Lull Before the (Next Trade) Storm?

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In February, we saw the latest in a 4-year string of executive orders and investigations, starting with the Trump administration, focused on global supply chains in the context of U.S. national security. This one, however, is the largest in terms of scope. Reviewing the outcomes and recommendations from the previous orders may provide some insight into what we could expect. Supply Chain Resiliency Review On February 24, 2021 the Biden administration issued an executive order commencing a resiliency review of four supply chains by different department secretaries. It should not be lost that these individuals have “priority and allocation authority” according to the Defense Production Act for each supply chain they’ve been assigned. Supply Chain to be Reviewed and Assigned Secretary: Semiconductor manufacturing and advanced packaging: Secretary of Commerce High-capacity batteries (including electric-vehicle batteries): Secretary of Energy Critical minerals and other identified strategic materials: Secretary of Defense (as the National Defense Stockpile Manager) Pharmaceutical and active pharmaceutical ingredients: Secretary of Health and Human Services The order asks for each secretary to provide a report that includes recommendations around (note: not the full list): Actions that can successfully engage allies and partners to strengthen supply chains jointly or in coordination Reforms to domestic and international trade rules and agreements needed to support supply chain resilience, security, diversity, and strength Education and workforce reforms needed to strengthen the domestic industrial base Steps to support small businesses, prevent monopolization, consider climate and environmental impact, encourage economic growth in communities of color and economically distressed areas Federal incentives to attract and retain investments in critical goods and materials Determine whether to commence a supply chain review every 4 years, gather ongoing data, and perform supply chain monitoring Previous Orders and Investigations (from 2017-2020) On July 21, 2017, the Trump administration issued an executive order to assess and strengthen the manufacturing base and supply chain resiliency related to the defense industrial base. The problem was defined as “modern supply chains are often long and the ability of the United States to manufacture or obtain goods critical to national security could be hampered by an inability to obtain various essential components, which themselves may not be directly related to national security.” In April 2017, investigations were ordered into whether steel and aluminum imports threaten U.S. national security. That was followed by a December 2017 order to study the dependency of the United States on foreign sources of critical minerals. The final order from the Trump administration was issued on September 30, 2020 to address the “threat to the domestic supply chain from reliance on critical minerals from foreign adversaries.” Published Findings These executive orders resulted in a series of reports. The most extensive was published in September 2018 in response to reviewing the defense industrial base. It identified five macro forces that led to ten supply chain “risk archetypes” (see figure) and concluded one of the main causes of these archetypes has been China’s aggressive trade policies. In response to the review of critical minerals, a report was published listing 35 critical to U.S. national security and highlighted a significant reliance on foreign countries. One of the main conclusions was that the U.S. has the heaviest reliance on China. Reading the tea leaves, it is not a stretch to believe the report findings for each of the supply chain reviews commenced by the Biden administration will be substantially the same. Recommendations from these past orders included expanding investment and modernizing the industrial base, diversifying away from complete dependency on sources of supply in politically unstable countries, and accelerating workforce development efforts to grow domestic STEM and critical trade skills…the action taken: the levying of tariffs. Goal of the Biden Order? These orders and reports are often used to support and justify the goals of the administration. During his campaign, Biden explicitly called out the need to “buy American” and “win the competition for the future against China.” The most recent executive order expresses many of his campaign goals including revitalizing and rebuilding domestic manufacturing capacity, maintaining America’s competitive edge in research and development, and creating well-paying jobs. Additional goals include the support of small businesses, promoting prosperity, advancing the fight against climate change, and encouraging economic growth in communities of color and economically distressed areas. During his campaign, Biden pointed to possible tools to drive the change. He proposed increasing the federal R&D investment while strengthening existing federal rights to ensure that the U.S. government captures a share of the royalties from products developed with that funding. To penalize offshoring and incentivize reshoring, the Biden campaign proposed an offshoring tax penalty of 30.8% on profits coming from the sale of goods and services produced offshore and sold back to the United States for U.S. companies. As an incentive to bring manufacturing back to the U.S., companies would receive a 10% tax credit if they revitalize existing facilities that are closed or closing, retool to advance manufacturing, reshore job-creating production to the U.S., expand or broaden U.S. facilities to grow employment or expand manufacturing payroll. Finally, Biden proposed a pro-American-worker tax and trade strategy that takes “aggressive trade enforcement actions against China or any other country seeking to undercut American manufacturing through unfair practices.” If these reports come back as expected with the conclusion that U.S. national security is threatened due to an over dependence on China, my feeling is we could be looking at some version of a new trade war. Michael Uskert Chief of Research Gartner Supply Chain [email protected]
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