Analysis

What Biden’s Plan to Bring Home Technology Manufacturing Gets Wrong

Asia will remain central to U.S. supply chains, but the right policies could accelerate the shift from China to friendlier countries.

By Alexander Benard, an adjunct fellow at the Hudson Institute.

U.S. President Joe Biden speaks at the groundbreaking of a new Intel semiconductor manufacturing facility near New Albany, Ohio, on Sept. 9.

September 29, 2022, 8:41 AM

On her trip to South Korea this summer, U.S. Treasury Secretary Janet Yellen touted “friend-shoring,” the practice of moving critical parts of the supply chain from the United States’ rivals and adversaries to countries that are partners and allies. Russia’s continued attempts to blackmail Europe by cutting off natural gas supplies are a powerful reminder of how dangerous it is to rely on unfriendly nations for the supply of critical goods and services. Though the United States no longer depends on other countries for energy, there are other sectors—particularly technology—in which China still plays an unduly dominant role in the U.S. supply chain.

Initiatives are underway to reshore some of this manufacturing back to the United States by revitalizing the country’s industrial base. The latest example is the Chips and Science Act, which the U.S. Congress recently passed to boost domestic semiconductor research, development, and manufacturing. There has also been significant focus on “near-shoring,” which involves moving supply chain to neighboring countries like Mexico or parts of Central and South America. These markets have competitive labor costs, reduce lead times due to their proximity, and give the United States greater security over supply.

The efforts around reshoring and near-shoring are commendable, but they can’t solve the problems around supply chain security by themselves. Not all manufacturing can move to the Americas. For many good reasons, Asia will remain central to the U.S. supply chain. Some raw materials and components are only available in Asia. Certain types of complex manufacturing, particularly those related to semiconductors and other technology hardware, require a labor force with a specialized skill set that only exists at scale in a handful of countries.

Friend-shoring within Asia, therefore, must become a more significant pillar of Washington’s security strategy. Yellen gave her speech in South Korea, which, alongside Japan and Taiwan, is a very important market for the manufacture of high-technology products that are critical to the U.S. economy. The United States should continue to bolster the role these countries play. From a cost standpoint, however, Japan, Taiwan, and South Korea will not always be suitable alternatives to China. And of course, Taiwan presents its own set of potential supply chain risks, given the ever-growing tensions in the Taiwan Strait.

Countries in South and Southeast Asia—including the Philippines, Vietnam, Indonesia, India, and Bangladesh—have sizeable populations and capabilities that can serve a valuable role in the global supply chain, and some, such as Vietnam, have already emerged as destinations for U.S. manufacturers seeking to diversify their supply chain away from China. But so far, Congress and the White House have not been particularly focused on any proactive steps to encourage friend-shoring in these regions. In fact, some of the legislators leading the charge on Capitol Hill for supply chain resilience are at best lukewarm about friend-shoring in Asia. For one, creating domestic jobs and subsidizing U.S. companies at home are much better talking points than shifting production from one foreign country to another. Legislators also cite the risk that countries in Southeast Asia—such as Indonesia, Vietnam, and the Philippines—could become coopted by China over time and turn into equally unreliable supply chain nodes.

Washington could greatly accelerate the shift of supply chains away from China with concrete policies to support friend-shoring in Asia.

But this line of reasoning gets it backwards. Part of why countries in the region are vulnerable to Chinese influence is precisely because of insufficient economic engagement from the United States. If the United States deliberately focuses even less economic attention on them in order to maximize near-shoring in its own hemisphere, it will only help China further cement its grip on trade and investment in the region, thereby inevitably enhancing relationships with China at the expense of the United States.

The United States can ill afford for all of these countries to end up in China’s camp. Many countries in South and Southeast Asia sit along vital trade routes. They can play key roles in helping to balance and contain an increasingly aggressive China. The U.S. military understands this, of course, which is why it is seeking to enhance defense cooperation with countries like the Philippines and Indonesia and expand access for the U.S. military to seaports and airstrips across the region. These asks will be far more palatable, and the evolving security partnerships far more durable, if the United States also has something tangible to offer, such as large-scale trade and investment to counter China’s proactive economic engagement.

The good news is that despite the lack of concerted effort on the part of the U.S. government, major companies are already beginning to move parts of their core operations out of China and into friendly Asian countries. This month, Apple announced it will be manufacturing the just-released iPhone 14 in India as well as China. Around the same time, Google announced it is shifting some of its smartphone manufacturing from China to Vietnam. Discussions on these kinds of supply chain reconfigurations are taking place in many other boardrooms as well, as companies seek to build greater resilience in the face of seemingly unending Chinese coronavirus lockdowns and tightening U.S. regulations on the activities of U.S. companies in China.

Washington could greatly accelerate these trends with concrete policies to support friend-shoring in Asia. Tariffs and export controls making U.S. companies’ manufacturing in China more difficult and costly are only one side of the coin. Just as important are specific inducements that would entice companies to move their supply chain into the desired jurisdictions. This includes reducing or eliminating tariff and non-tariff barriers, as well as protecting intellectual property. Much of this could have been accomplished through the Trans-Pacific Partnership, the free trade agreement the United States negotiated but declined to ratify under the Trump administration.

The Biden administration is now having another go via the Indo-Pacific Economic Framework. The concern is that this framework is much weaker than the trade agreement Washington abandoned, and without the carrot of free trade access to the U.S. market—which has become difficult to champion because of bipartisan antipathy toward new trade deals—Asian countries may not be willing to make meaningful concessions. On the other hand, the prospect of attracting serious U.S. investments in manufacturing might be enough of an inducement for countries to reduce their own barriers and provide needed protections for U.S. firms.

In addition, the United States should better harness and target its other instruments of economic influence. For example, the Development Finance Corporation is a $60 billion U.S. government agency focused on financing U.S. companies making investments overseas. It should establish a specific program to support U.S. companies friend-shoring their supply chain. Ideally, the Development Finance Corporation could form a joint initiative with the Export-Import Bank, a U.S. government agency that facilitates trade with emerging markets. Such an initiative could take its cue from Japan, which has set up a pool of government funds to provide grants and low-interest loans for Japanese companies wishing to shift the supply chain from China to other Asian countries.

Securing U.S. supply chains will take ongoing effort and focus—and a well-designed, multi-pronged strategy. Hopefully Yellen’s speech, along with the initiatives recently undertaken by U.S. technology companies, are signs that friend-shoring in Asia is finally getting serious attention in Washington.

Alexander Benard is an adjunct fellow at the Hudson Institute and a senior managing director at Cerberus.