The Economist - USA (2021-10-09)

theideaofsupply­chainstresstests,ratherlikethosethatarenow
carriedoutforbanks.
The information gathering willcontinue—and with it de­
mandsonprivatecompaniestosharedata.Policymakersappear
tobecoalescingarounda setofproductsofparticularconcern.In
a reviewofcriticalsupplychainsthatwaspublishedinJune,the
Bidenadministrationhonedinonelectricvehicles,activephar­
maceuticalingredients,semiconductorsandrareearths.(In 2019
Taiwanaccountedfor92%ofhigh­endsemiconductorproduc­
tion.)TheEuropeanCommissionemphasisedlithiumbatteries
forelectricvehicles,activepharmaceuticalingredients,semicon­
ductorsandrawmaterials(includingrareearths),aswellascloud
andedgecomputing.
Thesecondstrandofactionstofosterresilienceinvolvesbol­
stering alliancesbetween like­mindedallies, to diversify and
“friend­shore”productionawayfromChina.Someofthishasan
airofperformance,thoughafterfouryearsofDonaldTrumpbad­
mouthingAmerica’sallies,somepublicschmoozingmaybewel­
come.Butmuchrespondstoproblemsthathavebeenrecognised
foryears,suchastheheavilyconcentratedbusinessofminingand
processingrareearths.Possiblecollaborationsincludeonebe­
tweenAmerica,AustraliaandJapantoincreaseprocessingcapac­
ityoutsideChina,andanotherbetweentheeuandCanadato
matchinvestorswithpotentialprojects.

Subsidywars
Much of this co­ordination is only at an early stage. In June a long­
running dispute over aircraft subsidies between America, Britain
and  the  euwas  settled  by  creating  two  new  co­operative  frame­
works,  to  analyse  jointly  “non­market  practices”—that  means
Chinese  subsidies—“with  the  goal  of  establishing  the  basis  for
joint  or  parallel  action  in  the  future”.  Other  links  are  meant  to
manage  a  shift  of  supply  chains,  like  the  agreement  in  April  be­
tween Japan and America to collaborate over semiconductors. 
The third prong of governments’ quest for greater resilience in­
volves  fortifying  domestic  economies.  This  implies  sharpening
defensive trade tools. In May Katherine Tai, the us trade represen­
tative,  called  for  new  defensive  tools  to  deal  with  prospective
damage  to  American  business  from  foreign  competition  rather
than responding only after the fact. Britain is also reviewing trade
remedies, out of concern that in 2020 33% of goods exports were
potentially in competition with companies benefiting from state
subsidies, up from 7% in 2010. And the euis creating defences in
its single market against foreign subsidies.
It also implies an inward turn. The “Buy America” laws that the
Biden administration hopes to strengthen will further reduce for­
eign  access  to  a  massive  public­procurement  market.  Mr  Arm­
brust has heard that help from the government is coming; the in­
novation and competition bill before Congress includes a supply­
chain  resilience  programme  to  reshore  production  of  personal
protective  equipment  and  medicines.  In  China,  where  the  au­
thorities were rattled by American restrictions on exports of some
technologies, the government has reportedly issued new procure­
ment guidelines setting local content requirements of up to 100%
for  315  items,  including  medical  equipment  and  seismic  instru­
ments. The government’s 14th five­year plan in March included a
strategy to increase self­reliance by raising spending on research
by 7% a year.
This  fits  with  a  general  tilt  towards  industrial  policy.  In  the
pandemic,  the  fear  was  that  foreign  suppliers  might  protect  na­
tional  interests  at  the  expense  of  trade  flows.  When  British  and
American  cash  for  vaccine­makers  came  on  condition  that  pro­
duction  would  go  first  to  their  populations,  other  countries  like
Australia, Canada, South Africa and South Korea that wanted to se­
cure supplies invested in the final stage of production. In July the

wtovaliantly  published  a  list  of  vaccine

inputs, to help governments assess which

trade  flows  not  to  impede.  Many  politi­

cians  now  believe  that  in  a  crisis  foreign

suppliers are unreliable.

The  semiconductor  industry  is  being

vigorously chased by government cash, in

part  because  of  the  perception  that  exist­

ing production sites arose from public sub­

sidy.  The  Biden  administration’s  review

noted that the Taiwanese government cov­

ers 50% of land costs and 45% of construc­

tion  and  facility  costs  for  semiconductor  fabrication  facilities;

and that South Korean subsidies cut the cost of owning a semicon­

ductor manufacturing facility by 25­30%. A bill to support semi­

conductor manufacturing to the tune of $52bn is currently going

through Congress. Japan is dangling financial incentives to entice

tsmc, a Taiwanese company, to set up a facility. eumembers are

similarly eyeing a partnership with Intel.

It remains to be seen how far such spending might spread. The

European Commission has funnelled €6bn ($7bn) to a pan­Euro­

pean research and innovation project to support the battery sup­

ply  chain  since  December  2019,  but  it  faces  sharp  budget  con­

straints.  Japan  has  allocated  up  to  ¥457bn  ($4.2bn)  in  grants  for

companies to diversify supply chains, with little enough effect to

show how expensive incentives can be.

Mr  Evenett  worries  that  these  behind­the­border  measures

will further distort trade. Places already comfortable with the idea

of localising production may be emboldened. Trudi Hartzenberg

of the Trade Law Centre, a South African think­tank, says the pan­

demic has bolstered the resolve to develop productive capacity in

South  Africa,  which  is  linked  to  the  government’s  push  to  waive

Many politicians

now believe that

in a crisis foreign

suppliers are

unreliable

The Economist October 9th 2021 Special report World trade 7