Report Suggests COVID-19 Could Lead to Diversification of U.S. Supply Chains Away from Mainland China

The United States’ dependence on critical manufacturing and global value chains that rely on production based in mainland China could prompt Congress to consider actions that lead to greater burdens on U.S. companies. A recent report from the Congressional Research Service states that while the on-going COVID-19 pandemic is highlighting these challenges with respect to medical supplies and pharmaceuticals, they could also occur with respect to other industries in the future.

Because of mainland China’s role as a global supplier of personal protective equipment, medical devices, antibiotics and active pharmaceutical ingredients, the report states, reduced exports of these goods from mainland China have led to shortages in the United States, which has limited domestic stockpiles and insufficient domestic industrial capacity. This reduction in exports is attributable to several factors. One is that the mainland Chinese central government commandeered medical manufacturing and logistics down to the factory level and directed all medical-related production, including U.S. companies’ production lines in mainland China, for domestic use. Another is that mainland Chinese firms and logistics operations struggled to return to full capacity as the pandemic widened due to government policies and restrictions.

This experience could be repeated in other sectors and industries, the report suggests. “COVID-19 provides a direct learning experience – potentially more compelling than any war game or natural disaster simulation – about the direct effects and costs of a serious disruption or cutoff of critical supplies from China to the United States,” the report states. For example, Beijing could elect to nationalise production and distribution, or restrict exports, of other goods for health or other reasons, which could deny access to critical supplies to the United States and other countries that depend on open and free markets for their supply chains. In such a case, the United States could face shortages of products typically imported from mainland China such as raw materials, intermediate industrial inputs and consumer products.

To protect against such a situation, as well as to respond to the on-going pandemic, the report identifies several options for congressional action. However, these options would likely increase cost and other burdens on U.S. companies and could affect sectors beyond medical supplies.

For example, Congress may consider the potential longer-term advantages and disadvantages of diversifying U.S. supply and incentivising production of health supplies in the United States, possibly in collaboration with other countries. Similarly, U.S. firms with operations in mainland China or that depend on production in the mainland may be prompted to diversify away from mainland China and begin establishing new supply chains.

In addition, the report states, Congress could consider whether to request that the president invoke his authority over the U.S. government’s collection of data on corporate activity abroad for statistical and analytic purposes. These corporate surveys could obtain specific supply chain information about the status of PPE and medical supply production, distribution and export policy facing U.S. companies overseas, including in mainland China.

Importantly, the report notes that such surveys could also cover other sectors of potential congressional concern, not just those associated with the COVID-19 pandemic. This information could inform legislation that Congress has already passed or is considering with regard to overseas supply chains, including sourcing from mainland China.

Congress may also want to consider additional policy measures to defend against the potential for mainland China to overwhelm global markets as it leans on exports for economic recovery, the report states. Rather than waiting until market injury has occurred to seek damages, for example, Congress may want to be watching trade patterns for signs of import surges and oversee the administration’s potential use of safeguard measures. Similarly, the report states, a broader liberalisation of U.S. tariffs on mainland Chinese goods could further expose the U.S. economy to mainland Chinese excess industrial capacity at a point of economic downturn.

The report also cautions against a liberalisation of U.S. import requirements (e.g., relaxing product certification requirements), noting that such measures in the past “created some of the challenges the United States is facing now, such as loosening requirements for U.S. pharmaceutical firms to report on shortages and how they classify imported content for finished products that qualify as U.S. products.”