. In 2020, the U.S. was scrambling to provide critical products to its healthcare industry and population as the pandemic raged in China, and the country coped by shuttering businesses and making workers stay home. To this day, supply chains continue to be disrupted, as COVID crackdowns continue in that country.
Now, another factor in China further threatens to extend supply chain woes. As with many other parts of the world, China is experiencing a severe heat wave, the worst in 60 years. This heat wave is causing drought, particularly in the industrial region of Sichuan, which boasts more than 80 million residents and a slew of worldwide electronics and automotive manufacturers. The production base of Sichuan relies on hydroelectric power for more than 80 percent of its needs. The drought has caused dam levels to drop in this region, thereby resulting in less water being able to flow through powerplants.
In response, the Chinese government has ordered the closure of many factories in order to help reduce power consumption. This promises to further exacerbate supply chain issues throughout the world, as companies such as Toyota, Apple, and Foxconn have a strong presence in the region and will be affected by shutdowns.
What is occurring in Sichuan is but another reason why the U.S. must focus on supporting strategic industries at home in order to protect ourselves from events we cannot control in other parts of the world. As with the course taken by many industries, the U.S. must opt for supply chain security, and not so much for supply chain efficiency and cost in terms of strategic industries.
One prudent move that was recently undertaken by Congress and the Biden Administration is the new CHIPS and Science Act. This legislation appropriates more than $250 billion of investment to secure and expand the semiconductor business on a national basis. The pandemic and supply chain issues have caused disruptions in the automotive and consumer electronic industries, especially for countries dependent on computer chips being manufactured in Asia.
When I was in college, Intel was the undisputed chip manufacturer, and it seemed as if it would always be. However, firms in Asia have caught up during the last 30 years. Today, Taiwan Semiconductor Manufacturing Company (TSMC) is the biggest chip maker in the world. While Taiwan is considered a strategic partner to the U.S., both politically and economically, threats by China to invade Taiwan should send chills down our spines. China is already a major chip manufacturer, and the prospect of a hostile power taking over a country that boasts the largest chip maker in the world should greatly concern the U.S.
The CHIPS and Science Act will not cause semiconductor production and research to reappear overnight. This industry is extremely expensive and can take years to develop. However, it is a sound long-term strategy that the U.S. should have undertaken a long time ago. We seem to have fallen into a trap during the past few decades of not considering the consequences of allowing strategic industries to be gobbled up by other countries. During this period of time, industries such as bio-pharmaceutical, rare minerals, and computer manufacturing have migrated to what were low-cost countries that take U.S. technology and sell finished products back to us.
It has been a natural economic evolution for developed countries such as the U.S. to focus more on information industries, and let countries with cheaper labor build what are considered commodities-type goods and sell them back to us. This will continue in the future. However, we must not be lulled into a lackadaisical attitude that the status quo will continue to provide Americans. The world can change in an instant, as has been witnessed by the chaos caused by Russia’s invasion of Ukraine. European countries are experiencing a hard wake-up call as their dependence on Russian fuels reveals their vulnerability.
It will take time to reestablish strategic industries back in the U.S., and in our two North American partners, Mexico and Canada. The U.S.-Mexico-Canada Agreement can provide a vehicle for the three partners to secure our economic future and to hedge against future unknowns, such as environmental crises or war in foreign countries. Some people may complain that U.S. consumers will be paying more in the long run, due to higher production costs. However, as Americans, we need to address the following question: We may be paying a little more for products, but what is the cost of freedom and security?