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The Pundit’s Dilemma

Tue, 22 Apr 2025 15:34:44 +0000

Trumpism will deindustrialize America. That’s a hard pill for some thinkers to swallow.

“There are no American troops in Baghdad!” — Mohammed Saeed al-Sahhaf

Around the middle of 2022, it became apparent that the Biden administration was going to go all-in on industrial policy. The policies that Biden implemented — the CHIPS Act, and the green energy subsidies in the Inflation Reduction Act — had already been in the works for quite a while. But so had a bunch of other Democratic policy ideas that didn’t end up making it into law. So it wasn’t until 2022 that we realized that industrial policy was going to be Biden’s Big Thing.

I was personally overjoyed about this trend. For years, I had worried that America’s eroding manufacturing base made it less capable of standing up to China and other authoritarian adversaries. I was also optimistic that a big push for green energy could accelerate decarbonization both at home and abroad. And for years, I had been deeply interested in the successful industrial policies of East Asian countries like Korea and Japan during their catch-up development phases. I was eager to see America try its hand at something similar, in order to revive its stagnant industrial base.

At the same time, I didn’t agree with everything the administration was trying to do. I realized that if the U.S. did experience a manufacturing revival, it would be by leveraging our strengths in automation and technology — in other words, even in the best-case scenario, the era of good plentiful blue-collar manufacturing jobs wasn’t going to come back. Some people in the Biden administration didn’t seem to understand that, and appeared to view industrial policy as a jobs program.

I also disagreed with some of the ways that the Biden administration tried to implement industrial policy. The “buy American” provisions were unnecessary and unhelpful (local demand will foster a network of domestic suppliers anyway). The “everything bagel” requirements for subsidies were too onerous, particularly the union labor requirements in states with very few union workers.

As one of the more prominent commentators writing about these policies, I had a choice to make. I had to decide whether to emphasize my criticisms of Biden’s approach, or my overall positivity about the idea. Then, as the years went by and we started to see some of the results of Biden’s policies, the choice became even more acute, because some of the policies succeeded and some of them failed.

The administration’s core industrial policies seemed to be bearing fruit; there was a massive factory construction boom, most of it financed with private money (the subsidies acting mainly as a nudge). The TSMC plant in Arizona got back on track after some initial hitches. But at the same time, Biden’s administration failed to build any EV chargers or rural broadband, and new transmission lines were stymied by regulatory hurdles. It seemed like the more the government was directly involved with a project, the less likely it was to ever happen; nudging the private sector worked, but direct government action turned into wasteful jobs programs that built nothing.

I had to make a decision: How vehemently and how frequently should I lambast the Biden administration’s failures, and how vehemently and how frequently should I praise its successes? If I leaned too hard toward praise, I might look like an apparatchik who just parroted administration talking points. And even worse, I might fail to perform one of my core functions as an independent commentator — criticizing policy to help steer it in the right direction. But on the other hand, if I leaned too much toward criticism, the people in the administration might decide that I was their political opponent, and stop listening to me entirely. And I might also throw the baby out with the bathwater by ignoring the real successes.

To be honest, I didn’t actually think very hard about any of these tradeoffs at the time. But perhaps subconsciously, I was making these sort of calculations. In any case, I think I ended up striking a pretty good balance between criticism and praise.

Conservative industrialists, however, are facing a much harder dilemma right now. Biden’s industrial policy was a mixed bag, with more successes than failures. But Trump’s tariff policy is a giant flaming disaster. The dollar is down, as investors flee American bonds, putting the country’s whole financial stability in danger. Forecasts for the real economy are getting more pessimistic by the day. Stocks are down yet again. Here’s a representative headline:

Dow Headed for Worst April Since 1932 as Investors Send ‘No Confidence’ Signal

Any time you hear the words “worst since 1932” in connection with the American economy, you know things are not going well.

Given this disaster, commentators who support Trump have a hard choice to make. Do they denounce Trump’s policies, thus condemning themselves to certain excommunication from the MAGA movement, and dropping their influence to basically zero without altering Trump’s course in any perceptible way? Or do they scramble to find some way to put lipstick on the tariff pig?

The latter course of action will preserve their influence within MAGA-land, but will also make them look ridiculous to the rest of the country, who has no such ideological commitments to uphold. And in the process, the commentators will become an accomplice to this act of economic self-mutilation.

Oren Cass, the chief economist at American Compass and a prominent advocate of industrial policy from the right, has chosen the second path. He is continuing to fiercely defend the idea that tariffs are a way to reindustrialize the American economy. In a post on April 4th, shortly after Trump’s “Liberation Day” tariffs, Cass defended the tariffs and made some minor suggestions for how Trump might tweak the policy:

As the economic carnage from the tariffs became more apparent, Cass continued to double down. In a debate with Jason Furman and others a week later, Cass argued that trade had devastated American manufacturing in the 2000s. A few days after that, he argued that many Americans will enjoy working in factories:

“[I]f fully 25% of poll respondents say they’d prefer a factory job to their current job, that suggests massive potential unmet by the current labor market…One in four?! That would be 40 million of 160 million employed Americans!…When we talk about reindustrializing America, we are talking about adding millions of manufacturing jobs, not tens of millions—several percentage points of the labor force, not a quarter or more…[P]lease, let’s stop with the “nobody wants to work in a factory,” and even more so the “I don’t see you working in factory.”

And a few days after that, Cass argued that Trump’s tariff strategy is primed to succeed, because meeting American domestic demand is more important than exporting:

“Our $1 trillion trade deficit presents an enormous opportunity. Most economic analysis of the American position in the global economy seems to assume that export markets represent the key opportunity for U.S. industry and thus success depends upon winning in those markets. From that perspective, for instance, tariffs on the intermediate goods that manufacturers might use in their own production is a disaster. How can a U.S. producer hope to compete with a German producer if the U.S. producer has to pay a tariff on components from China and the German producer does not?

This assumption makes good sense in the typical developing-country situation where the domestic market is small and trade imbalances are likely a minor factor…But the top priority and major opportunity for the United States is not higher exports, it is recovering the capacity to meet domestic demand with domestic supply…Indeed, the U.S. will be building leading-edge semiconductor fabs to meet domestic demand for a long time before it needs to consider export markets at all.”

If you’re going to try and mount an intellectual defense of Trump’s tariff policies — instead of just screaming out memes, pointing fingers, and trying to distract people by talking about immigration instead — this is basically how you have to do it. Nothing good is coming of Trump’s tariffs right now, so if you’re going to defend them, you basically have to argue that they represent short term pain for long term gain. In this case, the long-term “gain” is economic self-sufficiency and a bonanza of factory jobs.

Formally speaking, you can’t prove that this is wrong, except by waiting a bunch of years and then observing that reindustrialization didn’t happen. There are no hard and fast economic laws of the Universe; we have a lot of theories, but economies are complex beasts, and the past is an imperfect guide to the future. I can’t completely rule out the possibility that Trump’s tariffs will cause a vast crop of steel factories and shoe factories and semiconductor factories to spring up from the American topsoil like mushrooms after the rain.

And yet when we look at what’s actually happening to American manufacturing in real time, it doesn’t look anything at all like the beginning of the reindustrialization that Cass imagines. Here’s a quick roundup of news from just the last few days:

Volvo is cutting 800 jobs at three U.S. factories, citing tariff uncertainty.
The Philadelphia Manufacturing Survey is plunging, signaling extreme pessimism among U.S. manufacturers.
Howmet Aerospace, a major aircraft parts manufacturer based in Pittsburgh, has declared that it may halt production due to Trump’s tariffs.
The April NY Manufacturing Survey is recording some of the most negative conditions that it has ever recorded, with new orders and shipments falling off a cliff:
The Philadelphia Fed’s survey of manufacturers is also showing a massive dropoff in new orders.
Falling orders are causing Volvo to lay off hundreds of American workers at two factories.
Plenty of evidence shows that American manufacturers are pulling back on their capital spending plans because of tariffs:

Manufacturing pessimism has spiked dramatically in April as industrial producers deal with changing tariff plans and try to assess how global trade policy will impact their costs and operations in the coming months…Several surveys released this week show huge swings in business confidence between January, when most manufacturers had a positive outlook for near-term conditions…and April, when sentiment changed for the much, much worse…Some of the most dramatic declines came from the Equipment Leasing Finance Foundation (ELFF), an organization that represents lenders that help manufacturers obtain new capital equipment for factories. In March, more than half of manufacturers surveyed by that group expected capital spending to increase or stay about the same in the next four months. By April, more than 61% said they expect spending to fall.

Ford is halting sales of some American-made cars to China. (Note: This will increase America’s trade deficit with China).
GM is laying off American factory workers too.
News of various other factory layoffs is proliferating. Cleveland Cliffs, the steel company, is laying off 1200 workers.

It’s not hard to understand why American manufacturing is getting hit hard by tariffs. As I’ve said in many posts, and as knowledgeable folks are screaming from the rooftops, broad tariffs of the type Trump has imposed raise the price of imported components and makes U.S. manufacturers less competitive. Even manufacturers who initially scoffed at this effect are quickly learning what a big problem it is:

And on top of the effect of the tariffs themselves, uncertainty about future tariffs — which has spiked to record levels under Trump — hurts manufacturing even more, because manufacturers don’t know how to plan their future supply chains.

This is not a difficult principle to understand. And yet somehow, Oren Cass appears not to grasp it. In his post that I quoted above, Cass argues that the “imported components” problem only applies to exports, not to manufacturing for the domestic market. That is obviously wrong. For an American auto factory in Kentucky, the cost of components matters just as much whether you’re selling your cars to customers in Dubai or Dallas. Without the ability to source cheap car parts from Mexico and Canada, American manufacturers will see their costs for domestic manufacturing rise.

This is why you can’t just measure the U.S. trade deficit and assume that this amount will be added to U.S. manufacturing if we wall off our economy (as Cass assumes in his post). The amount of domestic demand for manufactured products is not fixed. More expensive components will mean more expensive manufactured products, which will cause Americans to consume less. Americans will become poorer, and they’ll also substitute their consumption away from goods and toward services (whose price will go up by less).

Cass’ hand-waving dismissal of exports also ignores another crucial factor: scale effects. Export markets help American manufacturers scale up their production, which lowers their costs — and thus helps them sell even more to American consumers, capturing more of the U.S. market as well. Commentators like Sam Hammond, who argue that the U.S. should focus on export promotion instead of import substitution, are correct for this reason.

(On top of all that, it’s not clear how much tariffs even reduce trade deficits. As Arnaud Costinot and Ivan Werning show in a new theory paper, it’s possible that even very high tariffs might leave trade deficits mostly unchanged, while simply making an economy poorer.)

All this is theoretical, of course. Cass and other tariff defenders can simply continue to assume that tariffs will reduce trade deficits by a lot, and that this reduction will translate into a whole bunch of new U.S. factories. Perhaps they assume that the unfolding carnage in the U.S. manufacturing industry is simply a temporary disruption, and that after a short period of suffering, American manufacturers will get back on their feet, invest in domestic production capacity, and eventually do better than ever.

Except if that were true, we’d probably see two things. First, we’d see manufacturing stocks doing well, because far-sighted investors would know if American manufacturers would eventually benefit from tariffs. Instead, the stocks of American manufacturers have been crashing. Also, if tariffs provided a protective shield under which American manufacturers could flourish, we’d probably see a bunch of them rushing to invest and build new capacity. But we don’t; capex in the industry is plummeting.

In other words, neither investors nor manufacturers themselves believes in the long-term reindustrialized future that Oren simply assumes will come about. Instead, it appears that tariffs are dramatically accelerating America’s deindustrialization.

And if that’s true, Cass’ other arguments all go up in smoke. Who cares if people like working factory jobs when there are fewer factory jobs to work in? And so on. Every defense of the tariffs is based on this assumption of reindustrialization; if, as looks very likely, that turns out to be a fantasy, the whole edifice collapses.

Oren Cass and other tariff-defending pundits have thus hitched their wagons to a stagecoach that is driving straight off a cliff. They have managed to remain inside the favored circle of the MAGA movement, but this required them to make a terrible sacrifice — they lost their freedom to look out the window and see the calamity unfolding.

I am glad that during the Biden administration, I didn’t have to make any such choice.

To read the full opinion as it was published on the Noahpinion website, click here.

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US Manufacturing Jobs and Gen Z Workers—Can Common Ground Be Found?

Mon, 21 Apr 2025 20:17:41 +0000

The “made in America” agenda has been leading many of the biggest administrative changes and tariff upfolding right now. As a result, manufacturing jobs are expected to return to the country in the long run, but will Gen Z be willing to take up the work when the time comes? The manufacturing industry is expected to add 3.8 million new jobs to the market by 2033, which will mean a whole variety of trade jobs for Gen Z workers who will soon make up the biggest slice of the workforce.

Boomers will be left to the retirement jobs and positions that best utilize their knowledge and strength while millennials will continue to dominate the corporate world for years to come. As manufacturing jobs begin to present the only opportunities for young workers, some tough choices will have to be made on what is to come.

MANUFACTURING JOBS AND GEN Z: A MATCH MADE IN THE POST-TARIFF ERA

In the last few years, many Gen Zers are shifting away from college education and skipping straight to trade schools and labor work. There are many reasons for the shift. Some Gen Z workers no longer see the value of a college degree as educated workers are often stuck doing jobs that have nothing to do with their intended careers.

College degrees have also been seen as insufficient in actually preparing workers for white collar jobs. These degrees may bless students with textbook-based knowledge, but they haven’t entirely kept up with the times and expanded to provide Gen Zers with the workplace skills they need in a post-pandemic world.

GEN Z WORKERS ARE OPEN TO EXPLORING BLUE-COLLAR JOBS

In the last few years, Gen Z workers have developed a fascination for blue-collar jobs. These jobs have improved the pay and working conditions offered to workers, and in recent years, have also grown to be significantly more flexible. Workers are joining family businesses and starting their own, after embracing the DIY-er spirit and taking matters into their own hands.

Blue-collar work has become popular on social media platforms like TikTok, further inspiring teens to take an interest in building a career in fields like metal work and carpentry. Putting on a neon safety vest and pink rubber boots is now more of a fashion statement than the uncomfortable heels required in the corporate setup, so the shift in approach has been a big one.

Avoiding student loans by skipping college is just another one of the many advantages of switching to blue-collar work. The Gen Z workforce face many issues, but one thing they understand best is working on their own terms and expressing themselves creatively. Many blue-collar jobs offer just that.

WHY IS GEN Z AGAINST MANUFACTURING JOBS?

Research from Deloitte and the Manufacturing Institute shows that 3.8 million manufacturing jobs will flood the market by 2033. While this should be good news, for now, it appears there will be few takers. Fortune brought up another study by Soter Analytics, which showed that only 14% of workers would be willing to take up industrial work. If trade jobs are acceptable to Gen Z than why are manufacturing jobs not seeing the same support?

It has a lot to with the conditions of work at manufacturing plants. While the number of jobs may increase, there is very little indication that pay will increase as well. Manufacturing jobs are not known for providing financial stability, so it is unlikely that anyone will be too thrilled to take them up, Gen Z or not. Most workers in the field of manufacturing take home less than the average American salary of $66,600, despite working under strenuous and hazardous conditions oftentimes.

The Soter Analytics study also suggested that Gen Z workers will refuse manufacturing jobs because they fall short in two areas—flexibility and safety. The popularity of remote work and the rise of gig worker jobs has already told us that flexibility is an essential consideration for most workers, so it is unsurprising that Gen Zers feel the way they do about manufacturing jobs.

WILL THE US MANUFACTURING WORKFORCE BE REPLACED BY AUTOMATION?

If corporate, retail, and trade jobs attract all the Gen Z workers, employers might have no choice but to look at automation as the solution to their worker problems in the future. Even without these early signs that manufacturing jobs might not appeal to Gen Z workers, it is likely that many industrialists are exploring how to build factories that prioritize automation.

The relationship between tariffs and automation is an important one, as organizations are now investigating how they can best prepare for changing times. If bringing in products from the outside becomes too expensive, many will be forced to look into setting up their own manufacturing plants locally.

This is expected to take a few years at least, and will require heavy investments to set up. To future-proof their business against future changes, it is possible that AI and automation will lead the way for their upcoming manufacturing plants, with human labor kept to a minimum. Despite these claims that 3.8 million new jobs will open up in manufacturing, we may not see these numbers in reality.

FINAL THOUGHTS ON THE IMMINENT RISE OF MANUFACTURING JOBS

Close your eyes and point at any industry—the chances are high that a large number of its workers have been laid off there since the start of 2024. In the last few years, particularly in 2025, workers have lost their jobs in droves, having been pushed out into the job market by force and left to fend for themselves. Under such circumstances, the creation of jobs should be good news to workers looking for employment.

For many it is—any work that can put food on the table is better than no work at all. However, the conditions of the work and the benefits they offer also play a role. For years, corporate jobs have remained the target as top organizations offer competitive pay and benefits that vastly improve the quality of life. Many have also spent years building up their expertise in niche areas, hoping to find work that aligns with their interest.

Under these conditions, manufacturing jobs are not appealing to Gen Z, Millennials or any other generation looking for work. Many will still take up these opportunities when they come up, but improving the conditions surrounding the work will also be important for employers opening up new positions. Unhappy, unsatisfied workers don’t fit in to the recipe for a safe and productive workforce.

MANUFACTURERS WILL NEED TO PLAY NICE WITH GEN Z WORKERS

Baby boomers heading towards retirement or looking for easier jobs are unlikely to join factories despite how positively they may feel about bringing production back to the States. Corporate industries are not going anywhere and, at least in the short term, they are likely to stick to hiring majorly from among the Millennial workers.

As a result, employers will need to find some common ground with Gen Z workers to draw them into the manufacturing jobs more willingly instead of bringing them in out of desperation.

To read the full article as it appears on the HR Digest website, please click here.

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The Sudden Death of Detroit in China

Tue, 12 Mar 2024 18:58:42 +0000

GM, Ford and Jeep Meet Their Maker All Too Soon

The bodies are still warm. But the victims are already dead.

Natural causes? Or was there foul play?

GM, Ford and Jeep – once darlings of the Chinese consumer – are goners. Sales have collapsed. Profits are heading toward zero.

In 2023, the Detroit Three sold 3 million fewer cars in China than they did in 2017: 2.3 million vs 5.4 million. That is six straight years of falling sales – and we have not hit bottom yet.

Jeep’s China joint venture went bankrupt in October 2022, despite operating in the world’s largest SUV market.

Ford is losing buckets of money, operating at just 25% of its plant capacity.

For years GM made ‘more money than God’ in China, a former executive once told me. Today, the company is grasping at straws. Mary Barra recently told investors that GM would move its products upmarket in China to be “more premium and high end,” including the Cadillac Celestiq, starting at $300,000.

That’s a roundabout way of saying that GM can no longer compete in most segments of the China market.

Detroit’s China demise came so suddenly that there was talk of summoning Inspector Jacques Clouseau, the internationally famous solver of murder mysteries. Alas, China would not grant Monsieur Clouseau a visa.

So we are left to piece together clues on our own: How did the Detroit 3 expire so swiftly? And what might the end of Detroit in China tell us about what happens when Chinese automakers enter the US market?

Complacency & Confusion

Complacency kills. And smugness was no small part of what happened to Detroit in China.

For decades, they knew nothing but growth and profits. GM, Ford and Jeep – along with their Chinese JV partners – grew convinced of two eternal truths: First, Chinese consumers would forever prefer foreign car brands like Buick, Chevy and Ford over the Chinese offerings. And second, gasoline-powered vehicles would be dominant until kingdom come.

As things turned out, they were wrong on both counts.

Bureaucratic confusion also played a role. “Our guys in China can’t make up their minds,” a senior GM executive in Detroit told me in 2018. He was referring to his colleagues working at the Shanghai-GM joint venture. “Last week, it was ‘we should hurry up and get more EVs ready’ for the China market. This week it’s ‘wait, never mind’.”

When Chinese demand for EVs started its explosive growth in 2020, the Detroit 3 were caught flat-footed and without products.

The tables turned in what seemed like a blink of an eye. Chinese EV brands were now in the lead. “When a Chinese buyer considers an EV, he thinks Tesla or one of the Chinese brands,” a senior executive from BYD told me in 2021.

“Ford and GM are seen as old fashioned, out of step with the times.”

EVs now account for 1 of every 3 new cars sold in China, Tesla is the only non-Chinese brand in the top 10.

More Than Meets The Eye

Now, hold on a minute. Inspector Clouseau would be disappointed if we simply stopped our investigation there and called it case closed. I can almost hear him teasing us: “Was there not more going on than meets the untrained eye?”

Clouseau knows things. Detroit’s fall was also part of a grand Chinese plan. Detroit automakers had served their purpose, bringing advanced technology and processes to China. Now that China had what it needed, Detroit was being shown the exits.

I first sensed this larger scheme years ago when I asked the Chinese Minister of Industry whether Detroit’s JVs in China would succeed over the long term. After all, the Chinese themselves describe JVs as precarious arrangements with partners “sleeping in the same bed, dreaming different dreams.”

The global automakers wanted market access. And the Chinese wanted technology.

“Look, despite their different dreams, they are still sleeping together,” he said with a chuckle. The Chinese, he hinted, were biding their time, waiting for the moment when they could emerge independent and triumphant, leaving the joint venture behind.

Today, the partners sleep in separate beds. The Detroiters are taking their final breaths. And the Chinese side does not appear to be in mourning.

So What

Are there implications for competition in America? You bet. Complacency can happen here in America, too. The Detroit 3 will continue to dominate the large pickup truck market for years to come. But they have withdrawn from the more affordable segments, convincing themselves that Americans do not want smaller cars anymore.

This retreat presents the Chinese automakers, the lowest-cost producers on the planet, with a mouth-watering opening. That’s dangerous for Detroit.

Ford, GM and Jeep are dead in China—even if their executives can’t or won’t admit it.

The Detroit 3 still possess vast resources, technology, ingenuity and smart people. But they better start hustling, taking risks, inventing and working harder than their Chinese competitors.

If not, they could face extinction – this time on their home turf.

Future Cars & Markets

Electrics

Geely’s Crowded Portfolio. Geely’s array of EV brands – Polestar, Volvo, Zeekr and Lotus – are living on top of one another. This is making investors have second thoughts about their value. Lotus shares are down 67% since their market debut two weeks ago.

Xiaomi’s March Launch. The world’s second largest cell phone maker will start selling its SU7 premium sedan on March 28th. Consumers outside of China will need to wait 2-3 years before they can buy one.

Mercedes Welcomes Chinese EVs Into Europe. “Don’t raise tariffs. Go the other way around. Take the tariffs that we have [in the EU] and reduce them.” This is the stance announced this week by Ola Kallenius, CEO of Mercedes-Benz. He says competition is a good thing for Europe. But he just might also be working to preserve Mercedes’ market access to China, its largest market. Oh, and Geely happens to be a major shareholder in Mercedes, too.

Batteries / Supply Chains

Lithium Price Recovery? After falling by a stunning 80% in 2023, there are signs that lithium carbonate prices in China may be recovering. But Goldman Sachs says a recent bounce should not be interpreted as the end of the bear market

Koreans Into LFP. SK On says it is planning to mass produce LFP batteries as soon as 2026. Up until now, the LFP battery business has been totally dominated by Chinese battery makers.

Advanced Technologies

Pony.ai Goes Worldwide. Last week Pony.ai signed an agreement to establish an R&D center in the Grand Duchy of Luxembourg. This comes after forming a joint venture in South Korea and securing a $100 million investment from Saudi Arabia. In 2020, Toyota invested $400 million into Pony.ai through its China joint venture, Guangzhou Toyota.

NIO Humanoids. This is not a simulation. NIO has actually begun testing humanoids sourced from UBTech at its new factory.

New Numbers / Milestones

BYD: Brazil vs Europe. BYD had an underwhelming start in Europe, selling just 16,000 vehicles last year. Cross the Atlantic to Brazil and you find a totally different reality. BYD expects to deliver more than 100,000 cars in South America’s largest market. And the company is now renovating an idled Ford plant.

SAIC MG Fast Ramp in Europe. Europeans bought 239,000 SAIC MG vehicles in 2023, twice the number from the previous year. Competitive pricing and several powertrain options are the key drivers. Familiarity with the MG brand has been a huge asset, too. The MG ZS was Spain’s best-selling car in December, 2023.

VinFast Super Leasing Deal. Dealers in the US started leasing the VF8 at the incredibly attractive price of $249 per month in late January. Within weeks, all existing inventory was sold out. “At $249 a month, VinFast would be losing thousands of dollars a vehicle,” one dealer told me. Let’s watch what VinFast does next with its pricing. VinFast plans to appoint 100 dealers in America by the end of the year.

To read the full newsletter as it appears on The Dunne Insights Newsletter, click here.

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To Decouple, or To De-Risk? That Is The Question

Mon, 03 Jul 2023 20:32:17 +0000

As often happens in diplomacy, the communique the G7 leaders issued in May from their meeting in Hiroshima ducked a key question: What is the difference between “de-risking,” which the communique expressed approval of, and “decoupling,” which it disapproved?

The G7 statement didn’t define those terms. It didn’t even mention that the foremost object of both decoupling and de-risking is China. That’s diplomacy for you.

The leaders of the seven countries (the United States, the United Kingdom, Canada, Japan, Germany, France and Italy) simply said they were coordinating their approaches to economic resilience and economic security “based on diversifying partnerships and de-risking, not decoupling.”

As often happens in diplomacy, the vagueness was intentional. It conveniently papered over differences between the U.S. and some of its allies. “Economic resiliency” and “economic security” are diplo-speak for avoiding overreliance on China (and to some extent Russia) for key products and avoiding supplying those countries with strategically sensitive technologies.

On the surface, decoupling (the trendy word until recently) implies taking separation from China further than de-risking (the European Commission president’s word). De-risking suggests diversifying, ending exclusive reliance on China, rather than withdrawal.

In practice, though, much of the decoupling to date has also been diversification. For communique purposes, the difference between decoupling and de-risking is semantics. That’s why the U.S. could agree to the communique even though there are real differences between the U.S. and its allies in their concerns about reliance on China.

Those differences reflect their differing geopolitical situations, especially with regard to Taiwan. A Chinese military attack on the island seems increasingly possible — possible enough that U.S. officials have to plan for it even as they pray it never happens.

Washington’s allies don’t. In the event of an attack, Japan could end up supporting the U.S., at least logistically. It’s a prisoner of its history and geography. The European allies would be far less inclined to see an attack on Taiwan as their problem. They might be cajoled into joining a coalition of the willing, but that is far from guaranteed.

The U.S., then, has greater reason to worry about providing China with technologies that strengthen it militarily. It has more serious fears of being cut off by China from critical products during hostilities.

When governments are planning for war, national security ranks higher in their concerns than economic efficiency. This can be a hard swallow for those who believe, as many in exporting sectors like agriculture do, that financial markets allocate capital more efficiently than governments and free trade produces the best economic outcomes.

But it explains why some Republican believers in free markets have voted for Biden administration industrial-policy initiatives. And why Republicans are solidly behind the Biden administration’s stepped-up efforts to block exports of the most advanced semiconductor technologies to China, despite warnings from U.S. high-tech companies that restrictions will have long-term economic consequences.

European countries share some of the same concerns about China as the U.S., but they’re nowhere near as worried about national security. Referring to Taiwan, French President Emmanuel Macron has warned Europe not to get “caught up in crises that are not ours.”

Europeans are displeased with the Biden administration’s high-tech subsidies and buy-American rules, which they see as drawing investment away from them as much as from China. Some Europeans are also leery of U.S. efforts to block exports of high-tech products to China. The Dutch government, however, eventually went along with the U.S. and restricted Dutch companies’ exports of the most advanced semiconductor manufacturing equipment to China.

Europe, in sum, prefers “de-risking” because it doesn’t want as much economic separation from China as the U.S. The Biden administration accepted “de-risking” because it’s sufficiently vague to let allies march to different drummers.

Actually, so is decoupling. For all the talk of it over the last few years, for all the government’s industrial-policy moves, for all its export restrictions, for all the announcements by companies of plans to move manufacturing back to the U.S. or to Asian countries other than China, U.S.-China trade in goods set a record in 2022, as did U.S. exports to China.

U.S. ag exports to China also set a record in fiscal 2022 at $36.4 billion.

Though the U.S. and China are rivals, American companies’ supply chains are deeply imbedded in China. China is the largest trading partner of the U.S. and of about 120 countries, including American allies like Japan, South Korea and Germany.

China has dominant world market share in some product lines, like drones and solar panels, and is a critical supplier of countless thousands of others. In a war, China would unquestionably cut off exports to the U.S., which makes it logical to decrease reliance on China.

But short of war, how far disentangling today’s supply chains can or will go is unclear, regardless of which diplomatic euphemism is used to describe it.

Urban C. Lehner joined DTN as editor-in-chief in July 2003. He became vice president of the editorial operations of DTN and the Progressive Farmer in July 2010. He is a past president of the North American Agricultural Journalists and in August 2009 was named “Writer of the Year” by the American Agricultural Editors’ Association.

To read the full blog post, please click here.

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Making Supply Chains Resilient

Mon, 07 Mar 2022 20:01:58 +0000

This article is the second of a two-part series describing Christine McDaniel’s conversation with Leila Aridi Afas, the director of global public policy at Toyota Motor North America. Part one discusses Leila’s background, Toyota’s crisis management strategy and the Beijing Olympics. Part two explores how Toyota is coping with the ongoing challenges of the COVID-19 pandemic and other geopolitical challenges.

Leila Aridi Afas coordinates cross-functional and cross-cultural teams to understand, anticipate and navigate the ever-evolving policy environment and successfully advocate Toyota’s position. Before joining Toyota, Afas was appointed by President Obama to serve at the U.S. Trade and Development Agency to help grow U.S. jobs and exports following the 2008 financial crisis. Her career spans the public and private sectors in the United States and abroad. She earned a master’s degree in international economics from Columbia University.

After Toyota’s supply chain was significantly disrupted by the 2011 earthquake and tsunami in Japan, the automaker decided to change its game. A team within the company started building a huge dataset of suppliers, suppliers’ suppliers and suppliers’ suppliers’ suppliers (yes, three steps out), which led to stocking strategic inventories of essential components. Creating the ability to catch a hiccup before it became an impediment put Toyota in a strong position to deal with the past two years of COVID-related supply chain issues.

Toyota weathered the first and second COVID waves of closures, port delays, natural disasters and shipping problems. The company had up to a four-month inventory of essential components such as chips. In fact, it was a surprise to many in the company how long it was able to keep production going.

But the third and fourth waves of COVID-induced closures of suppliers’ and chip makers’ factories across Asia presented too many obstacles at once. “Those new lockdowns exacerbated an already dire situation,” Afas explained, and in August of 2021 Toyota announced a 40% production cut.

Protect Your Supply Chain But Also Your People

Several other automakers announced COVID-induced production cuts as well, but while some of these companies laid off workers, Toyota kept theirs on the payroll. “Managers were calling their team members every week to check in with them and their families, and to see if they needed anything,” Leila said. Workers may not have been making cars at the plant, but they were figuring out how to improve performance once they returned.

Toyota had already seen how its people-first approach paid off after the financial crisis of 2007 to 2009. As the U.S. and global economy slid into a recession and production lines slowed down (or in some cases stopped), Toyota workers stayed on the payroll and kept busy finding new ways to improve their own or their colleagues’ performance. Harvard Business Review showcased the “Toyota production system” that draws on frontline workers to identify ways to improve the production process. In some cases, workers spent time on community service projects. “So once the economy picked back up, Toyota came storming back,” Leila said.

The Death of Just-In-Time Manufacturing Has Been Exaggerated

Toyota is famous for its just-in-time manufacturing system, which relies on keeping just enough inventory to make value flow without interruption, thus minimizing waste. For decades it was praised as a key to good performance, but since the emergence of COVID, many observers are pointing to just-in-time manufacturing as the cause of supply chain problems. Toyota had more essential components in inventory than most other automakers, but even it succumbed to the continued disruptions. Keeping 8 to 12 months of complete inventory on hand is not commercially viable for most companies since the capital could be deployed in more efficient ways.

Still, just-in-time manufacturing does not appear to be going anywhere, although Toyota changed how it implements the techniques a decade ago, after the Tohoku earthquake and tsunami in Japan. Leila was hesitant to highlight or frown on any one inventory process. “For an industry like autos, the supply chain is so incredibly complex,” she said. Considering that the average vehicle has about 30,000 parts, and “you need all of them to build a car,” it is vital to have reliable ways of getting those critical parts and components into your manufacturing facilities.

If one supplier goes down, it’s not so easy to find a replacement. Certifying a supplier is a lengthy process to ensure that strict safety and quality specifications are met. This process can take up to several years in some cases. “You can’t just flip on a dime and switch suppliers,” Leila said. And suppliers do tumble. Toyota’s suppliers have been hit by natural disasters, a 2021 fire in a semiconductor facility, the Texas 2021 deep freeze and the COVID pandemic.

Regulatory Challenges After COVID

Like many companies, Toyota is taking a hard look at how it will move forward after the pandemic. There will always be crises, whether natural or geopolitical, and those are costly. But it is the changing policy landscape that worries Leila more.

Consider advanced electric vehicles with a high-tech landscape that includes new battery technology, fuel cells, charging stations and a host of privacy issues for smart cars. If Toyota develops these technologies in the United States, will it be able to commercialize them in the EU? Can the company do that in a way that includes Japan?

Or consider new laws around forced labor. In December 2021, President Biden signed the Uyghur Forced Labor Prevention Act into law, which bans imports of goods made with forced labor in China. As a result, U.S. companies are preparing for outright bans on everything from this region. The EU, U.K. and Canada are gearing up to pass similar laws.

It is yet to be seen how U.S. Customs and Border Protection (CBP) will administer the legislation, but the key words in the statute are “rebuttable presumption.” That is, if the good comes from the Xinjiang Uyghur Autonomous Region, it is presumed to be made with forced labor, and the importer will have to prove otherwise. China closed down its one remaining independent auditor last year, which made it that much harder for shippers to prove their goods were not made with forced labor. Toyota, like some other large multinational corporations, has its own supplier certification process. But it is not clear if those processes will be sufficient for CBP.

Despite living through a once-in-a-century pandemic and a slew of horrible natural disasters, the biggest challenge for Toyota, according to Leila, has been “geopolitical risks and the protectionist measures put into place to grapple with them.” While the irony was not lost on her, she understands the desire to protect national security and health. “But unfortunately, many new barriers have been erected,” she said. Companies are trying to deal with challenges that are completely out of their control. On top of that, they are navigating how to comply with new policies and the barriers those policies create. “Lately, new rules have been coming down the pipe at a pretty fast clip,” she said. The latest are restrictive rules of origin for autos in the United States-Mexico-Canada Agreement (USMCA) and Section 232 steel and aluminum tariffs that hurt Toyota’s domestic suppliers, even though Toyota sourced more than 90% of its steel from the United States for its U.S.-built vehicles.

The USMCA has far more stringent rules-of-origin requirements than did the original North American Free Trade Agreement (NAFTA). So, when the freak deep freeze hit Texas in the winter of 2021, manufacturers could not get product in, and having to comply with the myriad USMCA rules of origin was not just an added cost but a huge roadblock to crisis management. Similarly, the Section 232 tariff on steel imports (25%) raised costs throughout the supply chain, further limiting flexibility.

Resist Protectionism in All Its Forms

Leila also warned against using statecraft to further certain goals. “It is wonderful to see countries make strides to reduce emissions, but be careful of protectionism in disguise because trade partners will undoubtedly retaliate.” For instance, the electrification tax credit might benefit the U.S. producers but not allies who are also working toward the common goal of electrification. If Congress makes certain domestic batteries eligible but not those of our trading partners, that will undermine global cooperation.

Carbon does not respect borders. So, if reducing emissions is the goal, policymakers may need to rethink these protectionist approaches. Leila went on, “Will the EU’s CBAM (carbon border adjustment mechanism) be one or the other? Are you pursuing a climate goal or a trade goal? They could be on a crash course.”

Companies like Toyota need the ability to maintain flexibility, not rigid rules. If policymakers want resilient manufacturers, they must help manufacturers help themselves in times of a crisis. Openness to trade brings that much-needed flexibility. It is what matters most for resiliency. Those ties with other countries are a good thing, and Washington must figure out how to keep them intact.

Christine McDaniel is a senior research fellow at the Mercatus Center at George Mason University. Her research focuses on international trade, globalization and intellectual property rights.

To read the full commentary from Discourse Magazine, please click here.

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The Biden-⁠Harris Plan to Revitalize American Manufacturing and Secure Critical Supply Chains in 2022

Thu, 24 Feb 2022 16:50:27 +0000

One year ago, President Biden signed Executive Order 14017 directing an all-of-government approach to assessing vulnerabilities in – and strengthening the resilience of – the United States’ critical supply chains. Within six months of taking office, the Administration completed a comprehensive review of the supply chains for four critical products, identified solutions to secure those supply chains against a wide range of risks and vulnerabilities, and established a first-of-its-kind Supply Chain Disruptions Task Force (SCDTF) to address the challenges arising from a pandemic-affected economic recovery.

These actions are contributing to a historic recovery in American manufacturing and industrial strength. During President Biden’s first year in office, the economy added 367,000 manufacturing jobs – the most in nearly 30 years – manufacturing as a share of U.S. Gross Domestic Product (GDP) returned to pre-pandemic levels, and companies have announced major new investments in American manufacturing. American ports also moved a record amount of cargo, and inflation-adjusted retail inventories – excluding autos – surged 5 percent in 2021 compared to the previous year, ensuring retailers’ shelves were fully stocked for a record-breaking holiday season. The progress made rebuilding American supply chains contributed to the fastest job growth in history, the fastest economic growth in nearly 40 years, and a faster recovery than every other country in the G7.

Today, on the one-year anniversary of President Biden’s executive order, seven cabinet agencies published reports identifying key weaknesses in some of the nation’s most crucial supply chains, and devising multi-year strategies to address those weaknesses. The White House also published a capstone report that provides an overview of the key actions the Biden-Harris Administration has taken over the past year to reduce the vulnerability of U.S. supply chains across a range of key sectors. And in the coming months, a number of federal departments and agencies, including the Department of Commerce and the Department of Labor (DOL), will host regional summits that will bring together stakeholders to discuss opportunities to align regional economic development strategies with the national supply chain strategy.

Building on the conclusions outlined in these reports, the Biden-Harris Administration is announcing additional, concrete actions it will take this year to build long-term resilience across critical supply chains and formally institutionalize supply chain resilience throughout the Federal government. Central to this effort is implementing the Bipartisan Infrastructure Law (BIL), which is our nation’s most significant investment ever in modernizing the transportation systems on which our supply chains depend. Looking forward, with the historic investments included in the landmark America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength (COMPETES) Act, the United States Innovation and Competition Act (USICA), and President Biden’s Build Back Better Agenda, these actions will strengthen our supply chains, grow domestic manufacturing, enhance our domestic workforce with a focus on good, union jobs, and help us outcompete China and the rest of the world. Specifically, the Biden-Harris Administration will:

Put the U.S. Economy on a Path Towards Long-Term Resilience Across Critical Supply Chains:
Since his first day in office, President Biden has focused on an industrial strategy to address near-term disruptions linked to the global pandemic, revitalize our manufacturing base, strengthen critical supply chains, and position U.S. workers and businesses to compete and lead globally in the 21st century. To date, the SCDTF’s whole-of-government actions have contributed to a more than 70 percent decline in long-dwelling containers cluttering the docks at our two largest ports. Over $600 million in American Rescue Plan (ARP) resources have already been announced to strengthen the port workforce and improve facility efficiency at ports nationwide, from California and Florida to Massachusetts and Louisiana. These actions have also produced new supply chain partnerships between the automobile and semiconductor industries. And, they have helped secure $1 billion in ARP funding to expand meat processing capacity to promote competition and reduce prices for consumers. Because of the Biden-Harris Administration’s commitment to domestic industrial revitalization, American companies are also betting on the United States again. In just the last year, companies have announced nearly $200 billion in investments for semiconductor, electric vehicle, and battery manufacturing in the United States. But there is more work to do to build long-term resilience. In addition to working with Congress to enact the historic, bipartisan COMPETES/USICA legislation and the President’s Build Back Better Agenda, the Biden-Harris Administration will:

Propose a new domestic manufacturing initiative through the Export-Import Bank to strengthen U.S. manufacturing exports. Too many American manufacturers – especially small- and medium-sized ones– struggle to obtain the financing they need to expand their operations and compete for global sales. As the official export credit agency of the United States, the Export-Import Bank (EXIM) is well positioned to address this issue, supporting jobs in America along the way. This Spring, EXIM’s board will vote on a new domestic initiative, including providing financing priority to environmentally beneficial, small business, and transformational export area transactions, including semiconductors, biotech and biomedical products, renewable energy, and energy storage. This initiative will help America win the future by revitalizing American manufacturing, improving the resiliency of our supply chains, and leveling the playing field for American companies competing in overseas markets.
Expand access to capital for small manufacturers. Even before the COVID-19 pandemic, too many small businesses struggled to access the capital needed to grow and compete. Through new and existing programs at the Department of the Treasury and the Small Business Administration (SBA), the Biden-Harris Administration will unlock tens of billions of dollars for small manufacturers. Specifically, $10 billion in ARP funds deployed by the Treasury Department under the new and improved State Small Business Credit Initiative (SSBCI) will be leveraged into more than $70 billion in additional lending and investment for small businesses, including small manufacturers. Nearly a quarter of funding from the last round of SSBCI supported manufacturing companies. To ensure small manufacturers can access this program, the Treasury Department will convene state, local, territorial, and Tribal governments this Spring to share ideas and highlight best practices, building to a roundtable of elected officials and other stakeholders later this year to highlight accomplishments. SBA will also promote and prioritize licenses for Small Business Investment Companies (SBICs) committed to providing capital to domestic small business manufacturers. SBIC fund managers have financed over $14 billion in manufacturing-related businesses over the last decade, representing 24 percent of total dollars invested through the program during that period.
Advance the technological leadership of both small and large manufacturers. U.S. technological leadership remains critical to building greater long-term resilience and global competitiveness, including innovations in manufacturing. The Administration will host a series of roundtables with the 16 Manufacturing USA institutes focused on scaling innovative technologies, promoting sector-based regional workforce initiatives, partnering with unions, and supporting small- and medium-sized suppliers, to develop specific proposals for how the institutes can strengthen our supply chains. SBA will also host the inaugural America’s Seed Fund Start-up Expo to support Small Business Innovation Research (SBIR) awardees seeking to access resources and assistance they need to help them commercialize and manufacture innovative technologies addressing critical supply chain challenges. Additionally, SBA will establish a committee of industry leaders to advise on transformative inventions and innovations from U.S.-based startups and established small businesses, as well as vulnerabilities in commercializing and financing domestic innovation.
Leverage the Bipartisan Infrastructure Law to move critical goods from ships to shelves faster and more affordably. Outdated infrastructure and the COVID-19 pandemic have strained the capacity of the entire goods movement supply chain, resulting in unprecedented snarls in global freight and logistics supply chains. Recognizing the importance of port investments for U.S. competitiveness, President Biden’s BIL is the single largest Federal investment in our ports in U.S. history. The Department of Transportation (DOT) is announcing the opening of the $450 million Port Infrastructure Development Grant program, the first and only Federal grant program wholly dedicated to investments in port infrastructure. In the coming weeks, DOT will also release notices of funding opportunity for the BIL’s INFRA, MEGA, CRISI, and grade crossing grant programs, which will fund a diverse set of transportation infrastructure projects of regional and national significance, including those that support the movement of freight and improve supply chain resilience. And, DOT will develop and issue revised State Freight Plan Guidance that incorporates updated requirements from BIL and requires consideration of cargo flows, the impacts of e-commerce, and supply chain resilience in directing BIL funding.
Invest in sustainable domestic production and processing of critical minerals. From rare earths in our electric motors and generators to the carbon fiber used for airplanes, the United States must ensure we are not dependent on foreign or single sources for critical minerals. To that end, this week the Biden-Harris Administration announced plans that will expand domestic rare earth processing; strengthen the National Defense Stockpile; update mining regulations to ensure sustainable and responsible practices; and issue recommendations for comprehensive reform of outdated mining laws. Through the BIL, the Department of Energy (DOE) will also demonstrate the feasibility of a full-scale integrated rare earth element extraction and separation facility and refinery from mine waste. Today, as part of the Mining Innovations for Negative Emissions Resources (MINER) Program, DOE is also releasing a $44 million funding opportunity to provide commercial-ready technologies that give the United States a net-zero or net negative emissions pathway toward increased domestic supplies of copper, nickel, lithium, cobalt, rare earth elements, and other critical elements required for a clean energy transition. These and other efforts to secure a reliable, sustainable, and diverse supply of critical minerals and materials will help the United States meet its climate goals while creating good paying jobs and boosting U.S. competitiveness.
Leverage the American Rescue Plan to jumpstart a more competitive, innovative, and resilient meat and poultry supply chain. Over the last few decades, the meat and poultry processing sector has become dominated by a handful of large companies that control most of the business and most of the opportunities—raising prices and decreasing options for American families, while also squeezing out small businesses and entrepreneurs. To increase competition and create more options for producers and consumers, the Department of Agriculture (USDA) is taking the next steps outlined in its comprehensive action plan to create a more diverse and resilient supply chain, supporting farmers, ranchers, and workers alike. This action plan includes dedicating $1 billion in American Rescue Plan funds to expand independent processing capacity. At a press conference this morning, USDA will announce the opening of applications for the first tranche of grants for new processing capacity and detail a partnership with DOL’s Goods Jobs Initiative to support the food processing workforce. In the weeks ahead, USDA will also announce $10 million in technical assistance funding to establish an initial network, with additional efforts to follow, for a total of $25 million for technical assistance. Through that partnership, the agencies will improve workers’ access to information about their rights, engage with employers to improve job quality and workforce pathways, support workforce development such as Registered Apprenticeships, and provide technical assistance on grants, contracts, and other investments intended to improve job quality.

Institutionalize Supply Chain Resilience Throughout the Federal Government:
Supply chain resilience must become a lasting focus for businesses and governments alike. In addition to the SCDTF, which has broken down silos and coordinated collaboration between agencies to respond to supply chain disruptions, the Administration has begun to formally institutionalize supply chain resilience throughout the Federal government. Earlier this month, DOE announced an internal realignment to effectively deploy more than $60 billion in BIL funding for clean energy infrastructure and deployment. The Department of Health and Human Services (HHS) announced a new dedicated public health industrial base expansion and supply chain management office. And, as highlighted above, DOT will now work with states to include supply chain resilience in their State Freight Plans, so that state-led infrastructure planning and investments bolster the resilience of the entire goods movement chain – across ports, trucking, rail, and warehousing. To build on this progress, the Administration is announcing new actions to institutionalize supply chain resilience throughout the Federal government. Specifically, the Biden-Harris Administration will:

Bolster the American manufacturing of critical goods through new reforms under the Buy American Act. President Biden believes that when the U.S. government spends Federal dollars, it should buy American-made products. During his first week in office he issued Executive Order 14005 to close loopholes and raise standards in the Buy American rules that govern Federal contracts. The White House Office of Management and Budget will soon issue a new Buy American rule that will create a new category of critical products that will be eligible for enhanced price preferences. By allowing the Federal government to pay an additional premium for critical domestic-made products and components essential to the Administration’s supply chain resiliency strategy, the new rule will create a steady source of demand that will help catalyze domestic production and bolster thin supply chains. Once implemented, American manufacturers will have an easier time securing the government contracts they need to expand their operations and create good-paying jobs.
Fully establish a Defense Production Act Investment Program to build and expand the health resources industrial base. The United States remains critically dependent on imports for a range of key pharmaceutical products and active pharmaceutical ingredients—the primary ingredients of generic drugs. During the pandemic, HHS established a Defense Production Act (DPA) office to ensure supply chain scarcity and shortages did not impede national efforts to combat COVID-19. Now, HHS will fully establish a DPA Title III Program to provide loans, grants, and other financing to build and expand the health resources industrial base. This program will ensure timely availability of essential domestic industrial resources; establish the necessary authorities and mechanisms to leverage the proposed Supply Chain Resilience and Crisis Response Office for management of the Public Health Industrial Base; support extended long-term contracts, on-hand inventory, and vendor-managed inventory; and ensure sufficient manufacturing capacity.
Bolster clean energy manufacturing through implementation of the Bipartisan Infrastructure Law. As part of the first ever Energy Sector Industrial Base strategy, America’s Strategy to Secure the Supply Chain for a Robust Clean Energy Transition, DOE is executing dozens of lines of work to accelerate domestic clean energy manufacturing. These include creating a new Manufacturing and Energy Supply Chains Office to strengthen and secure the energy supply chains needed to modernize the nation’s energy infrastructure and support the clean energy transition. Amongst many other activities, DOE is establishing four Regional Clean Hydrogen Hubs and supporting the electric-vehicle battery materials supply chain. And today, as part of the Mining Innovations for Negative Emissions Resource Recovery (MINER) Program, DOE is releasing a $44 million funding opportunity to provide commercial-ready technologies that give the United States a net-zero or net negative emissions pathway toward increased domestic supplies of copper, nickel, lithium, cobalt, rare earth elements, and other critical elements required for a clean energy transition.
Restore U.S. global leadership on supply chains. President Biden is committed to working with U.S. trading partners to address the immediate supply chain challenges from this unprecedented economic recovery and building long-term supply chain resilience for the future. Later this year, the Biden-Harris Administration will host a Ministerial-level Summit on Global Supply Chain Resilience to address near-term bottlenecks and tackle long-term challenges, building on the Summit on Global Supply Chain Resilience that President Biden held in October with the European Union and over a dozen like-minded countries. The Biden-Harris Administration will also partner with North American trading partners to prepare for future crises and mitigate resulting supply chain disruptions. Through the U.S.-Mexico High-Level Economic Dialogue, the United States and Mexico will establish a joint list of critical sectors involved in cross-border supply chains and create procedures to maintain continuity of supply chains in the event of times of crisis. The Competitiveness Committee of the U.S.-Mexico-Canada Agreement will also work to define essential industries and effective approaches for supply chains, including through information-sharing activities, providing advice and recommendations, identifying priority projects and policies, and designating a contact point for these efforts. And, as agreed to at the North American Leaders Summit in November, the United States, Mexico, and Canada will hold a trilateral supply chain coordination meeting by Summer 2022 to explore trilateral opportunities on supply chains based on results from the bilateral supply chain working groups.

There is still more to be done. To build on these investments and spur more private-sector investment in the United States, the President is committed to passing comprehensive competitiveness legislation like the COMPETES/USICA bills put forward in the House and the Senate to strengthen our supply chains, grow domestic manufacturing, and help us outcompete China and the rest of the world. This legislation, combined with the critical investments included in the Build Back Better Act, will help to deliver on the President’s mission to expand the productive capacity of our economy and lower costs for families.

To read the full announcement from The White House, please click here.

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Streamlining Toyota’s Supply Chain

Tue, 22 Feb 2022 20:06:00 +0000

This article is the first of a two-part series describing Christine McDaniel’s conversation with Leila Aridi Afas, the director of global policy at Toyota Motor North America. Part one discusses Leila’s background, Toyota’s crisis management strategy and the Beijing Olympics. Part two explores how Toyota is coping with the challenges of the COVID-19 pandemic.

Leila Afas coordinates cross-functional and cross-cultural teams to understand, anticipate and navigate the ever-evolving policy environment and successfully advocate Toyota’s position. Before joining Toyota, Afas was appointed by President Obama to serve at the U.S. Trade and Development Agency to help grow U.S. jobs and exports following the 2008 financial crisis. Her career spans the public and private sectors, and she earned a master’s degree in international economics from Columbia University.

Leila Aridi Afas speaks of world affairs like she is talking about what is happening down the street. A glance at her family background soon reveals the reason why. While she was born in Maryland, her mom was born in Britain and grew up there during World War II. Her father was born in Lebanon. Her parents met in Washington, D.C., and raised a family in the area. Leila grew up hearing about the civil war in Lebanon and the goings-on in the U.K. and around the world from family living in Australia, Colombia, Liberia, South Africa and across Europe. Her husband was born and raised in Casablanca. Because Leila grew up with one eye on the world, navigating the global policy affairs of a multinational company like Toyota felt like a natural fit.

One might think that a love for cars is a prerequisite for Leila’s job, but she wasn’t a “car gal.” So when the position came up, she was interested in it but had to be honest with her interviewers. “Listen,” she told them, “I have no background in the auto industry. I know nothing about cars. And I am not a lobbyist.”

“You’re perfect,” they said. Turns out that Toyota was looking for an industry outsider with a global perspective who could look “beyond the headlights” to identify emerging issues that could impact the company. As Leila explained, “If the 21st century has taught us anything, it’s that opportunities and threats are not contained within borders. We need to look beyond them.”

Dealing With Crises

I asked Leila what a typical day looks like—or, since there is no typical day for many of us lately, “How about one day this past week?” I asked. First thing in the morning, she connected with her colleagues around the globe—Brussels, Bangkok, Tokyo—to discuss topics related to global trade compliance. Next, she moderated a think tank panel discussion, and then she met with her colleagues to discuss emerging geopolitical events that might affect some of their plants and supply chains around the world.

The Beijing Olympics was on their radar that day, but not for the reasons Toyota had hoped. Toyota is an Olympic sponsor, and corporate sponsors are under fire from many in Congress and around the world because they are seen as ignoring human rights abuses in China “in blind pursuit of profits,” to quote Senator Marco Rubio. But what most people don’t understand, Leila said, is that Toyota’s sponsorship supports the Team Toyota athletes. Unlike in other countries, U.S. athletes receive no direct government funding, so corporate sponsorships are critical. She also explained that it is the International Olympic Committee (IOC) that selects the host city. And Toyota’s IOC sponsorship, including that of Tokyo 2020, Beijing 2022 and even Paris 2024, was decided years ago, in 2015, “well before the numerous reports of prison labor camps and genocide in the Xinjiang Uyghur Autonomous Region,” she said. Listening to her, I could not help but think this is yet another large multinational company in a tight spot over a human rights issue in China—just what Ian Bremmer and the Eurasia Group warned us was coming as corporations risk losing the culture wars in new and unexpected ways.

Given that Toyota has operations in 28 markets and sells its products in more than 170 countries and territories, the team has experience with geopolitical disasters, both natural and manmade. The 2011 Tohoku earthquake and tsunami were massive, devastating human tragedies with a crushing impact on companies throughout Japan, including Toyota and its suppliers. One of Toyota’s main semiconductor suppliers was offline for many months, and the disruption had ripple effects on the carmaker globally. Its U.S. plants were forced to cut production by 75% as they waited for their Japanese suppliers to get back up and running. That was a big wake-up call, Leila said.

In 2016, a coup attempt in Turkey threatened to increase instability. For a moment the team was gearing up to protect its workers and families, not to mention their plant for the popular-in-Europe Toyota C-HR. Fortunately, the coup did not materialize. Crisis averted.

But for Toyota, or any company built on just-in-time manufacturing, navigating crises and disasters requires a big pivot. With just-in-time manufacturing (sometimes called lean manufacturing), items are created to meet demand, not created in surplus; there is no inventory. For any company that relies on this production process technique, the big question right now is how do you stay nimble and efficient to keep consumer prices competitive, yet still be able to deal with unforeseen events?

1,400 Critical Parts

As is often the case, the first step to solving any gigantic problem is to gather information. A team in the company worked around the clock to map out the entire supply chain—not just one supply chain for the company, but chains for nearly every single part it takes to make nearly every single one of their automobiles. The team identified about 1,400 critical parts (out of roughly 30,000 parts total) that had relatively long lead times. If any one of those 1,400 critical parts were not available, the entire production line could be forced to a halt.

“The team identified their suppliers, their suppliers’ suppliers, and their suppliers’ suppliers’ suppliers,” Leila explained. Over time, Toyota worked to increase inventory and manage lead times for these critical parts. Listening to her explain the database, you get the sense that if anyone so much as sneezes in a plant where one of those 1,400 critical parts is coming from, a red-alert button lights up. While that’s not literally the case, Leila described several ways in which Toyota worked to safeguard its supply of critical parts:

A team within the company worked to diversify its presence in multiple geographic regions while ensuring that it could procure the necessary parts to keep building vehicles if one particular region were unable to produce.
Toyota began standardizing parts across different vehicle models. Now, if one supplier shuts down for any reason, another plant is able to increase production of the standardized part to meet demand.
When standardization wasn’t an option—as is the case for the 1,400+ critical parts Leila’s team identified—Toyota increased inventory to maintain a supply in case of emergencies.

Leila identified several takeaways from Toyota’s experiences in dealing with supply chain problems. “In my view, the most important part is the trust and respect between Toyota and our suppliers, who are truly partners.” She also emphasized the importance of staying in close and constant communication with suppliers. Following the devastating 2011 earthquake and tsunami, Toyota created a new database called the RESCUE system, which suppliers update in real time and which Toyota tracks consistently. “It’s crucial that the information is always up to date,” Leila concludes. “You never know when a crisis will strike.” As part two of this series discusses, the current crisis of the global COVID-19 pandemic is forcing Toyota and many other companies to take these lessons to heart.

Christine McDaniel is a senior research fellow at the Mercatus Center at George Mason University. Her research focuses on international trade, globalization and intellectual property rights.

To read the full commentary from Discourse Magazine, please click here.

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Vance and Lighthizer: Continuing Tariffs on China Is a Step Toward Helping US workers

Thu, 09 Sep 2021 13:26:51 +0000

In light of Labor Day this past weekend, it’s worth reflecting on the condition of organized labor in this country. And for private sector unions, things aren’t looking good. Not long after World War II, 35% of private sector workers belonged to a union; now, that number is 6.3% (which is actually a slight increase over recent years).

While public sector unions have thrived because the public sector itself has grown, private sector unions have been annihilated by a bipartisan force: globalization. While much of our political debate over organized labor has focused on the effects of Right to Work and related laws, the evidence suggests that these types of reforms have minimal effect. Wisconsin, for instance, is a Right to Work state and Ohio is not, yet workers in Ohio have not fared obviously better (or worse) than those of Wisconsin.

That’s because on a national scale, the jobs that supported a good union wage have become less common or disappeared altogether. Economist David Autor has found that from 1999 to 2011, 2.5 million good manufacturing jobs were lost to import competition from China alone. We’ve also lost millions of jobs to other countries like Mexico. Combined, the effects of globalization have hollowed out America’s industrial core.

These policies have made our country far less self-sufficient economically. Just remember last year, when the Chinese Communist Party threatened America with a loss of critical pharmaceutical ingredients at the height of a global pandemic. But they’ve also destroyed millions of middle-class livelihoods. As Autor also found, when the manufacturing jobs moved out, a host of social problems moved in: family divorce and breakdown, child abuse and neglect and opioid addiction. Ohio suffered more than most states from the decline of manufacturing jobs.

Some blame the disappearance of these manufacturing jobs on unions themselves. And while there are undoubtedly examples of inflexible unions that made it harder for their companies to keep factories in America, many countries have far higher union participation rates but suffered much less of a decline in manufacturing employment.

Far more important than any individual union was the cheap labor overseas and the fact that our government did nothing to stop U.S. companies from exploiting it. Indeed, policymakers often encouraged offshoring through bad trade deals and tax policy.

As we now know, China gives companies who relocate their factories a massive advantage: cheap workers with no expectations and no rights. Some of our biggest corporations (like Apple) have benefited from literal slave labor in China.

That our biggest companies have taken their businesses to places like China is shameful, but our government policy shouldn’t depend on our biggest companies doing the right thing. In fact, during the Trump administration (where one of us served in the Cabinet), our country imposed tariffs on many goods coming into the United States from China. These policies had the effect of offsetting China’s unfair economic advantages and sending a clear signal to U.S. companies that the time has come to bring jobs home and reduce our dependence on China.

We should continue those policies and expand upon them. Instead, some in Congress and the Biden administration seem desperate to turn the clock back. Under influence from many American multinational companies, Treasury Secretary Janet Yellen and others want to reduce or eliminate tariffs that were part of a long overdue effort to combat China’s industrial warfare on the United States.

It would be regrettable if the Biden administration were to cave to this pressure and sell out the very workers it claims to champion. As we’ve learned the hard way over the last decades, there is no more important foundation for American workers than a strong manufacturing base.

Politicians will talk big about fighting China or standing up for the American worker. But unless they’re willing to impose real economic costs on the Chinese and stand up to the American CEOs who work with them, Labor Day will be little more than a reminder that we once lived in a country where the American worker was thriving.

Republican J.D. Vance of Cincinnati is a candidate for the U.S. Senate, and Robert Lighthizer is a former U.S. trade representative who has endorsed Vance’s candidacy.

To read the full opinion as it was published by the Akron Beacon Journal, click here.

The post Vance and Lighthizer: Continuing Tariffs on China Is a Step Toward Helping US workers appeared first on WITA.

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Clean Energy’s Messy Problem: The Solar Industry, the U.S. Government, and the Complex Task of Combating Forced Labor

Fri, 23 Jul 2021 17:01:47 +0000

Clean energy faces a messy problem.

The region at the heart of solar production is rife with forced labor and it is not clear that there is a meaningful supply anywhere else of the materials the solar industry relies on. Further, it is not clear how solar suppliers, importers, developers, or investors can verify that their supply chains are free of forced labor when the Chinese government denies that such practices exist and may punish those who would contradict that position.

Add to that issue the fact that Customs is stopping equipment at the border if the agency suspects there is forced labor in the supply chain, but the U.S. Government has not provided meaningful guidance on how to prove that solar products are free of forced labor and therefor admissible.

The industry and regulators are searching for a viable way to source clean supply chains for clean energy and to verify with some certainty that solar equipment in the United States if free of forced labor.

1. Background

Hoshine Silica Industry Co. is a major supplier to the solar industry and is more or less ground zero for forced labor abuses. The solar industry relies on panels made from silicon. Hoshine is the world’s largest metallurgical-grade silicon producer.

Silicon can be made a number of ways, but the most common steps are to mine quartz, crush and heat that material into metallurgic-grade silicon, then use chemical processing to make polycrystalline silicon. There is obviously more complexity to the system, but the purpose of the explanation above is to point out that a major source for the silica rock, as well as the coal needed for the heat processing, are both found in the mines and manufacturing facilities of Hoshine Silica Industry co. According to reports, those facilities are in the same industrial park as two Uighur internment camps.

The solar industry recognizes the forced labor problem is real, is not going to go away on its own, and must be addressed head on.

2. The Current and Near Future State of Regulation

2.1 U.S. Customs is stopping equipment at the border

As we reported here, the U.S. Government issued a Withhold Release Order (WRO) stating that any products believed to contain silica material produced by Hoshine Silicon Industry Co. and its subsidiaries should be held by Customs and Border Protection (CBP) and not released without evidence that the product’s supply chain was free of forced labor.

It appears that more similar regulation is coming down the pike. We understand that the effort to combat forced labor in the solar industry is being driven by the National Security Council at the White House, and supported by an unusual coalition of China hawks, Labor interests, and NGOs. For that we reason, we believe that there the current administration will pursue more WROs.

Additionally, on June 24, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) added four Chinese entities to the Entity List for accepting or utilizing forced labor in the implementation of China’s campaign of repression against Muslim minority groups in the Xinjiang Uighur Autonomous Region (XUAR). It is very possible those companies may soon be subject to WROs:

Xinjiang Daqo New Energy Co., Ltd.
Xinjiang East Hope Nonferrous Metals Co., Ltd.
Xinjiang GCL New Energy Material Technology Co., Ltd.
Xinjiang Production and Construction Corps (XPCC)

According to recent reports, BIS may also issue more entity list designations. Those designations prohibit exports to the designated companies. However, they may be a good indicator of what companies may be targeted for WROs thereafter.

2.2 The U.S. Congress may broaden prohibitions on imports

In parallel, the House and Senate are currently working on two bills, both titled Uyghur Forced Labor Prevention Act. The senate bill has been passed, while the House bill is still in committee. Those bills could establish a presumption that anything produced in the XUAR uses forced labor. That would mean that importers of those articles would then be reqiured rebut that presumption in order to import any goods from the Region into the United States.

2.3 Other agencies may add to the restrictions

There is some speculation that the USTR may start issuing 301 designations – adding a substantial punitive tariff to equipment from the Xinjiang region. Meanwhile, the U.S. Department of Treasury has shown that it is not afraid to use its sanctions authority to entirely cut off U.S. persons from transactions with parties suspected of forced labor abuses.

3. The Opening for Industry: Self-Regulation or Government Regulation

3.1 Customs will need some time to ramp up its enforcement apparatus

The U.S. Customs and Border Patrol agents addressing forced labor are competent and hard-working. However, the agency is understaffed to deal with the overwhelming problem of forced labor in the solar industry. With maybe a couple dozen agents assigned to forced labor, and that force also looking at Xinjiang textile and agriculture imports, it will be difficult for CBP to find bandwidth to clear imports stopped at the border for forced labor issues.

That small group of enforcement officials will face the challenge of tracing supply chains from the base chemical level described above, with documentation in Mandarin. Finally, at this point, there is no clear guidance from the U.S. government as to what evidence would clear a shipment stopped at the border. There is no U.S. Customs checklist for forced labor verification nor a list of acceptable evidence that a supply chain is free of forced labor.

Because no guidance on what constitutes admissible product has been issued, it is unclear what CBP would want to see in order to clear equipment held under a WRO. This uncertainty leaves industry with an opportunity to lead before government imposes requirements (more in Section 5 below).

3.2 Industry can have a voice (for now) in what regulation will look like

As the U.S. Government slowly starts to work on figuring out what constitutes admissibility, the Solar Industry has opportunity to lead the process in a number of different ways:

The Solar Industry could create and propose a list of criteria for admissible products.
While it is taking steps to identify suppliers accepting or relying on forced labor (on which more in our second article of this series), the Industry could effectively clear a group of suppliers and white-list those in cooperation with the U.S. Government.
The Industry could take the Better Cotton Initiative as a template and invest in a third-party verification system that would constitute substantive, auditable evidence of a supply chain free of forced labor.
We understand that chemical signatures in the silicon wafer from the silicon rock processing would allow for batch tracing,[1] which allowing the Industry or a vendor to the industry to batch-test and identify the source of the materials rely on.

Any one or a combination of the above approaches could help the Industry support the laudable goal of eliminating forced labor from the supply chain while, at the same time, helping the Industry avoid onerous or inconsistent regulations devised without its input. There is opportunity for solar to continue its spectacular growth, but it will need to take steps to address this messy problem.

Reid Whitten is the Managing Partner of Sheppard Mullin’s London office, practicing in international trade regulations and investigations.

Julien Blanquart is an International Trade associate in the Government Contracts, Investigations & International Trade in the firm’s Brussels and London offices.

To read the full commentary from Sheppard Mullin, please click here.

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Biden Administration’s Recent Actions Related to Products from China’s Xinjiang Region

Fri, 25 Jun 2021 15:56:55 +0000

The Biden Administration has taken new actions related to forced labor in the Xinjiang region that may affect the supply for material critical for solar panels: U.S. Customs and Border Protection (CBP) issued a Withhold Release Order (WRO), the Department of Commerce (Commerce) updated its Entity List, and the Department of Labor (Labor) updated its “List of Goods Produced by Child Labor or Forced Labor.” These updates are part of an increased emphasis on both forced labor issues and a crackdown on goods from China’s Xinjiang province, and come on the heels of the G7 Summit that was held in mid-June. The White House indicated that the Administration’s actions are a “translation” of the commitments made at the G7 denouncing forced labor in the Xinjiang region.

CBP issued a WRO on silica-based products manufactured by Hoshine Silicon Industry Co., Ltd. and its subsidiaries (Hoshine). Hoshine is located in Xinjiang. CBP issued the WRO based on unidentified “information available” that “reasonably but not conclusively” points to the use of forced labor. Based on the WRO, silica-based products will be detained at all U.S. ports of entry. It is also possible that CBP could issue redelivery notices for affected goods imported and released within 30 days of the redelivery notice. This WRO marks the eleventh order on goods allegedly made by forced labor from Xinjiang. Additionally, it broadly applies not only to goods exported by the Hoshine Silicon Industry Co., Ltd. but to any goods incorporating materials produced by this company. This broad scope may be the largest problem for purchasers of the Hoshine product, who now may be faced with the disruption of their imports or even redelivery notices.

Commerce’s Bureau of Industry and Security (BIS) also updated its Entity List to include the following five (5) entities:

Hoshine Silicon Industry (Shanshan) Co., Ltd.
Xinjiang Daqo New Energy Co., Ltd.
Xinjiang East Hope Nonferrous Metals Co., Ltd.
Xinjiang GCL New Energy Material Technology Co., Ltd.
Xinjiang Production and Construction Corps (XPCC)

Several of these entities are major manufacturers of monocrystalline silicon and polysilicon which are used in the production of solar panels. As a result of the BIS Entity List designation, effective June 24, 2021, the export, reexport, and in-country transfer of commodities, software, and technology subject to the Export Administration Regulations (EAR) is prohibited if a company on the Entity List is an end-user, purchaser, or intermediate or ultimate consignee.

BIS’s action did include a savings clause which allows shipments of items “en route aboard a carrier” as of June 24, 2021 to proceed to the newly listed entities if those shipments were made pursuant to actual orders and would not have otherwise required BIS export licensing.

BIS’s action is in addition to the WRO issued by CBP. In a press release issued by Commerce, the Administration indicated that “ [t]his action targets these entities’ ability to access commodities, software, and technology subject to the Export Administration Regulations (EAR), and is part of a U.S. Government-wide effort to take strong action against China’s ongoing campaign of repression against Muslim minority groups in the XUAR.”

Finally, the Labor Department added polysilicon produced with forced labor in China to its “List of Goods Produced by Child Labor or Forced Labor.” Updates to this List are typically published at two-year intervals, but this update is the first in the List’s history that was published before the next scheduled publication.

Jeffrey Neeley has more than 25 years of experience representing private parties in international trade remedies disputes in the U.S. and in foreign jurisdictions. He guides clients in matters including antidumping investigations, countervailing duties, subsidies, intellectual property disputes as well as related customs, export control, and other import/export issues.

To read the original commentary from Husch Blackwell please visit here

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