By: Maximilian Mooradian
DOI: 10.57912/27932133
The economic conflict that surfaced during the 2018 Trade War, characterized by the imposition of tariffs, served as a wake-up call for the United States to initiate economic decoupling from China. These efforts aimed to strengthen domestic economic resilience against potential threats from America's adversaries. These objectives remain unchanged, primarily focusing on key industries such as semiconductors and pharmaceuticals. The overarching goal is to achieve economic self-sufficiency to preempt potential disruptions that could arise in a conflict with China, ensuring the U.S. economy would not be brought to a standstill.
China is the premier assembly country in the world, responsible for over 50 percent of assembly, testing, and packaging in the global semiconductor supply chain. Without the production power of China's factories, the United States would suffer significant semiconductor supply chain shortages that would heavily delay all manufacturing sectors. A perfect example of such a shortage was during the COVID-19 pandemic. Another vital industry China significantly influences is the pharmaceutical industry, with active pharmaceutical ingredients (API) being the critical control point. Active pharmaceutical ingredients are used to createantibiotics, painkillers, and cancer treatments. China produces around 40 percent of the world's APIs, and 80 percent of those sent to the United States were made in China. Without Chinese APIs, the United States cannot create antibiotics, cancer drugs, over-the-counter medicines, sedatives, etc. If Beijing
halted its shipments of semiconductors and antibiotics, the United States would face a significant health, economic, and national security threat.
China's strategy for its lack of innovation in the semiconductor and medicinal sectors is to be the 'factory of the world' by providing the cheapest and most efficient production processes. This strategy has significant implications for the global economy, allowing China to dominate the manufacturing sector and exert influence over supply chains. Thus far, this tactic has proven quite effective—as evidenced by the fact that most items you purchase likely say 'Made in China.'
Given these variables, the United States must do more to ensure its semiconductor and pharmaceutical domestic manufacturing base becomes self-sustainable, which can be achieved through additional direct legislative investments. These investments will prevent potential risks from escalating into a crisis and pave the way for a more resilient and self-sufficient future.
Reshoring critical manufacturing will only happen with significant government support. The challenges of bringing production back to the U.S. are considerable, especially when competing with countries like China that offer low-cost labor, extensive government subsidies, and lax environmental regulations. The U.S. government must implement comprehensive incentives and policy initiatives to overcome these obstacles to ensure the nation's economic resilience and security in domestic manufacturing.
The United States could also pursue ally shoring as a complementary approach to reshoring. This method provides a pragmatic solution by leveraging trusted allies to enhance supply chain resilience and reduce reliance on adversaries like China. Strategic partnerships with nations such as Taiwan, Japan, and South Korea are vital due to their advanced semiconductor and pharmaceutical manufacturing capabilities. Additionally, Mexico presents a unique opportunity in this effort, given its proximity, competitive labor costs, and expanding industrial base. Mexico's economic relationship with the U.S., exemplified by the United States-Mexico-Canada Agreement (USMCA), offers further advantages, including reduced tariffs and an established, streamlined trade process. Incorporating ally-shoring into a broader strategy ensures critical supply chains remain secure, cost-effective, and globally diversified. This approach not only strengthens national security but also positions the United States as a leader in fostering a resilient and collaborative economic order among allies, driving innovation and shared growth.
Regarding legislative strategies to achieve the goal of critical reshoring, The Facilitating American-Built Semiconductors Act (FABS ACT) is a perfect example of a successful policy initiative. This bill was signed into law in 2021 and promises extensive funding to create semiconductor factories in the United States. Taiwan and TSMC have been heavily involved with this process, with TSMC being the lead company in building two massive FABS factories in Arizona. Combined, these two fabs represent an investment of $40 billion, making it one of the most significant foreign direct investments in U.S. history. Once fully operational, the two FABS will have an annual capacity of over 600,000 chips, significantly bolstering U.S. domestic semiconductor manufacturing capabilities.
The America COMPETES Act of 2022 is an example of a law that provided promising solutions but ultimately failed to be passed into law. This bill had several components focusing on supply chain resilience, with one section focused on incentivizing domestic manufacturing of APIs with increased federal investments, tax incentives, and grants to encourage pharma firms to repatriate their API production. The potential benefits of this bill included a more secure pharmaceutical supply chain, job creation in the U.S., and increased domestic production of critical medicines. This bill would have provided federal funding to build more plants to produce APIs at scale, support further research and development, create a medicinal stockpile, and work hand-in-hand with the Federal Drug Administration (FDA) to streamline the manufacturing process for APIs. Sadly, the America COMPETES Act was never signed into law and was replaced by the Chips and Science Act of 2022 (CHIPS ACT), which did not address the domestic production of pharmaceuticals.
The FABS Act and the Chips and Sciences Act have made several strides in domestic semiconductor manufacturing. Still, future legislation must address several vital areas lacking in previous legislation. One of these is long-term funding for research and development since China's long-term strategy that combines public and private entities is much more advanced than that of the United States. Another area where these bills fall short is the infrastructure and energy needs since semiconductor factories require large amounts of water, electricity, and waste management systems that should have been addressed in both bills signed into law. The labor shortage of personnel capable of operating semiconductor factories is another area that needs more attention. Despite the creation of two large FABS in Arizona, only some know how to manage these factories efficiently, and this work requires programs to facilitate the skills necessary to close the skill gap.
Regarding pharmaceuticals, the America Competes Act needs to be reintroduced, or a similar resolution should be created that touches on all of the same key points that incentivized domestic manufacturing of APIs. This legislation would need to address the creation of a life-saving drug stockpile, federal incentives to restore API production, and a streamlined manufacturing process. To facilitate the passage of this bill into law, it should be framed as a national security imperative that underscores the critical supply chain vulnerabilities and the United States' reliance on China. National security, job creation, and economic growth are among the most bipartisan priorities, and this bill addresses all three. Furthermore, it positions the United States advantageously over the Chinese Communist Party, enhancing economic resilience and strategic independence.
If these initiatives are passed into law, the U.S. can build a robust, secure, competitive manufacturing sector that safeguards the nation's economic interests. This will foster innovation, create good jobs for American workers, and position the U.S. as a leader in self-sustainability in the 21st century.
Comments