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By Ryan Li and Jai Malik
Many people are rightly coming to the conclusion that America must decouple its supply chains from China. As competition and tensions heighten between our nation and China, it looks increasingly alarming that 78% of our rare earth imports, 62% of our electronics imports, and up to 50% of our lithium-ion battery imports come from our greatest rival. It is thus no surprise that reshoring supply chains has gained major momentum over the past twelve months. Since April 2022, manufacturing employment growth in America has been at its highest in nearly 40 years, and increasing domestic manufacturing has continued to be one of the Biden Administration’s central initiatives.
Ending offshoring of American industry is certainly necessary if we are to maintain our strength on the world stage. We need greater command of production and domestic access to natural resources to keep our country safe and prosperous. However, reshoring will only be beneficial for our country in the long term if it happens with significant adoption of new technology. Only technology has the power to make our labor force more productive and our manufacturing processes more cost-efficient, thus aligning our economic priorities with our geopolitical ones. For this reason, the growing momentum to reshore American industry is not enough. Our country must embrace a broader movement to reinvent it—one which encourages entrepreneurs to develop new technology at home and inspire the next generation to will this technology into practice. Without both new technology and new talent, reshoring alone will be an expensive pursuit that contributes to a growing shortage of workers and cripples an American economy addicted to cheap, overseas labor and prices.
To understand why modernization of traditional industry is so crucial for our future, we should turn to the story of our past. Many pundits and politicians seem to have forgotten that offshoring supply chains was a direct result of the economic incentivization to do so. Beginning in the 1980s with the global acceleration of shareholder capitalism and the increasing focus on profit maximization, the financial sectors of developed nations ballooned in size and displaced industrial capitalism with a promise of making more money, more quickly. However, our manufactured goods still needed to come from somewhere. As free trade increased in the United States and other Western nations, we turned to cheaper labor markets in China and the broader developing world in the pursuit of greater profits and explosive growth. Subsequently, between 1990 and 2008, global trade jumped from 39% to 61% of global GDP, and China was accepted into the World Trade Organization. This era of late-20th-century offshoring is best summarized by GE CEO Jack Welch’s famous quip: “Ideally, you’d have every plant you own on a barge to move with currencies and changes in the economy.” We followed the money, and the money took us abroad.
Nevertheless, since the mid-2000s, the inevitable disruptions to company operations that have arisen—epidemics, cyberattacks, extreme weather events—have tempered the globalist promise of a seamlessly interwoven network of supply chains, and as a result global trade volume as a percentage of GDP has largely stagnated. Analysts now speak in greater volumes of a looming end to offshoring precipitated by COVID-19, the greatest supply-chain shock we’ve experienced in recent memory. Yet, despite this increasingly popular sentiment, the financial incentives that drove the trend toward supply-chain offshoring largely persist.
Far from what we would like to believe, China’s supply chains are well-oiled machines. Its manufacturing sector is still strong, and Western nations are still enticed by the scale of China’s industrial capacity. You can simply follow the money. The first four months of 2022 saw foreign direct investment drop over 50% year-over-year in Vietnam (another country touted as a new industrial hotspot) and 14% in the United States while increasing 26% in China—including a staggering 53% increase from American firms. While many American firms are concerned about political developments in China, it remains to be seen whether that worry alone will be enough to spark large-scale supply chain restructuring and overcome hawkish American monetary policy.
The only way to definitively align the growing momentum to reshore American industry with the demands of economic success is to develop new hardware and software that increases margins and financially pressures firms to manufacture in America. Government intervention can and should only do so much to effect large-scale change in firm behavior. Lasting change in private industries often comes from private-sector entrepreneurs: railroads from the railroad tycoons, cars from Ford, and computers from Gates and Jobs. Individuals—not governments—will technology into widespread adoption. What our politicians have pushed—“bringing back factory jobs”—is not quite the answer, alluring as that might sound. Nor is the answer only to pump hundreds of billions of dollars into temporarily subsidizing industrial businesses, as the current administration has pushed for. These are helpful stimulants, but not cures, for the underlying problem.
It is undoubtedly very promising that American policymakers are paying more attention to manufacturing than they have for decades, but the exact approach must be targeted. As just one example, it is estimated that a hypothetical complete decoupling of our semiconductor supply chain from China would result in a whopping 35% to 65% increase in chip costs. Despite the geopolitical importance of doing so, fully reshoring semiconductor supply chains—without any other action—is commercially untenable today. However, if we incentivized the creation of new companies and the use of technology to alter the economic status quo, the case for complete decoupling becomes more compelling. For instance, in the case of semiconductors, it was estimated in 2019 that adoption of intelligent digital tools alone could reduce engineering and operating costs at semiconductor companies by 30% to 35%. Since the days of Ford’s assembly lines, America has excelled at developing complementary technology that augments our talented workforce and increases profitability. With a more focused strategy, we can certainly excel at it again.
Reinventing American industry is not an idealistic fantasy. America has almost always been the first to market with superior, cost-cutting technology. For example, even though China produces almost 10x as many lithium-ion batteries as America today, we developed the core technology in the 1970s. Today, our industrialists are demonstrating a new ability to revamp our lithium-ion battery production while using technology to bring down costs. Tesla’s in-house Gigafactories have been able to continually reduce the cost-per-kWh of its lithium-ion battery packs by creating new designs that streamline the manufacturing process, developing new anode and cathode technologies to reduce the need for certain raw materials, and more. This should be our general approach to rebuilding America’s industrial base: combine the vitality of 20th-century American manufacturing with technology of the future to further national security and, crucially, make more money while doing so.
Semiconductors and lithium-ion batteries are only two components of the future American industrial base. We urgently need more industrialists crafting new businesses in this vein, relying more on technological implementation than on government intervention or supply-chain shocks. With our highly skilled workforce and unique capacity for entrepreneurial innovation, America has the potential not just to re-industrialize in the vein of the 20th century but shape what industrialization ought to look like in the 21st. The economic competition of the future will not be won with factories of the past, and the sooner we adopt this vigorous way of thinking, the sooner we secure the America of tomorrow.