Winter 2020 | Media

WardsAuto: Auto Industry Should Loosen Ties to China

This article was originally published in WardsAuto


The U.S. automotive industry should prepare for increased pressure to reshore supply chains away from China. This looming disruption to the manufacturing sector reflects a broader trend driven by Beijing’s and Washington’s similar desire for self-sufficiency in critical areas. COVID-19 has acted as an accelerant but did not create this underlying dynamic.

Nationalism and industrial policy – at the expense of internationalism and free trade – likely will prove powerful policy imperatives during the coming decade, despite the preference of automotive industry leaders for a more integrated global economy.

As summarized in 2019 by the Chairman of the Joint Chiefs of Staff, “China is the primary challenge to the U.S. national security over the next 50 to 100 years.”

The automotive sector will be at the center of the reshoring debate and should expect scrutiny of economic ties to China: The industry accounts for nearly 10 million U.S. jobs, many of which are located in key electoral battleground states.

A robust bipartisan consensus appears to have formed in Washington, with the Trump Administration and President-elect Joe Biden both embracing reshoring, albeit with important differences in implementation. Biden’s tax plan promotes a “Made in America” future and calls for an offshoring tax penalty.

Recent legislation reflects congressional support: The Senate version of the annual defense bill contains several provisions to bolster domestic manufacturing and reduce dependence on China. For example, one provision seeks to increase national self-sufficiency in critical minerals via a new policy that requires U.S. manufacturers to meet all the domestic defense industrial base’s critical mineral needs by 2030.

Reshoring represents one of the few areas of agreement in the U.S.-China relationship, with Beijing strongly committed for at least the past decade to achieving greater self-reliance alongside modernization.

China’s most recent five-year plan appears to advance a “dual-circulation” strategy to decrease Chinese dependence on the United States. In addressing ground-vehicle transportation, President Xi Jinping in recent years has called for China to “ensure key and core technologies are in our hands…to build strong domestic automobile brands.”

“Made in China 2025” offers China’s official statement on controlling key supply chains. Released in 2015, the document sets an ambitious objective: becoming the global leader in high-tech manufacturing, in part by reducing dependence on foreign technology.

President Jinping has remarked, “We need to take a path of indigenous innovation through self-reliance.” The pursuit of this goal necessarily will impact important aspects of the automotive industry, including critical minerals, semiconductors and 5G technology.

China already has made impressive progress in realizing these ambitions: The country controls more than 80 percent of the global supply of neodymium, a rare earth mineral needed for electric-drive motor vehicles. History offers examples of the real-world implications: In 2010, China blocked exports of rare earth elements to Japan as part of a maritime dispute.

With both Republicans and Democrats increasingly concerned, further escalation in U.S.-China tensions could result in serious disruptions to critical automotive supply chains and long-term policy changes. Improving company-level resiliency to such instability offers the best defense. Enterprises that highlight to American policy makers the practical challenges and specific costs in advance of a crisis will be best positioned to secure support.

The intensifying U.S.-China standoff imperils the implicit policy of corporate neutrality that prevailed for almost two decades. Events suggest the bilateral relationship will continue to move away from “constructive engagement” and toward conflict. The United States tech sector largely has failed to straddle Washington and Beijing and today confronts the bleak reality of a deteriorating market position in China and declining political support in the U.S. Auto manufacturers and suppliers should apply those lessons by identifying reshoring options now, before events unfold.

Jonathan M. Baron is the founder of Baron Public Affairs, a political risk consultancy based in Washington. Jeremy Furchtgott, a director at Baron, leads the firm’s China practice.