Supply chain review reflects new national security mentality

For all the talk of “decoupling” the U.S. economy from that of China, the reality was always that there would be, at most, a limited and selective redesign of global supply chains. China produces too much, too efficiently for the rest of the world to exclude it from all multinational production networks.

The Biden administration’s review of critical supply chains, announced Wednesday, makes more sense — if it leads to the establishment of resilient supply chains for the United States and its economic partners. Success is only possible, however, with a focus on national security concerns that embraces cooperation with allies and like-minded countries. Japan must do its part.

While the COVID-19 pandemic made clear the world’s reliance on China for production of personal protective equipment, there have been other indications of China’s central role in vital manufacturing networks. Vulnerability was first exposed in 2010, when China, which controls about 80% of global rare earth refining capacity, cut off shipments of those minerals to Japan during the dispute over the Senkaku Islands. Rare earths are critical to high-tech products, including many leading-edge military applications. Ever since, Japan, the United States and other partners, such as Australia, have developed alternative sources to ensure that they are not held hostage in another political dispute.

Tokyo, Canberra and Delhi took a potentially important step last September when they announced the supply chain resilience initiative (SCRI), which aims to promote regional cooperation to build a resilient supply chain in the Indo-Pacific. The following month, during his first trip overseas as prime minister, Yoshihide Suga pledged in Vietnam that he would help Japanese companies diversify their supply chains across Southeast Asia.

Tokyo is offering money to businesses that either reshore operations (return them to Japan) or move them from China to somewhere else in Asia. Targeting is key to the success of any such project. Businesses will be tempted to see offers of assistance as easy money rather than a national imperative. National security strictly defined should drive government action, not a desire to protect domestic companies.

The U.S. will be looking for that sweet spot in the wake of President Joe Biden’s announcement that federal agencies will review critical supply chains to reduce dependence on any rival. The U.S. is “going to get out of the business of reacting to supply chain crises as they arise and get into the business of getting ahead of future supply chain problems,” a senior official explained.

While the U.S. policy does not single out any country, the previous week’s creation of a military task force to review U.S. policy toward China, including in technology, helps spotlight Washington’s concerns. The supply chain review will focus on six areas: the defense industrial base; the public health and biological preparedness industrial base; the information and communications technology industrial base; the energy-sector industrial base; the transportation industrial base; and supply chains for agricultural commodities and food production.

The supply chain review follows reports that a shortage of semiconductors for the automobile sector forced the temporary closure of manufacturing plants in the U.S. According to one estimate, the shortage reduced production by more than 280,000 vehicles, and the number could reach 500,000. Ensuring a steady and adequate supply fits neatly into Biden’s goal of fashioning a foreign policy that helps the U.S. worker.

There are limits to such thinking, however. While governments must re-conceptualize national security, the idea cannot be rendered so sweeping that nothing is left out. Experts note that the semiconductors that the U.S. needs for vehicles are not especially high-tech — unlike those used in the military or other advanced uses. In other words, job losses alone are not enough to justify protectionism.

Biden’s order emphasizes working with allies to build strong resilient supply chains, and Japan, South Korea and Taiwan are expected to play central roles when it comes to semiconductors, which are essential to technology products. Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chip maker, agreed last year to build a new fabrication facility in the U.S. (with U.S. government support); Japan has been courting the company as well. Those efforts have paid off: TSMC revealed earlier this year that it would build a research and development center in Japan.

Supply chain resilience must be a Japanese government priority. Japan should undertake its own review of production networks in vital sectors. That analysis should be a systematic assessment of supply chain resilience in its entirety, including risks of disruption resulting from natural disasters, as occurred after the March 2011 triple catastrophe. Last year, the government initiated a review of pharmaceutical supply chains as the COVID-19 pandemic intensified; that effort should be expanded.

The breadth of the assignment means that it should be coordinated by the economic division of the National Security Secretariat that was established last year. The need for assessment and planning across the entirety of the economy demands a directing and coordinating body that is intimately tied to national security planning.

At the same time, these are private sector activities. Accordingly, businesses must adjust their thinking, too. Traditionally, investment decisions have been guided by commercial logic, with the bottom line — cutting costs — the foremost consideration. No longer. Business executives must attune themselves to political risk and understand the larger geopolitical and geoeconomic contexts in which they operate. This is the new reality of contemporary political and economic competition, one in which once bright lines are being blurred and erased.

The Japan Times Editorial Board