Trade Yes, Dependence on China No

L ast July seems like the last millennium, but experts were already warning that American reliance on Chinese-made medicine was a strategic risk to the country. Eight months and one pandemic later, the PRC government was already threatening to cut off drug supplies. Dependence on China for medical-mask production forced the U.S. government to lie about the efficacy of masks so that a shortage (from Chinese government hoarding) did not produce a run on supplies that left nothing for medical professionals. While it is undesirable for the U.S. to withdraw from international trade, we should take steps to limit our dependence on an ambitious and unfriendly rival government.

One suggestion has been offered by Senator Tom Cotton (R., Ark.). His plan would, with phase-ins to take account of the current crisis, prohibit the purchase of pharmaceuticals and pharmaceutical ingredients that are produced in China. That is a good first step.

In future years, it will be seen as an act of madness that we allowed our medicine production to be outsourced to a hostile government. The only holdouts will be ideological fanatics and the bought flacks of a government that uses slave labor at home while deploying the language of freedom and business to explain why we should not remove the knife from our throats. As a heuristic, the more opposed the PRC government is to repatriation of supply chains to America (or at least out of China), the better an idea it is.

Senator Marco Rubio (R., Fla.) has proposed federal loans and tax benefits to encourage domestic production of medical supplies. Another policy might complement these suggestions: For key industries, companies that want access to American markets should move some percentage of their production to America.

One instructive example might be the American experience with quotas for foreign automobiles. The 1980s American automobile industry was bloated, inefficient, and dysfunctional. It was losing market share to foreign companies that made more reliable cars at lower prices. The Reagan administration reached an agreement with Japan to “voluntarily” limit car imports in order for the American automobile industry to have a chance to reform and regain competitiveness.

In its stated goals, the policy was a failure. The Big Three automakers stayed unreformed and dysfunctional. They continued to lose domestic market share. During the Great Recession, two of the Big Three (General Motors and Chrysler) went bankrupt and were bailed out by the taxpayers.

But there was an unanticipated benefit. In a paper that condemned the Reagan automobile quotas as having raised prices on American consumers, Robert W. Crandall noted that the quotas had encouraged Japanese investment in American manufacturing so that Japanese car companies would have secure access to American markets in case quotas were ever reimposed.

Crandall got much right (but also some wrong) when he wrote:

In the end, it is new competition [in the form of the new Japanese-owned American automobile factories] and not the restriction of competition that will revitalize the U.S. automobile industry.

That was so close to the truth. The dysfunctional U.S. auto industry would not be revitalized for decades, but the quotas encouraged the creation of a foreign-owned auto industry within the United States whose production would rival that of the old Big Three automakers.

These foreign-owned factories produce hundreds of thousands of cars and employ tens of thousands of American workers. If we want to encourage American production of key products, that could be a model.

This raises the question of what should be counted as a strategic product. The current crisis indicates that medicines and medical equipment should be on the list. Perhaps there is an argument for telecommunications equipment. Blue jeans are probably not a strategic priority. If China shuts off the supply, wear the same clothes a little longer as global supply chains adjust and we move to different international producers. It isn’t the same as not being able to get your blood-pressure medication. The same would be true of most products at the local Walmart or Target.

One other thing to keep in mind is that the industrial politics of 2020 is not the same as that of the 1970s and 1980s. This is no longer about protecting inefficient domestic firms from international competition. Firstly, it is nominally American firms that have outsourced production to China that would be expected to oppose partial repatriation of supply chains. Rather than clamoring for protection, corporate America would oppose partial repatriation of supply chains. After all, these firms would now be required to invest in American production facilities and American workers alongside their investments in China as a condition of access to the American market. Good. Let them and their lobbyists cry about it.

Secondly, we should not necessarily expect that American firms would be the sole (or even primary) beneficiaries of a policy that demanded increased domestic production. If foreign-owned firms profit by investing in American factories and American workers, so much the better. The goal should be having a base of manufacturing plants and skilled workers so as to lessen our dependence on potentially hostile foreign regimes, and not in rooting for the superficially national branding of transnational corporations.

We should recognize that this policy is neither blind to the national interest nor utopian. We should ignore complaints from rigid, ideological extremists that this policy violates the true principle of freedom that consumer goods be made exclusively by Uighur slaves.

Finally, we should remember that this policy is fundamentally modest. America will still be open to trade. Most manufactured products will still be made overseas, and most American workers will still be in the service sector. But, in an emergency (or just a period of political tension) we won’t be dependent on a hostile foreign power for the lives and health of our fellow citizens. That is good enough.