Beijing Unveils Manufacturing Plan Amid Calls to Move Supply Chains Out of China

More than a month into the Biden administration and as Chinese top leaders meet for the annual “Two Sessions” top political meetings in Beijing, it appears that protracted U.S.-China tensions are here to stay. Last week, the White House released a report on President Biden’s national security agenda, which featured a heavy focus on how the U.S. should engage in long-term competition with China. The South China Morning Post’s Sarah Zheng reported on the details of the administration’s interim strategic guidance:

The interim strategic guidance released on Wednesday described China as the only competitor that had the power to “mount a sustained challenge to a stable and open international system”, placing a firm emphasis on US interests in the Indo-Pacific region compared to a focus on the Middle East during the Barack Obama era.

priorities included defending and bolstering the US and its democracy at home, promoting a “favourable distribution of power” to deter or prevent adversaries from threatening the US and its allies, and leadership in a rules-based international order underwritten by democratic alliances.

“Taken together, this agenda will strengthen our enduring advantages and allow us to prevail in strategic competition with China or with any other nation,” it said. “By restoring US credibility and reasserting forward-looking global leadership, we will ensure that America, not China, sets the international agenda, working alongside others to shape new global norms and agreements that advance our interests and reflect our values.” [Source]

Central to the strategy of competing with China is the issue of manufacturing. Biden sought to demonstrate the centrality of the issue to his administration by signing a “Buy American” executive order within days of taking office, aimed at forcing the federal government to buy more goods made in the United States. More recently, in late February he signed another executive order aimed at reducing America’s reliance on foreign supply chains for critical goods including semiconductors and pharmaceuticals. As The New York Times’ Jim Tankersley and Ana Swanson reported, that move came amid a growing chip shortage crisis and worries about China’s chokehold over the global supply of rare earth minerals:

The president ordered yearlong reviews of six sectors and a 100-day review of four classes of products where American manufacturers rely on imports: semiconductors, high-capacity batteries, pharmaceuticals and their active ingredients, and critical minerals and strategic materials, like rare earths.

[…] The executive order did not target imports from any specific country, but it is being viewed as an early salvo in the administration’s economic battle with China. Beijing’s dominance of global supply chains for raw materials and critical products like medical masks has prompted deep concerns that its authoritarian government could cut off the United States, causing even bigger economic disruptions.

Early in the coronavirus pandemic, China diverted exports of surgical masks and protective gear to its local governments and hospitals, leaving foreign purchasers empty-handed. Along with India, China is also a major source for the active ingredients that go into making vital drugs, including antibiotics and pain medicines.

China has also periodically moved to ban exports of rare earth materials that are crucial for manufacturing electronics, fighter jets and weaponry; it proposed new export curbs this year. [Source]

Escalating competition over critical high-tech sectors such as semiconductor manufacturing and batteries is a dominant issue for both Washington and Beijing. Top leaders in Beijing introduced a comprehensive plan to upgrade China’s manufacturing capabilities at the annual meeting of the National People’s (NPC) this past week. As the South China Morning Post’s Che Pan and Celia Chen reported, the plan signified a renewed focus on the “Made in China 2025” initiative after years of Beijing playing down its high-tech manufacturing strategy:

China unveiled on Friday a comprehensive plan to upgrade its manufacturing capabilities by 2025 via eight priority areas, sharpening its global competitiveness amid a broad trade and tech dispute with the United States.

[…] The plan [to upgrade its manufacturing capabilities by 2025,] which was introduced at the annual meeting of top legislative body the National People’s Congress (NPC), is focused on rare earth and special materials, robotics, aircraft engines, new energy vehicles and smart , high-end medical equipment and innovative medicine such as vaccines, agricultural machinery, major equipment used in shipbuilding, aviation and high-speed rail, and industrial applications of China’s Beidou global navigation satellite system.

The renewed focus on advanced manufacturing, years after Beijing played down its “Made in China 2025” strategy amid complaints from Washington and , reflects the Chinese government’s determination to pursue a hi-tech transformation of this sector. That would help offset rising production costs, strengthen the country’s position in global supply chains, reduce reliance on foreign technologies and enhance its competitiveness against the US. [Source]

But while lawmakers are focused on competition in the high-tech sector, relatively less attention has been paid to U.S.-China trade in low-tech manufactured goods, which have been deeply affected by the coronavirus. This week for The New Yorker, former China correspondent Peter Hessler wrote about the U.S.’s growing reliance on China’s manufacturers over the course of the pandemic:

Li [Dewei, who co-owns a manufacturing company] said that things would have been worse if not for the stimulus checks sent out by the Trump Administration under the cares Act. Because Li sold directly to customers, he could track sales closely. “We check the statistics every day,” he said. “After the American government started issuing the money, the next day we saw an increase in sales.” By the time I visited, two weeks into the stimulus program, Kimzon’s American sales had almost doubled, although they were still slightly lower than usual. “We don’t know whether the current consumption with the U.S. government aid is a short-term trend,” Li said.

[…] He had also concluded that U.S.-China tensions were unlikely to have any impact on Kimzon’s business. Trump Administration officials often blamed China for its early handling of the pandemic, but there didn’t seem to be any consumer backlash. In the span of three months, Li’s ideas about risk had completely reversed: now he believed that the poor handling of the pandemic in the U.S. was likely to benefit his sales. “A lot of businesses are closed,” Li explained. “People are afraid of going to shops, because of infections, so they want to buy online.” Even the Amazon reviews of his shoes told him which way the wind was blowing. May 14th, five stars: “I purchased them to wear during the day at work delivering packages for a big online order company that rhymes with am-a-John. So far so good on 10-hour shifts.”

[…] As a Corps volunteer, I hadn’t returned to the U.S. for two years, and now we seemed likely to repeat that experience. But, in the nineteen-nineties, Sichuan still felt remote, and even American commerce seemed a world away; I never saw a McDonald’s during those two years. By , there were more than seventy thousand American companies . Meanwhile, the Chinese were producing much of the P.P.E. and many other goods that were bought by Americans during a time of crisis. Almost any event in the U.S.—a protest, a lockdown, a stimulus program—had an immediate economic ripple effect somewhere in the People’s Republic. Decoupling had been envisaged as an economic process, but the market links were stronger than ever: in 2020, U.S.-China trade increased by nearly nine per cent. The separation was happening almost entirely at the human level. […] [Source]

For multinational brands, a significant challenge in 2021 is reckoning with the ethical question of maintaining supply chains in China. It comes as the mounting evidence of crimes against humanity and genocide in Xinjiang is becoming impossible for companies to ignore. Yet, as The Wire China’s Katrina Northrop and Eli Binder wrote this week in an article titled “The Xinjiang Silence,” ignoring the problem, at least publicly, is exactly what American businesses are continuing to do:

The Wire surveyed the 48 largest U.S. businesses with operations in China and asked if they had a position on the well-documented evidence of the Chinese government’s systematic repression in Xinjiang and if they have done anything in response. The vast majority — 88 percent — did not reply or would not respond to questions that referenced Xinjiang. Indeed, a Costco spokeswoman seems to have perfectly summarized the attitude of the U.S. businesses community in response to The Wire’s questions about the largest persecution of an ethnic group in the 21st century: “Management has no comment at this time.” She asked not to be named.

[…] The first step, many experts agree, is to cut ties with Xinjiang. It is impossible to do any type of business in the region without being somehow involved in the detention and forced labor system.

[…] Even if a company could guarantee there wasn’t forced labor in its supply chain, what does it mean to work in a country with ongoing state-sponsored genocide?

“Imagine back in the 1940s saying: ‘we’ll still work with Nazi Germany, but we wont buy products made in Auschwitz,’” says Foundation for Defense of Democries’ [sic] Schanzer. “That would sound ridiculous today.” [Source]

See also a 2019 Council on Foreign Relations backgrounder examining the threats that the Made in China 2025 initiative poses to global trade.

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