U.S. government officials have called for the “reshoring” of domestic industrial capacity in several areas in recent weeks. Whether it is the production of pharmaceuticals and personal protective equipment, or the development of microelectronics, specialty chemicals and materials, calls for a significant increase in U.S. manufacturing capabilities are coming through loud and clear. This makes complete sense, but how do we do this reshoring?
The solution is not an autarkic “Buy America”-only approach that would be counterproductive to our long-term economic health. Instead, we need to have a laser focus on getting out of the China business with respect to industrial capabilities critical to national security and, in many cases, doing that with a little help from our friends.
During the early days of the COVID-19 response, the administration and Congress quickly identified the principal tool to address industrial base weaknesses: the Defense Production Act. Congress appropriated $1 billion for the DPA fund in the Coronavirus Aid, Relief, and Economic Security Act. In mid-May, the administration revived a long-dormant DPA authority to provide loans under Title III to “take actions to create, maintain, protect, expand, and restore” domestic supply chains to respond to the pandemic. This loan authority, placed under the direction of the U.S. International Development Finance Corporation, received little attention until the July 28 IFDC announcement of a letter of interest for a $765 million loan with Kodak to build domestic capacity for pharmaceutical production.
Some are rightly questioning the sustainability and selection criteria of this still-in-progress deal, but the creation of this loan authority is an important advance because it is a straightforward and expeditious way to facilitate the expansion of U.S.-based production of PPE, pharmaceutical and defense capabilities.
Some congressional members and White House officials have argued that the COVID-19 pandemic calls for a dramatic increase in “Buy America” or “Buy American” efforts. This is not the right way to go for three principal reasons. Most importantly, protectionist efforts — such as the House provision of the National Defense Authorization Act sponsored by Rep. Donald Norcross, D-N.J. — focus on the wrong issue. Norcross’ provision would require that 75 percent and then 100 percent of the Defense Department’s major acquisition programs be manufactured and sourced in the United States by 2021 and 2026, respectively.
Because of existing regulations and national security priorities, defense systems are already one of the strongest domestic manufacturing sectors, and defense companies — with the partial exception of those companies with significant commercial aerospace exposure — have been least impacted by the pandemic. It is hard to see how it is beneficial to eliminate key international suppliers from our defense industrial base, many of whom have significant physical and economic presence here, not to mention the fact that the countries where these companies are based — mainly our NATO allies and close partners like Japan, Australia and Israel — buy billions of dollars of U.S. defense systems each year.
Protectionist efforts are also wrong-headed because they are not strictly focused on the real problem in our industrial base, namely the dependencies on companies based in adversarial countries such as China. Chinese companies are a threat in two main areas: the production of PPE and pharmaceuticals and in the lower tiers of the defense industrial base. With respect to the former, DPA efforts are focused on rebuilding domestic manufacturing capacity in critical public health areas such as N95 mask production and pharmaceutical production. For the latter, recent Govini analysis has shown the growing influence of Chinese suppliers in the lower tiers of the defense supply chain such as specialty chemicals, telecommunications equipment and electronic components.
These findings track with the major findings of and subsequent DPA projects resulting from the 2018 whole-of-government review of the defense and manufacturing industrial base. Additional cumbersome Buy America restrictions are not the answer; we have the tools we need.
Finally, Buy America initiatives are ultimately counterproductive. Almost all of the critical efforts underway to reduce Chinese dependencies require some sort of collaboration with our close partners and allies. One of the awardees of a recent project to reshore heavy rare earth processing capacity, for example, is a partnership between an Australian mining company and a Texas firm. Under Secretary of Defense for Acquisition and Sustainment Ellen Lord has further underscored the importance of “partners and allies supporting us as much as possible” in efforts to “reshore as much as possible” capabilities such as microelectronics fabrication and rare earth processing. In a little-known provision, DPA projects specifically identify Canadian firms as eligible for Title III project awards.
Furthermore, Congress expanded the national technology and industrial base in the fiscal 2016 NDAA, making the United States, the United Kingdom, Australia and Canada one industrial base. The Senate has a provision in the FY21 NDAA that would establish criteria for the expansion of the national technology and industrial base to other countries.
Finally, one of the administration’s major trade deals, the United States-Mexico-Canada Agreement, creates an additional opportunity to strengthen North American efforts to decrease dependencies on Chinese sources. These tools are practical ways to address critical needs for reshoring now.
It took us decades to get into this national mess with China. We are not going to reshore critical industrial capabilities through a Buy America only approach. Let’s fix this in the most cost-effective and timely manner, through domestic capacity building efforts and, where needed, with a little help from our friends.
Jerry McGinn, a former U.S. Defense Department official, is the executive director of the government contracting center in the School of Business at George Mason University.