Tariffs won’t make critical US supply chains more resilient

This week, President Biden received a report on the well-being of U.S. supply chains in semiconductors, batteries, minerals and materials, and pharmaceuticals. It’s not good news, and the report could make things worse.

The report, titled “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth,” includes old-school industrial policy themes peppered with catchy new terms, such as resilient. It also talks about how other countries’ trade policies have left the U.S. vulnerable, and how Washington should respond. This is where the report gets it wrong.

The term “resilient supply chain” can come across as a call for trade protectionism. The report defines a resilient supply chain as “one that recovers quickly from an unexpected event.” So, in time of war or COVID-19, the U.S. should be able to get and build the things it needs, and not be denied by foreign firms that are either unable, or unwilling, to deliver the goods.

Is this a plea for autarky? No. The report insists that “It is neither possible nor desirable to produce all essential American goods domestically.” The problem is that the report’s theory of trade suggests otherwise.

Take batteries. The study surveys U.S. tariffs, noting that these are relatively low, and zeroed-out for those countries that, under free trade deals, meet regional content requirements. Then the discussion turns to how these tariffs can be increased, despite the commitments the U.S. has made at the World Trade Organization (WTO). Ongoing Section 301 tariffs against China, which include batteries, get a shout-out in this regard.

What’s going on here? Why are higher tariffs good for supply chain resiliency? Actually, higher tariffs are about the only thing the report wants from trade policy.

The report clings to a story that goes like this. The U.S. is not competitive in batteries, for example, because other countries subsidize their firms, making it possible for these firms to sell below their cost of production, purging U.S. competitors through predation. The report calls this “pumping and dumping,” argues it hasn’t been sufficiently unopposed because Washington is preoccupied with economic efficiency, and sees more enforcement through antidumping and countervailing duties as the answer.

Or take nickel. In explaining why the U.S. does “not have a strong presence” in this supply chain, the report lists three reasons, starting with a lack of competitiveness “given globalization, alleged dumping, and excessive foreign government subsidization.” 

Coming in at number three: “limited US nickel reserves.” Yes, the report calls for “coordination with allies” to fix things, but how would more antidumping and countervailing duties help?

The report makes two specific recommendations concerning trade policy. The first is to establish a “trade strike force” to “identify unfair foreign trade practices,” presumably meaning dumping and subsidy. The second is to launch a Section 232 case on neodymium, the idea being that “national security” tariffs might secure access to rare-earth magnets used in things ranging from electric cars to defense systems. So, both recommendations boil down to this: more tariffs.

Semiconductors show why this won’t work. The Boston Consulting Group estimates that protectionism will do more damage to the U.S. industry than all the subsidies that China is throwing at its domestic firms under its “Made in China 2025” program. A supply chain that doesn’t exist can’t be made resilient.

More tariffs will only create greater uncertainty up and down supply chains, scaring off allies and undermining the expected return to the report’s industrial policy recommendations. The report’s view of trade policy equates supply chain resiliency with protectionism. That’s not the way forward. 

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University, a nonresident senior fellow at the Atlantic Council and host of the podcast TradeCraft.