Why Is Biden Investigating America’s Supply Chains?

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March 7, 2021 Topic: Economics Region: Americas Blog Brand: The Buzz Tags: Supply ChinaGreat Power CompetitionCoronavirusChinaAmerica

Why Is Biden Investigating America’s Supply Chains?

The Administration’s political response to worries over the U.S. supply chain raises some important problems.

In late February, President Joe Biden—motivated perhaps by difficulties obtaining protective medical gowns and masks during a pandemic and a recent semiconductor shortage that disrupted American auto production—signed an executive order calling for an across-government, 100-day review of supply-chain performance for a number of critical items and sectors.

Is President Biden’s order merely about broken links in supply chains from the past year? “Reshoring” production now concentrated in China and Russia? Or, is it also about accomplishing the bigger goals mentioned in the document, even dealing with global climate change? In any case, it sets in motion a host of federal agencies that can each be a supplier of regulation. Will we look back and see a prelude to a regulatory surge?

When the order was signed, somewhere in the background were “rent seekers” who would love to have the White House use its dictatorial powers to shift some valuable resources in their direction or skew the regulatory chess board away from their competitors. The Defense Production Act gives the president just that authority, meaning demanders of regulation will be interacting with the suppliers as the process unfolds.

Biden is not the first president to seek to do something about supply chains. It’s a perennial problem. In a trade-enriched world of global markets and extreme specialization, any faction hoping for a more self-sufficient nation—or which essentially prioritizes existing jobs and wages over newer jobs and lower prices—will always be engaged in a political struggle. This is part of the reason why tales of the pending doom wrought by unencumbered world trade are ever present.

After all, specialization means Americans will always need some critical product that is produced somewhere else. The same goes for U.S. trading partners. The struggle to upend a robust trading system—where everyone can each focus on what they do best and use the gains to acquire the rest—can end up making things worse, or at least costlier.

The Biden review focuses on semiconductors, pharmaceuticals, electric vehicle batteries and critical minerals used in manufacturing products such as cars and weapons. And if that is not enough to keep government senior executives busy, the major industrial sectors to be examined are defense, public health and biological preparedness, information and communications technology, energy, transportation, and supply chains for agricultural commodities and food production. One would be justified in wondering what else is left.

Yet there is still more. Reaching gargantuan proportions, the review “will identify opportunities to implement policies to secure supply chains that grow the American economy, increase wages, benefit small businesses and historically disadvantaged communities, strengthen pandemic and bio-preparedness, support the fight against global climate change, and maintain America’s technological leadership in key sectors.”

If this job is done in just 100 days, America will arrive in a supply-chain wonderland. But America will also be forced to carry some excess regulatory baggage once Washington gets there. This, at least, is what past experience teaches.

In the late 1970s, oil embargoes created a severe U.S. crude oil supply-chain problem. Regulating vehicle fuel economy standards and appliance energy efficiency, rationing gasoline, and searching for alternate forms of energy, the federal government decided to squirrel away enough oil to counter another interruption. Pumped from the earth in one location and back in another, there are now 637 million barrels stored in Louisiana salt mines—enough to supply our consumption for a month.

Along the way, America became itself the world’s leading crude oil producer. It turned out to be an insurance policy that did not have to be redeemed. Who knows? In a world longing for renewable energy, the reserve may sit there forever.

In the early 1980s, the U.S. supply chain problem had to do with strategic minerals and rare earth elements that came from other countries. America now have a federal stockpile of thirty-seven strategic minerals valued at more than $1 billion.

Later in the 1980s, “Japan, Incorporated” (as it was then called) was the supply-chain challenge. Its Ministry of International Trade and Industry (MITI) seemed to be outsmarting the rest of the industrialized world. They were picking winners and directing large amounts of investment into gigantic factories that, as first movers, would underprice global competitors and gain monopoly power. At least, that was the evening news version: America was thought to be in a losing race.

To fix things, federal coordination was summoned. America, the world leader in chip design, was determined not fail. In 1982, an Assistant Secretary of Commerce for Productivity, Technology & Innovation was named to lead the effort.

Later, Americans would learn that the Japanese weren’t invincible after all. Instead of just picking winners—MITI notably turned away the burgeoning Japanese auto industry as not worthy of support—they ended up with some losers.

America motored on, but not without spending big bucks on Sematech, a government-sponsored non-profit R&D consortium of fourteen semiconductor producers subsidized for five years by the Department of Defense. As some industry insiders see it, the overall effort was successful, but it led U.S. firms to focus their design here and locate their high-volume production elsewhere, especially in Asian countries. It turns out it was cheaper that way—but that clearly was not the intended outcome!

No, the Biden administration’s recognition that the United States has supply chain problems is not in any way novel. In fact, it’s business as usual inside the beltway. As reported by the Congressional Research Service in June 2019, “President Trump and various U.S. lawmakers have expressed concerns about U.S. reliance on critical mineral imports and potential disruption of supply chains that use critical minerals for various end uses, including defense and electronics applications.” Like President Biden, Donald Trump was specifically worried about China’s strategic behavior.

So in the end, what are Americans to make of the proverbial White House trumpet blasts announcing that America, once again, faces a supply-chain crisis that only an empowered federal government can solve? Is this just another chapter in a decades-long politician’s handbook about the ongoing need to control industrial policy?

Or could this be a new handbook that shows how alleged supply chain crises can be used to pursue much-broader goals—raising wages, bringing pandemic relief, reversing climate change and strengthening disadvantaged communities—while simultaneously warming up the regulatory engine and satisfying rent-seekers’ demand for special-interest regulation?

This is not just about supply chains. Be on the lookout for a regulatory boom.

Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, dean emeritus of the Clemson College of Business and Behavioral Sciences, and a former executive director with the Federal Trade Commission.

Image: Reuters.