US Can Fix Supply Chain Vulnerabilities Without an Industrial Policy
Supply chain bottlenecks seem to be everywhere. Restaurants, auto manufacturers, and home-builders cannot get the supplies to meet the consumer demand that is surging back in the aftermath of the pandemic lockdowns. The unusual economy-wide pervasiveness of the shortages is prompting economic and security concerns about the reliability and resiliency of international trade channels and about whether these significant challenges are systemic and long-lasting.
Failure to respond to these challenges now could have serious consequences. Yet, the U.S. can manage the supply chain risks and benefit from the stability and the prosperity of well-functioning global supply chains of goods and services, without having to turn to the inefficiencies and pitfalls of an “industrial policy.” This will require that private producers review the resilience of their own supply chains, enhance their backup supplier strategy, consider appropriate stockpiles based on both cost efficiencies and elasticity of alternative supplies, and work with public authorities in genuine cases of national security or public health vulnerability.
China is currently at the nexus of these concerns about supply chain resilience, given the size of its economy, its extensive role in global supply chains, its growing military strength, its use of state subsidized production, and the growing tensions in its bilateral U.S. relationship. These concerns are compounded by the superficially appealing argument that we could bring most manufacturing jobs home, eliminate supply-chain risk, and be much more self-sufficient. Widespread, reoccurring supply chain failures, and China’s outsized role in the global supply chain, pose risks to national security, to the stability and growth of the U.S. and global economy, as well as to overall public health.
Consequently, security with prosperity must be the goal in managing risk in our supply chains. Business decisionmakers and public policymakers need to analyze each unique global supply chain risk, especially threats to national security or public health, and choose policy tools that maintain practical supply-chain cost savings, at the minimum economic and security risk. Five main ways to do this include:
First, the U.S. and its firms must cultivate additional sources of materials or components. Relying on a single source or a single geographic region for any essential input entails risk. Businesses must assess the security of their supply chains, and seek alternative domestic sources. Meanwhile, the United States must recruit allies that share our values to hedge against adversary suppliers with nonmarket economies.
Second, public stockpiles may be necessary to prepare for supply interruptions that affect national security or public health. Private inventories must be adequate, whatever the commitment to “just-in-time delivery.” Importantly, the nation can safely import stockpiled goods; there is no need for items purchased in times of safety to be made here, especially if foreign goods are of high quality and low cost.
Third, we must increase private and public research and development (R&D) so that innovations from research can identify substitutes for critical goods now procured through global supply chains. In addition, given the critical nature of “talent” in global competition, including in the service sectors, there needs to be an increased U.S. public policy focus on STEM education so that the U.S. remains competitive.
Fourth, the nation may need to invest in critical production. Manufacturing capacity for goods that truly support national security or public health and that cannot be stockpiled may need to be maintained even if unprofitable. Such a decision must cross a high bar, which must not be lowered by rent-seeking by powerful private interests.
Lastly, in instances of extreme risk, the U.S. may need to maintain standby production facilities. A potential catastrophic national security or public health event might justify public funds to build and maintain standby production capacity.
Global supply chains are a part of global trade, which has been growing throughout the post-World War II years and has contributed substantially to U.S. and global economic growth. If the U.S. does not take advantage of low-cost inputs from abroad, our products will lose competitiveness in world markets. And, if other nations pull back from trading with us when we pull back from them, it will cost U.S. jobs and incomes.
The U.S. need not sacrifice the efficiencies and higher incomes from successful global supply chains through an “industrial policy” that would waste scarce resources pursuing low-value jobs even in safe times. Risk management requires planning that can avoid many possible supply-chain failures if business leaders and policymakers cooperate with market-based allied nations. Private producers should strengthen their own supply chains, and work with public authorities to eliminate national security or public health vulnerabilities, so that we can enjoy the prosperity of well-functioning global supply chains as well as economic stability.
Lori Esposito Murray is the President of the Committee for Economic Development of The Conference Board (CED). Vicki Poponi is Former Vice President of Digital Customer Journey at American Honda Motor Co. Hollis Hart is Former President, International Franchise Management, Citi. Poponi and Hart are CED Trustees and Co-Chair the Trade & Economic Globilization Committee.
