Global Supply Chains in the Era of COVID-19

Wednesday, March 31, 2021
Jonathan Ernst/Reuters

Bernard L. Schwartz Senior Fellow, Council on Foreign Relations; @edwardalden

Associate Professor, Economics, Tuck School of Business, Dartmouth College

Chief Information Security Officer, Google Cloud; CFR Member


Global Markets Reporter, CNBC; CFR Term Member

Our panelists examine the vulnerabilities in global supply chains exposed by the COVID-19 pandemic, resiliency options such as supplier diversification, reshoring critical industries, and stockpiling vital supplies, and the effect of such steps on international trade.

MODY: Thank you so much. Good afternoon and welcome to today's Council on Foreign Relations virtual meeting on global supply chains in the era of COVID-19. I could not think of a better day to talk about this topic as we await more details on President Biden's $2 trillion infrastructure package. Our panel today—Edward Alden, Bernard L. Schwartz senior fellow, Council on Foreign Relations; Emily Blanchard, associate professor of economics at Tuck School of Business, Dartmouth College; and Philip Venables, chief information security officer at Google Cloud. And by way of introduction, I'm a global correspondent at CNBC Business News. I'm actually on set right here today. Let's start this discussion. Emily, I would like to start with you as we wait for more details on Biden's infrastructure package. How could this deal potentially stress the global supply chain that right now has really been the central focus for corporate America right now?

BLANCHARD: Yes, great question. Details will be really important, of course, as we look forward to this. I think the key question is the package is designed to address fundamental challenges that we're facing right now. And there are different kinds of challenges that this bill will focus on. So there are short-term pieces, and there are long-term pieces. If we focus particularly on today's topic of global value chains and resilience, we can think about the bill and how it will strengthen resiliency of the American economy to unexpected shocks. This is both idiosyncratic shocks, so things like the shutdown in the Suez Canal this last week. It could also be systemic shocks where we see a correlated shift in demand or supply like COVID-19. At the same time, though, we have to be crystal clear this bill has a bunch of provisions, or we expect it to have a bunch of provisions, that address long-term considerations about U.S. economic competitiveness and decoupling in supply chains with China. So there's just a lot of pieces on the table here.

MODY: Absolutely. Edward, Emily just mentioned the Suez Canal. We finalized the topic of global supply chains, and we spoke a couple of weeks ago. The blockage of the Suez Canal wasn't even an issue. But how do you think this specific event—I've been covering the aftereffects from speaking with manufacturers out in Saudi Arabia to ones in Kansas that really are feeling the pressure, certain raw materials they cannot access, which you got to wonder how that's also going to feed into this infrastructure deal?

ALDEN: I mean, you know, I think the reason that the Suez shutdown was such a big deal—I mean, it would have been a big deal at any time because so much trade goes through the canal. But the fact that it came on top of a series of shocks that really companies have been dealing with for the last two years. I mean, I've paid a lot of attention, Emily did too, to the U.S.-China trade war and the impact of tariffs. Then you throw COVID on top of that, and you've got medical equipment shortages and face masks and everything else. Then as we come out huge consumer demand for goods from Asia and suddenly we've got this massive container shortage because containers are going one way. There's nothing to send them back. You've got slowdowns at the ports. We're still dealing with the effects of that. You've got an air freight shortage because passenger transport is down significantly. A lot of freight goes in the cargo holds of passenger aircraft. So you throw the Suez shut down on top of that, you've got this huge backup of containers now and they're going to be arriving at Rotterdam and the other big ports in Europe. It's going to take them a long time to unload it, and so all of this sort of carefully coordinated movement of those containers, which is critical to global trade, is being thrown off. So we've just had in the last couple of years an enormous series of events that I think have caused supply chain managers at every significant company to take a really hard look at what they're doing and whether they are adequately protected against these types of disruptions.

MODY: And Philip, we know that this is a story, the global supply chain story, that really started in the technology sector when we started to hear about reports of a shortage of chips and observers blaming U.S. companies for being overly dependent or reliant on manufacturing out of China and other countries there. Over the last week, we've heard from a major technology company, Intel, saying it's going to start investing more in manufacturing here in the U.S. Do you think other technology companies will follow suit?

VENABLES: Well, I think it's definitely interesting. Obviously diversifying manufacturing and where the manufacturing bases are for pretty much every product you can imagine is always going to be a great contributor to resilience. So that's a good thing. I would think though, as well, I mean all of the recent events and other events that have happened over the past few years just serve to highlight even more that all organizations need real-time transparency over not just their direct suppliers and not just their third parties, but the vendors of the vendors, the suppliers of the suppliers that have the fourth and fifth pies and gain that degree of real-time risk transparency, almost a digital overlay on the physical supply chain to enable companies to peer down that supply chain and run different risk scenarios. Whether it's disruption, whether its source capacity issues, other types of issues, it could be an overlay of sanctions risk, having that end-to-end continuous real-time risk transparency to enable companies to manage this supply chain risk, I think, is going to be the topic that dominates the next decade.

MODY: Emily, decoupling from China? That's a narrative that certainly is not new. We've been talking about this ever since former President Trump declared a trade war with China. I'm wondering, though, how the supply chain shortage contributes to that trend, if it will accelerate that trend?

BLANCHARD: Well, I think, yes, is the short answer. It's hard to imagine a scenario where COVID-19 and the massive disruptions to global trade and commerce don't cause firms to start thinking hard about how they're sourcing, where they're sourcing, how to build resiliency and redundancy into their value chains. At the same time, it's a question of how much? Since 2016 and the saber rattling about the potential for trade war, even before we saw tariffs go in, there's been a lot of talk about how firms would fundamentally change their sourcing patterns. We haven't actually seen that much shift in trade patterns yet. We don't see it in foreign investment patterns yet. So there's this question of just is it going to be enough? Is this new uncertainty going to be enough or maybe the new incentives and things like the infrastructure to actually move the needle so that firms undertake costly, slow, and just very, very expensive actions to change the way they produce things and source things in the world today? It's an open empirical question.

MODY: And Edward, this is, after all, the Council on Foreign Relations. If that's the case, we have to certainly try to understand the foreign policy implications if manufacturing is nationalized and becomes a bigger priority not just for the U.S., but other countries as well.

ALDEN: I mean, I think there are kind of two big drivers here of potential decoupling from China. One is just the, you know, the new market situation with the uncertainties we've been talking about. We haven't talked a lot about sanctions on China yet. I agree with Emily. The shifts so far have been fairly modest. You know, we've seen the U.S. trade deficit grow with places like Vietnam and Mexico. We're importing more from those places, a little less from China, but the shifts are not dramatic. There's this whole other dimension here, which is the national security dimension. One of the first things that President Biden did on coming into office was to set up this 100-day review of critical supply chains. We're due to get a report and my understanding is there's supposed to be an unclassified version that will come out in early June looking at four areas. One is semiconductor manufacturing and packaging, which I think we'll talk about more; high-capacity batteries of the sort used in electric vehicles, which are clearly the next generation for automotive; critical minerals, including rare earths; and then pharmaceuticals and ingredients. On top of that, he launched these year-long sectoral assessments in a number of other areas, including, you know, the whole ICT industrial base and public health and transportation. And so the question is what comes out of those reviews, which build on reviews that were done in the Trump administration? Is the conclusion of the Biden administration that in certain areas the United States has to be either self-sufficient or highly resilient in the sense that we're only relying on allies for critical supplies? And if the answer that question is yes, then I think at least in certain sectors we are going to see accelerated decoupling from China. Not across the board with the consumer economy, but I think in key sectors. So I think there's still plenty of shoes to drop on this front coming from the security and foreign policy concerns.

MODY: Philip, on the topic of security, let's just start right there. Does it reduce or increase the risk of cyber security threats if you see more companies starting to build out their supply chain domestically?

VENABLES: I don't think it really has a major dimension to that. I mean, I think even if there's an increase in domestic supply, it's hard to imagine there's ever a situation where there's not some extended dependency, whether it's a domestic or an international supply chain. So the same message applies. Companies are going to have to manage that supply chain. I think the broader question, though, is when you start to think about security, and in particular cybersecurity and a broader topic of digital resilience, is to think about not just the physical supply chain that interconnects companies in the world, but that the supply chain of services, of software, of other types of service provision. Certainly we've seen over the past year or so in times that kind of managing a response to COVID and other types of resiliency events how companies are able to position and use their digital infrastructure to connect other types of services supply chains. It actually has been a key mitigant for them. There's clearly been risks to manage in transitioning to remote operations and more diverse geolocated operations. But certainly the digital infrastructure has held up very well to manage those resiliency capacity and security risks. But then more deeply, and I'm not sure well, you know, if we're going to talk about this at more depth today, so I won't go into detail there, but certainly when you think about some of the recent security events that have more to do with the software supply chain of companies. I think that's going to also have a big focus and probably is going to have a big focus from a legislative and regulatory perspective not just in the U.S., but around the world as well.

MODY: Just a follow up there, Philip. I mean, what has activity been like at Google right now? I imagine many calls coming in from clients of yours, big companies who want to understand how to better protect their digital infrastructure.

VENABLES: Yes, exactly. And so, you know, we're fortunate in that we've had a long history of investing very deeply and securing our own environment. And a large part of the environment we offer to customers through Google Cloud has been built on that experience of building that in-depth security into our environment from the hardware up through the software and services. I also think there's a general realization as companies look now to not just modernize their IT, but modernize their digital supply chains. They're looking to cloud providers not just as, you know, a few years ago they would classically think of migrating to the cloud as a risk to be managed. Nowadays, they're thinking about using cloud services as a part of managing their risk from both the security and the resiliency perspective. So I think, again, the natural, large capacity, geographic diversity and resilience of the hyperscale cloud providers like us tends to play into giving an increased capability for companies to have more resilience globally.

MODY: Emily, I turn to you there because you look at the last two months—the Texas deep freeze, the Suez Canal blockage, plus the pandemic and the reopening of the economy—we call that a crisis especially with what's happening right now in supply chain world but also looking to solutions about how these companies and businesses can be stronger going forward. Is digital resilience, is digital infrastructure sort of the solution?

BLANCHARD: That's a great question. Digital versus physical is more the question for Philip. Let's be clear about that. But to the extent that, let me put it this way. It is hard to imagine, and it is dangerous to think about somehow digital resilience and digital security being somehow separate from the security of physical supply chains. Goods and digital services are now completely intertwined, and so success of a firm, even if it's producing something as sort of old school and traditional as sneakers, crucially relies on that firm's ability to source and use digital services trade. So security there is a necessary condition, I think, for success in the global economy. So in that sense its utmost importance.

MODY: Edward, you could argue just right there and what Emily said that it does come at a cost though, being able to beef up your technology budget just after a pandemic where certain industries were under a lot of distress. Is this a feasible target?

ALDEN: I mean, you know, I think every company is going through the same exercise, which is how much is the extra resilience worth? I mean, we created this just-in-time, globalized economy for a reason. I mean, it was a product of, you know, millions of independent decisions. But, you know, having a structure where you can, you know, source your products in the lowest cost place, transport them efficiently on container ships of a size we've never seen before. I mean, look at the Ever Given. You know, it's as long as the Empire State Building is tall. I mean an enormous container. There's logic to that, right? It's lower cost. They're actually in terms of the environment less damaging to have containers on fewer ships. Then, you know, companies want to strip their inventory down as much as possible because it's expensive to store goods. So there's a reason that this whole just-in-time global trade system emerged and the economic logic of that is powerful. And I think for the most part, companies are going to be reluctant to pad on, you know, more and more layers of protection at significant additional costs. So the thing is, there isn't a right answer to this question. I mean, I think it varies sector to sector, but I think across the board, this is the question that companies are asking far more urgently than they did, you know, three or four years ago. I mean, you know, my colleagues here at Western Washington who teach, you know, supply chain management at the business school, right, I mean, their curriculum was designed in an era when they were teaching all their students how to do, you know, lean and just-in-time and that whole set of principles about supply chain management. The whole issue of resilience now is front center. I mean, Philip will have a better sense talking from a corporate perspective about how different companies are doing that kind in the digital space. But that's the challenge that all companies are facing right now.

VENABLES: I think it's interesting because I think, you know, you see a lot of companies both in the physical and digital space increasingly not just thinking about resilience, about building supply chain buffers, but also thinking about how to design for resilience to enable some, you know, late-stage substitutability of product as well. And so I think you see a lot of companies starting to reexamine how they think about supply chain resilience and almost not just trying to manage the resilience of the supply chain but designing the products and services to be more capable of late-stage substitution, which I think you can only do by designing that from the start. It's very interesting to watch how companies are responding to this.

ALDEN: Philip, can I just ask a question as well? I could imagine that there are companies that will figure this out very well. I mean, I recall after 9/11, because I covered very close, I was a reporter with the Financial Times at the time, all of the things that companies had to do in terms of supply chain security in the aftermath. And one of the things that did for a lot of companies was give this incredible visibility into their supply chains that they had never had before. And you're talking about the need for that with kind of third and fourth order. And I can imagine some companies will probably discover, even as they're building in resilience, places for cost savings that they hadn't recognized before they did this deep dive.

VENABLES: Yes, I think that's right. You see a lot of companies looking to more solutions and third-party solutions that help get them visibility deep into that supply chain. And if I can, one of the things that's fascinating to watch as well is how many different parts of supply chain risk in a lot of major corporations are managed by different groups. So you'll have like the manufacturing team will manage the supply chain logistics of delivering components into manufacturing. Then you'll have probably a legal and compliance team that manages the sanctions and other types of geopolitical overlay risks. Then you've got the security team that looks for all of the security issues and so on. And so one of the things you start to see a lot of now, usually under the guise of the chief operating officer, the CFO, or the chief risk officer, is probably coming more to the forum is this bringing together all those things to create this as a holistic risk management discipline for the company. But then exactly to your point, off from that come some really interesting commercial angles where you can figure out different places to manufacture different places of how to deal with suppliers and then different opportunities for managing the supply chain. Even if it's less efficiently from a classic resilience point of view, it can potentially end up being more diverse and more effective from a commercial point of view as well. So it's definitely interesting to watch companies reshape their ability to manage this risk.

MODY: And that reshaping of companies seems to be happening right now. Emily, one way companies are responding not only beefing up their supply chain teams, but also raising prices. Companies like 3M, a big industrial player, PVG, which makes paint, Kimberly-Clark, which makes toilet paper today, all of those companies from different sectors have said they are going to raise prices because of the shortage of raw materials. Do you think this is a story that will likely gain more momentum in the coming months?

BLANCHARD: I think it's absolutely something we should expect, I mean, to the extent that we are in a competitive global marketplace. And we are, right? Firms’ costs rise because they recognize the importance to build in this resiliency and their supply chains building redundancy. And yes, absolutely, they face higher input costs, which means higher costs of producing the final product they sell to customers, we should expect those customer prices to go up. I think one of the really important questions is as firms reevaluate and rebuild and reimagine their supply chains to build in all this sort of new flexibility that they need commercially to be successful, the question for national governments is that enough? Or is there some external to the firm value of additional resiliency and redundancy? So there's really this question of how governments can or should use or maybe should not use policy instruments to help firms build up this resiliency and redundancy or really nudge firms.

MODY: Edward, do you do agree with that analysis?

ALDEN: Yes, I think there's no question, and I think this is where it will get tremendously interesting in Washington. You know, clearly the new Biden infrastructure bill that we're going to get more details of this afternoon will open up the possibility of all sorts of horse trading in the Congress about, you know, where are we going to spend, you know, assuming he can get the support for it and the tax increases are going to be controversial. But, I think, potentially, we're going to get, I think, at a bigger level than we have seen in decades, this real question of what sorts of industries does Washington want to support? I mean, Chuck Schumer, I think, is going to push another version of his Endless Frontier Act, which has to do with America's competitive response to China. The semiconductor industry, I think, is looking for significant subsidies from Washington to expand production here in the United States. I think we're going to see this in critical minerals and other areas. And I think there's going to be a long list of industries who are going to put their hands up and say, "Look, it's critical for the national security of the United States that we'd be able to expand here in the United States. The only way that we're going to be able to do that is with government support." And so I think this is going to be one of the huge challenges for the administration is to try to craft an intelligent and forward-looking industrial policy. And that's what we're talking about. I mean, we haven't seen anything that looks like industrial policy in the United States since, I would say, the second term of the Reagan administration. And we're back in that moment again, and the question is what form does that take, which sectors benefit, what are identified as the key security vulnerabilities for which Washington is really going to need to put its thumb on the scale? It's going to be interesting to watch all this.

MODY: Philip, when we think about infrastructure, as Edward was sort of laying out, and sectors that could benefit, we tend to focus on construction and the aging infrastructure, which has been a big issue here in the United States. I recently interviewed the CEO of Amtrak about them modernizing their fleets but still running at a lower speed because of the tunnels and bridges that are fifty to seventy years old, on average, across the East Coast. I'm wondering, from a technology standpoint, whether there is a larger role for companies like Google to help assist in sort of expediting this infrastructure effort if and when this bill gets passed?

VENABLES: Well, I can't talk to specifics about individual companies. But in general, I mean, if you think it gets back to this point of how companies modernize the management and updating of physical infrastructure goes hand in hand with how they're modernizing and updating their digital infrastructure. Because as you all know, the intertwining of physical and digital is just innate in how we do things, especially to do things efficiently and effectively. And so a big part of all of this physical infrastructure transformation comes with digital transformation. And a large part of industry is going through that process now in modernizing their technology, modernizing their applications, figuring out ways of connecting their customers and their suppliers in much more digitally integrated ways. And a big part of that journey, you know, from all of the large tech companies, but especially the hyperscale cloud providers like us, is we have the technology to enable them to do that. And so certainly over the past year and in the past few years, we'll see this in the future as companies are looking to cloud to help them modernize faster in safer, secure, and more resilient ways. I think we're going to continue to see that and a big part of the dynamic is how all of the tech companies can help all the rest of industry modernize their digital infrastructure to support all the rest of their objectives.

MODY: If infrastructure is not prioritized, Emily, and a deal doesn't move forward, because this has been a story now for over two to four years, infrastructure, when is it actually happening, how could this, in addition to the supply chain constraints hurting many U.S. companies, hurt the U.S. in overall competitive role?

BLANCHARD: Yes, great question. So profoundly, right, so the U.S. in a lot of ways has been scooting by on increasingly depreciated physical infrastructure—ports, airports, roads, the electrical grid, water and quality of water. These are fixed investments that have last seen major infusions of cash often decades ago, often many decades ago. And so as that infrastructure starts to crumble, you will see costs arise for firms, for communities, for commerce. These costs will arise that weren't there before. So we sometimes imagine that the choice is maintaining today's status quo or the way things have been for the last five years. But as companies, sorry, as countries, the United States, just like a company, if you don't keep investing and maintaining a certain standard, you'll start to see very, very large costs crop up. And I worry a great deal about what that would mean for U.S. competitiveness.

MODY: Edward, at a time when that inflation story is only becoming a fiercer debate amongst economists as to how the Federal Reserve is going to react, whether this infrastructure deal gets pushed forward or not, you wonder how that starts to enter the equation?

ALDEN: Well, I mean, you know, you're opening the fundamental debate that's going on right now. You just watched the back and forth between Paul Krugman and Larry Summers. I mean, clearly, the federal government has been stepping very heavily on the gas with, you know, several stimulus packages now and we would see the same thing with a new infrastructure package. You know, I tend to be on the side of those who think that we're in a somewhat different inflation environment certainly than we were in the 1970s and early 1980s. We've got a fair bit of room to run. I would hope that with the infrastructure package that we don't worry quite as much about that piece of it. I mean, the thing about the sorts of investments we're talking about is they have long-term positive payoffs. If you're spending money, even borrowing money—I find it sort of ironic that we're willing to borrow money for short-term aid, but we're not willing to borrow money for investment in infrastructure—but put that aside, when you're investing in infrastructure, the long-term result is you improve the productivity of the economy and increase American competitiveness. That pays itself back in different ways. So I hope that the timing here doesn't turn out to be unfortunate, that concerns about inflation managed to hit exactly when the Congress is considering investments are so, so overdue and just desperately needed to pull the U.S. economy into the twenty-first century, which in too many areas of our infrastructure we just are not.

MODY: Which countries do you think are doing the best job at prioritizing their infrastructure needs, Edward? We look at Japan and their fast trains. Even parts of Europe, Spain, has faster trains than we do here in the U.S. That's only one part of the infrastructure story, transportation, but curious what your thoughts are there?

ALDEN: I mean, honestly, I think a lot of this comes from looking at what China has done, right? And, you know, China has the advantage of being a late comer, right? And so, you know, it's building out all of its infrastructure anew, whereas we would have to replace a lot of ours that's got its own challenges. But you just look at the efficiency with which China can build, you know, airports or, you know, the bridge that got built in two days or whatever it was in Beijing or the speed with which they were able to assemble hospitals in the crisis. I mean, we are just so sclerotic here in the United States when it comes to infrastructure. I think there are, you know, a number of European countries that do it better, one of the ironies here. This is a whole other debate. My colleague, Heidi Crebo-Rediker has done a lot of great work on this. We don't use public-private partnerships very well. For some strange reason we think the government should fund all infrastructure, whereas there's a lot of room for public-private partnerships. The Europeans do this much better. The Canadians do this much better. So we have a lot of things to learn from other places.

MODY: We are halfway through our session. At this time I would like to invite members of the Council on Foreign Relations to join our conversation with their questions. As a reminder that this meeting is on the record. You can raise your hand. The operator will remind you now how to join the question queue.

STAFF: [Gives queuing instructions] We will take our first question from Rob Quartel.

Q: Hi, thank you. Can you hear me? I used to be Federal Maritime Commissioner under Bush 41. And while everyone else is looking at the Ever Given in the sense of supply chain, what I note is that of the 450 ships of which 250 were container ships, not a single one was owned by, run under the American flag. And likely not a single vessel in all of that queue was built in the United States. So we're talking about potentially pushing supply chains back into the U.S., which requires more transportation. We don't have a domestic shipping capability. Many of us would say because of the Jones Act, which actually demands that ships be built in the U.S., manned, owned, and operated by Americans. So I guess my question is, wouldn't it be better, well, first, don't we need to be focusing on shipping and the maritime industry and shipbuilding as well as rail trucks, trains, etcetera? And secondly, wouldn't it be better if our model for ship builders was Boeing on the manufacturing side and GM and Ford on the sales side, meaning you have to compete?

MODY: Edward, did you want to respond to that?

ALDEN: You know, thanks for the question, Rob. It's a great question. I do not have enough expertise in the shipbuilding industry to give a satisfactory answer. I mean, I think, you know, one of the challenges in this whole exercise is there are a lot of places where U.S. manufacturing capacity has really withered and shipbuilding is one of those. You know, rail transportation is another. We could go down the list. And so, you know, the question that is going to need to be asked is what are the potential startup costs in these sectors and are they worth it not just from an economic perspective, but from a sort of broader national security perspective? I mean, I suspect that, you know, when you're talking about semiconductors, the answer is probably going to be, yes, that's something that is absolutely worth the government investing in because the dangers of supply shortage and of not being on the leading edge of technology are so significant not just for the economy, but for defense. Shipbuilding, I don't know whether you get the same answer. Obviously, when you're talking about warships, sure. When you're talking about container ships, maybe not so obviously. But I'm open, Rob, to persuasion on that front. And again, that's going to be the discussion that we're going to be having in the context of the various bills that may work their way through Congress. What are the industries where it actually makes sense for the federal government to put its thumb on the scale in order to encourage expanded production here in the United States?

BLANCHARD: If I can jump in with one observation, I think it's really interesting. You mentioned Boeing as a model. The Boeing 787 Dreamliner is one of the examples that economists have been using for the last ten years as a product that is fundamentally made in the world. If you look at the sourcing from engines to landing gear, it crisscrosses the globe. It's the final assembly and it's the logistics and the design that are Boeing's, but this is a product that underscores more than almost any other how important global value chains are, global supply chains, and the fragmentation of production around the world to firms being competitive. So I wonder what that would look like in the context of shipping and railroads.

Q: So my point exactly. The Chinese have decided to become both a naval power and a commercial power and now carry one out of eight containers on the planet and have revitalized shipbuilding. So, to me, it's a question of China in the end.

MODY: It always comes back to China. May we have our next question, please.

STAFF: We'll take our next question from Tara Hariharan.

Q: Thank you so much. I'm Tara Hariharan. I'm from NWI, a New York-based hedge fund. I'd like to return to the question of the feasibility of supply chain decoupling between the U.S. and China, specifically in semiconductors. We heard earlier this week from the chairman of chipmaking giant, PSMC, that he thinks it's economically unrealistic for individual nations to expect to be fully self-sufficient in semiconductors. And on one hand, we hear that China is several years behind North Asia and the West on semi-technology and innovation. So they have a disadvantage. But on the other hand we hear, of course, as you've also discussed today, that manufacturing in the U.S. is expensive and also that the U.S. may not be suited to a very aggressive state-led integrated industrial policy the way China's "Made in China 2025" can do it. So what is the real feasibility for U.S. and China to decouple in semis?

MODY: Emily, would you like to take that?

BLANCHARD: Sure, great question. I mean, this is fundamentally the question that we're grappling with and the countries will grapple with: What is the right balance to strike between the resiliency or the strategic benefits to decoupling in this case versus the economic costs? The economic costs are very, very high. And how high we don't exactly know. The decoupling piece, though, I want to be clear, is a little bit separate from should every country be fully self-sufficient. I mean, that's clearly not going to happen. So many of these economies, these really critical upstream production technologies, like semiconductors or computer chips, are going to be produced just in a handful of places around the world. So really what we're talking about in the context of semiconductors is should there be another nation or another geographic region that also becomes a sort of a secondary source powerhouse to work in parallel to China. And I think that potentially is feasible. And again, we're seeing if this infrastructure bill gets passed, there's a lot of investment and push to renationalize things, including semiconductors. So we'll see if that can happen.

VENABLES: Just one very quick thing I'd say is, you know, I think we should remind ourselves and now that I've kind of been in and around technology for, you know, sadly, over thirty years now, one of the things we should remind ourselves is when we go down the path of saying something can't be done, there's usually some technology innovation that, you know, proves us all wrong. So I wouldn't count out some innovations in the future that can radically alter the perspectives we have today about what's possible.

ALDEN: Just the one other point I wanted to add here is the security piece. I mean, I think part of the concern here is that a significant percentage of the world's most advanced semiconductors are coming either from Taiwan or South Korea. And Taiwan, in particular, is a concern from a security perspective. I mean, there's a lot of discussion about the changing balance power in the South China Sea and China's growing capabilities. China has been increasingly aggressive. My friend, Dimitri Sevastopulo, is reporting for the Financial Times on what the Chinese have been doing to put pressure on Taiwan and to indicate, you know, at least a willingness to try to exercise some coercion with respect to Taiwan. So, you know, the issue of whether the United States has become self-sufficient is not as important as the issue of security of supply. And is it a feasible position from a security perspective for the United States to be so dependent on production coming out of Taiwan? Again, I raise that question without knowing the answer, but this is very much part of the debate right now about semiconductors. It's not just a market debate about where the advanced chips can be produced most efficiently. It's a security debate about where they can be produced so that we know that we in the United States and our allies will have access to the world's most advanced chips.

MODY: Next question, please.

STAFF: Our next question from Peter Coy.

Q: Hi. I want to go back to what Rob raised about building ships in the U.S. Some people have pointed out that if we had a war with China, which is really in the back of every conversation we've been having here, it would probably be a really, really awful thing. It might even go to nukes. And it would be unlikely to be World War II all over again, which, you know, lasted five, six, seven years, we include the part before the U.S. entered. And so you really need to think about it from that perspective. We're not going to need to import trains and cargo ships and so on from China during a war with China. Ships, fighter jets, and so on are probably national security. But you can't just keep expanding the view of what's national security, ad infinitum, because it's just prohibitively expensive and just crazy. So I think it's got to be defined fairly narrowly just to be reasonable and just to have any hope of actually making progress. I forgot to mention, Peter Coy, Bloomberg Businessweek, economics editor

MODY: Who would like to take that question?

ALDEN: I mean, all I would say is he makes an excellent point. I mean, you know, these are the issues that the administration is going to be looking at in its review of the defense industrial base. I mean, the Trump administration took this very broad view. I mean, Emily, you know, you and I both heard a lot about the steel and aluminum tariffs. I mean, you read the report on the steel industry and what the national security risks were that led to the Section 232 tariffs. I thought it was ludicrous. There was a stronger case to be made in aluminum. But the question of how you bound this and say, yes, this is a sector, this is a product that's critical to national security is an extremely important question. And I kind of agree with Peter. I think it should be defined quite narrowly, but how narrowly we will see.

BLANCHARD: Yes, if I can chip in? Absolutely, Section 232, we saw national security, that moniker, being used in a whole new way to define the importance of good jobs. I mean, they really said good jobs are important for national security. Well, at that point, you know, what isn't? And if you look at the historical record, countries very much, including the U.S., have always had a very clear attention where national security has been used as the cloak for just naked protectionism. So I encourage everybody to read Doug Irwin's book Clashing Over Commerce if you haven't for a history of U.S. trade policy. But what we're seeing today very much feels like a replay of some battles that we've had for centuries in this country.

STAFF: The next question is from Sonya Stokes.

Q: Thank you, Seema, and thank you to the panel. A waiver has been proposed for the WTO TRIPS Agreement with respect to critical medical supplies and technologies. This waiver is supported by WTO Director Ngozi [Okonjo-Iweala], as well as multiple organizations working in the health sector. What affects would such a waiver have on the global supply chain? And how might this impact our pandemic response?

MODY: That's a good point. I mean, the supply chain issues are affecting the health-care sector, especially as major countries try to expedite the rollout of the vaccine. Emily?

BLANCHARD: Yes, there's a short-term piece and there's a long-term piece. So in the short term, there's an incredible need and emphasis to get the vaccine and critical medical equipment and supplies, the inputs for making all of the things that we need to actually fight this virus. So WTO initiatives would certainly help with that. The COVAX initiative would certainly also help with that. So there's this short term-need. At the same time there's the question in their short-term crisis to combat this pandemic, will the WTO or other international organizations take steps that make it more difficult for countries to agree on deep behind-the-border provisions like intellectual property protection? Let's remember, before COVID-19 IP protection and technology transfer was right at the top of the global economic policy conversation. And so there's this question of what short-term steps will further the conversation in a positive way of what could potentially create future discord.

ALDEN: Could I just add that, you know, this is part of the broader conversation on vaccine nationalism. And, you know, my CFR colleague, Tom Bollyky, has been doing tremendous work on this. Chad Brown at [the] Peterson [Institute of International Economics] has been working with Tom so if the people on the call haven't taken a look at that body of work, they should. I mean, there are lots of concerns about distributing the vaccine to countries that don't have their own production capability and desperately need to either begin vaccinating people or increase their vaccination rate. So this is going to be huge issue for the next year or more.

MODY: Or the flipside of that a country like India, which has now become the world's largest vaccine manufacturer, but not being able to give out enough to its own citizens. We'll save that for another time. May we have the next question, please.

STAFF: We'll take the next question from John Negroponte.

Q: Hi, thank you very much for the opportunity and for the excellent discussion. I don't want to get stuck on the shipping part and maybe I can also use it to transition to another point but on shipping I have a comment, which is simply that we emerged from World War II as the single maritime nation in the world. We built four thousand Liberty and Victory ships and everything else and we disbanded that capability in very short order. And one of the reasons Edward Alden professes not to know much about the industry is we wrote it off a long time ago, which is a darn shame. We've managed to work ourselves to be the twenty-seventh, count it, the twenty-seventh maritime power in the world, which I think is a little bit of a shame. But maybe to transition as to where you might go with this kind of situation, we haven't talked about North America and NAFTA and the role that Mexico, for example, could play in strengthening our supply chains. We are very good on automobiles, but we really haven't developed other sectors. Just for example, Mexico has got some reasonably good shipyards where you could perhaps use the Boeing model to do some manufacturing here in the states and some of it in Mexico, but you could obviously use it for other products as well. So any comments on the utility of North America in this discussion would be much appreciated.

MODY: Emily, do you have thoughts there?

BLANCHARD: Sure. Yes, I would say NAFTA and the renegotiated NAFTA, NAFTA 2, as some of us like to call it, was very much about global supply chains and the deepening—not global supply chains, of the North American supply chain—the fact that so many products in the United States are made by combining bits and pieces of the value chain of value added, whether those are individual inputs or ideas or capital from Mexico, the United States, and Canada together. So this is really important. I'm not sure I would agree with the idea that it's just automotives. Automotives just get a lot of attention. So those value chains within North America are already quite strong. But whether they could be deepened is a great question. And here, I will say, you know, to the extent that the United States wants to strategically deepen its regional supply chain relationships, then being transparent and being predictable in trade policy towards Mexico and towards Canada certainly seems like a good first step. And that's one, frankly, that we need to work on after the last five years.

VENABLES: I think that the other thing is worth adding, and there's tone through a lot of the questions that I think we've got to distinguish between, and apologies if this is a statement of the obvious but, you know, we've got to distinguish between the capacity to manufacture things versus the capability to quickly establish that in times of crisis. I mean, exactly, John, to your point about World War II, yes, that was a terrific example of the question for us is could we do that again. And, you know, again, I'm a naturalized American, so I may be more kind of excessively patriotic on these things. By I happen to think I can have innate capability to respond to a crisis to build out capacity in time of need. I used to think we've got that, and I think the important thing is going to be to make sure we continue to make sure we have the capability to establish capacity, not necessarily to always have the capacity on hand.

ALDEN: Seema, can I just do one more shameless plug for a colleague, Shannon O'Neil, who's CFR's Mexico expert and many other things, the deputy director of Studies, has a book that will be coming out later in the summer or in the fall looking at regional supply chains and directly addressing Ambassador Negroponte's question about, you know, what we should be doing in the North American context. There's a lot of economic logic to regional supply chains. I also think, increasingly, there's political logic to strengthening the North American supply chain. So watch for that later this year.

MODY: A must read. Thank you, Carrie, next question.

STAFF: Next question from Peter Gourevitch.

Q: Hi, everybody. Great panel. Peter Gourevitch, UC San Diego School of Global Policy and Strategy. You know, you've made a great comment on sort of the firms are responding and they're paying attention and I have every belief that they will look carefully at the problem overseas supply. I wonder if you would address what the firms are not likely to do. I'm very worried that just-in-time is a great thing, but it puts pressure on them to have very short inventories. And so bringing production to home and securing supply chains is not going to solve that problem. That's what stockpiling is all about. There's [inaudible] problems and collective action problems. No individual firm has the incentive to solve a generalized problem of enough stockpile. It's understood that we need it for oil. What are the other areas in which we need to have bigger stockpiles for a time of crisis, which none of the firm's that you are talking about are going to solve on their own? It seems to me a matter of public policy has to respond to that. And what would you say is the way to do that? What are your thoughts on that?

MODY: Emily? Should there be a standardization process in how companies manage inventory? It's either never enough or too little.

Q: It's not just companies, right? It's collective.

BLANCHARD: Yes, exactly. I think this is the question. So a while back in the panel, I said something sort of vague about, you know, there's this question of how much companies can do and whether that's enough. What's the residual role for the government? Because fundamentally, government is solving collective action problems. It's figuring out when there are incentives that will only get firms so far. And then there's a piece where you need an extra nudge. And, I think, something like inventories, specifically inventories, is a really, really important part of this. There is this question of what do we need? What's really important? What might we lose access to? And what would take us a long time to build up domestically, right? And so the answer of those three things—you can't make a general designation of let's think about all products the same way, all critical inputs the same way because some critical inputs it would be very quick and easy to bring them online. And then others would take a very long time. We have to think about each part one by one. I think that's what the executive action that Edward Alden already talked about. Biden's executive action, the look of resiliency of supply chains, I hope, is doing exactly this analysis. Say, for semiconductors, is there an argument here? And, of course, is there sufficient risk to merit a government action? And then would stockpiles be a good way to address that? I hope this is exactly what we see in the report in June.

ALDEN: Just quick. Critical minerals are a great example of this, right? I mean, it's been acknowledged for a long time that the U.S. is quite vulnerable in rare earths and lithium and cobalt, other critical inputs into the green economy, and also important defense inputs. And yet it's going to take a long time. I mean, China's still has most of the world's processing capability. And that is a situation that is going to change even in the next year or two. So that's a good example of one of those long lead time areas where we actually probably do want to have some redundancy and capability.

MODY: And what's when that decoupling becomes even harder than in that case. Next question, please.

STAFF: We'll take the next question from Shannon Kellman.

Q: Thank you so much. I was going to ask Sonya's question about vaccine nationalism. So I suppose I just want to ask a little bit of a follow-up of what tools do you see as being available to policymakers both in the U.S. and certainly in Europe where we're seeing a lot more of the vaccine protectionism coming to play? And how can policymakers shift some of that to promote vaccine equity for one, but just make sure that we're combating the pandemic as quickly as possible?

MODY: Who would like to take that?

ALDEN: I mean, again, I would really differ. There was an excellent session on this about a month ago or three weeks ago with Tom Bollyky and others. But I think that the big limitation is production, and so the question of trying to expand production facilities around the world. Some of the work that's been going on in the Quad, the new Quad, you know, India, Japan, Australia, the United States, I think, is an important model. We've done a lot of good work on this at CFR. I just encourage you to go take a look at that.

MODY: Next question, please.

STAFF: We'll take the next question from Hari Hariharan.

Q: Hi, I'm Hari Hariharan. I'm Tara's father, I'm from the same firm. Look, forgive me, but you know, this conversation was somewhat one-sided in the following sense that when you look at it from a China prism, and when we talk to a lot of companies around the world, let's not forget that what the Chinese have built is just something sensational. The infrastructure in place to effectively get things from site of production on to transportation and ships and so on so forth, is on a scale unimaginable. So, for example, there was some discussion earlier on about Mexico. We do a lot of business in Mexico and let me tell you, in something as mundane as, you know, the masks and the gowns required, you know, during the course of last year in COVID, in talking to Mexican textile guys and saying, "Look, isn't this the most logical thing for you to reorient your production lines?" It was amazing to hear how rigid, you know, how much cholesterol there was in their production lines that they couldn't do the transition. Whereas the Chinese kind of did it instantly. The joke goes that [inaudible] late manufacturers in China started making masks overnight. So the question I'm asking is how realistic is this concept that a juggernaut economy, which in size is going to overtake the U.S. very soon, how realistic is it for us to just sit and blindly assume that because we decide we want to localize supply chains are we going to do it in any intelligent cost-effort basis? I'd love to hear your views. Thank you.

MODY: I want to go around with this one. Emily, do you want to start?

BLANCHARD: Sure. I don't think there's any presumption that this is cheap to renationalize supply chains. And also, I want to be clear, I wish we were not having this conversation. Geopolitical tensions have been rising so that decoupling is now a conversation we are having, and so we have to engage in it. But boy, would life be better if we could just look in nothing but awe and enjoy the dynamism of the Chinese economy? I wish that were true, right? I think that China's economy and economic growth have yielded enormous dividends to itself and its own people, first and foremost, but certainly to the rest of the world. And we would be cutting ourselves off from a piece of that, which is hugely expensive.

MODY: Philip?

VENABLES: I mean, I think, again, a theme that's come through today is ultimately this is about resilience and flexibility. I don't think it's about any one particular approach. And I think, again, the lessons of the past few years through major events have been felt in most major corporations who are adjusting how they're thinking about this. And I don't think we've yet had chance to see the ripple effects coming out from how corporations are thinking about how to make their supply chains more resilient and flexible. So I think we've got to keep looking for what effect that's going to have in addition to any one government's policy on things.

MODY: Edward, can we throw money at this problem and will it be enough especially as China makes strides?

ALDEN: I mean, I think there's no question we can throw money at the problem and we will. I mean, I think, you know, I very much agree with the question. I think, you know, from an economic perspective, the logic of continuing deep engagement with China makes a lot of sense. But we've been talking for the last hour on all the new risks. I mean, one we haven't even mentioned is this sort of growing values clash. You look at what's happened in terms of cotton coming from Xinjiang. The questioner asked about, you know, textiles in Mexico. Well, you know, suddenly, major apparel companies are being forbidden from sourcing cotton in Xinjiang because of forced labor issues there. There's a good chance I think Congress passes a broader bill restricting any sort of sourcing that involves inputs from Xinjiang. The Chinese have reacted with consumer boycotts of H&M and others. So I think, you know, you could say, yes, sure, the economics continues to dictate deep engagement with China, but there are all of these other factors that make it far, far more complicated for companies and the fact that China's an economic juggernaut doesn't end the conversation.

MODY: There is a new statement from Nike just today on that very issue. I think we have time for one more question, please.

STAFF: We'll take our last question from Jeff Bialos.

Q: Hi, this been a great panel. You know, I partnered a law firm, but in a prior life I was deputy under secretary for defense and I managed the kind of industrial base. Let me just say I think people want to look back here for lessons a little because there are a lot of different approaches that have been used over the years. The Defense Department regularly, even if it's not expressed an obvious, manages security of supply in many settings from stockpiling to doing a range of other things. I just want to make two general points that I think people need to consider and certainly it is a big national security issue here and it needs to be focused into some kind of tailored or reasonable solution. But one is dependency is not necessarily vulnerability. And I think the question here is how do you define vulnerability against the set of risks? You know, if you take the Boeing thing people keep mentioning, what happens if somebody denies supply who's a supply chain guy? They don't because if they don't, they'll be cut off. And I wonder about, I haven't heard anyone talk about business mitigation of these risks because that's been the savior in many cases because the idea being that there's codependence here, right? In that vein in the COVID-19 crisis, I'm not sure I've seen a lot of evidence of vulnerability in practice. People talk about it. I'm not sure beyond the rhetoric, tell me what you see. Second point is, you know, people forget we have a rule called comparative advantage in economics. And there's a reason some of these things moved offshore. And you have to really look carefully at this. The Pentagon tried to bring flat panel displays back. It didn't work too well. And I'm not saying we shouldn't try it in some areas like in chips and chip packaging in particular. But, you know, I wonder, I heard that in the conversations.

MODY: Can we get a quick response from Emily, please.

BLANCHARD: Sure. As an economist, I've been doing my best not to say comparative advantage. So thank you for letting me off the hook that way. Absolutely, first and foremost, in all of this, we are losing a comparative advantage by asking firms to do things that they did not already choose to do, again, with the clearest evidence that it is more profitable, more efficient to do things at least in a short-term economic sense. The way that we've been doing it's just looking at firms' choices so far. Do I have less than a minute to talk about the vulnerability and business response? So there is a great example that I think illustrates two of your points. One, during COVID-19, we saw vulnerability in firms to global supply chains. So I was living in Zurich last year when the pandemic broke out. A nearby producer of ventilators, Hamilton Medical, was just down the road in Switzerland and they suddenly couldn't get access to key components, these sub parts of ventilators, because the Romanian government said, in a well-intentioned and short-term thinking, "There's an emergency crisis here. Let's ban exports of medical equipment including these components of ventilators." So there's a vulnerability. Hamilton couldn't produce its products, ventilators, that the world desperately needed. At the same time you have the business coming up with the solutions. It didn't take long for Hamilton and its supplier in Romania to get on the phone and say, "Hey, there's a really important unintended consequence of this export restriction. Get rid of it." And the restriction was taken off very, very quickly and the problem was solved. So the vulnerabilities are there, but firms can also manage and increase resilience.

MODY: Wow, powerful example and a good way to conclude this session as tried to talk about the importance of supply chains and how it impacts every aspect of this global economy. Emily, Edward and Philip, thank you for your insight. That concludes today's virtual meeting. Thank you to our speakers. And please note that today's transcript will be available on CFR's website. Have a great day.


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