Biden’s trade attack on China will reverberate around the world

President Joe Biden’s ordering of a 100-day review of vulnerabilities in America’s supply chains highlights the dependence the US, and other developed economies, have on third-country suppliers, especially China, for products and technologies critical to their medical, industrial and defence sectors.

Biden’s initial review will cover computer chips, medical equipment, large capacity batteries and rare earths, with another 12-month review of other sectors including technology more broadly and food production.

The more urgent analysis, which comes amid a global shortage of the semiconductors critical to most modern manufacturing, from cars to smartphones to defence technologies, flows from a pandemic-inspired recognition of how concentrated, China-based and vulnerable most modern supply chains are and against the backdrop of the severe stresses in the relationship between the US and China.

President Joe Biden has ordered a review of vulnerabilities in America’s supply chains.Credit: AP

Most developed countries, including Australia, found themselves scrambling for personal protective equipment and pharmaceuticals at the onset of the pandemic, taken aback at how dependent they had become on China, and are now assessing how to “re-shore” the most critical manufacturing capacities.

Less obvious was the pandemic’s impact on demand for semiconductors. While some industries, like the auto and aviation industries, cut back production in response to the pandemic, the abrupt shifts in consumer behaviours generated by lockdowns and working from home saw massive increases in demand for computers and other equipment to support remote working and learning as well as a boom in other electronic products.

A shortfall in semiconductor supply relative to demand has led to automakers, including General Motors and Ford, being forced to reduce their production.

The US reliance on external supply for a product where US companies dominate the design of the chips, their manufacturing process and their ales – US companies account for roughly half global sales of computer chips but only about 12 per cent of their manufacture – has been exposed by the combination of the pandemic.

Taiwan, South Korea and Japan dominate chip manufacturing. China has invested massive amounts in subsidies and incentives and poached thousands of engineers from Taiwan and elsewhere to try to develop its own industry but has struggled to catch up to the speed at which the technology and the intellectual property that powers it develops.

It does design and manufacture chips – Huawei designs the chips for its 5G equipment and smartphones – but can’t produce the advanced chips that are central to technologies like artificial intelligence, machine learning and the Internet of Things.

Nevertheless its open ambition, supported by billions of dollars of state funding, is to become the major player in the sector as part of its broader ambition to dominate the building blocks of key 21st Century technologies.

The US Congress has authorised subsidies for companies that invest in domestic chip research and manufacturing but not appropriated the funding for what would be a massively expensive program – semiconductor production is arguably the most sophisticated and challenging manufacturing process ever developed.

The current chip shortage has highlighted America’s vulnerability to external shocks but the transformation in the relationship with – and US perceptions of – China during the Trump presidency is a key motivator of the push for reshoring.

The US has accepted it is now in a battle for technological and economic supremacy and that semiconductors are only one of its points of vulnerability. Another is rare earths.

Rare earths aren’t rare – Australia, for instance, has plenty of deposits – but China’s cheap labour and, for decades, its willingness to prioritise economic development over its environment, gained it dominance. Rare earth processing produces highly toxic waste.

The metals are, like semiconductors, vital to the production of everything from smartphones, to wind turbines, to defence equipment and therefore China’s dominance of their production – until Australia’s Lynas Corporation built its plant in Malaysia China accounted for almost 100 per cent of global production – is now a front-of-mind issue for the US and its allies.

When the Trump administration embarked on its trade war and slapped tariffs on $US360 billion of China’s exports there was a moment when China considered retaliating by banning sales of rare earths to the US. It backed off but more recently has imposed more controls over exports of rare earths and the technologies for processing them.

China has form. In 2010, during a dispute over the sovereignty of a group of islands in the East China Sea, China banned the sale of rare earths to Japan, threatening its high-tech industries. That led to Japan, via a state-owned enterprise, providing subsidised funding to Lynas to help create an alternate source of supply.

More recently Lynas and a US partner gained a US department of defence contract and funding for a rare earths processing plant in Texas as part of a push by the US to establish a domestic processing capability.

China’s ambitions in semiconductors, its still-dominant (albeit much-reduced) position in rare earths production and processing and another dominant position in lithium battery production aren’t accidents of history.

It targeted those sectors, used whatever means were available to access the largely US-developed intellectual property, subsidised and protected their development and used its large reserves of natural resources, cheap labour and (until relatively recently) lax environmental standards to build economies of scale and crowd out competitors.

The US and, indeed, the rest of the world were slow to recognise the significance of China’s dominance and its implications for their economies and existing geopolitical settings and only recently began scrambling to respond.

It has, for instance, an estimated 70 per cent of the lithium battery market vital for electric vehicles, smartphones and laptops, among other products.

Again, the US and, indeed, the rest of the world were slow to recognise the significance of China’s dominance and its implications for their economies and existing geopolitical settings and only recently began scrambling to respond.

The US, Australia and South America have plentiful reserves and production of lithium but, despite the cost of transporting heavy units from China to the major markets, haven’t developed meaningful processing and manufacturing capacity.

That’s changing. Wesfarmers and its Chilean partner have agreed to invest $1.8 billion to develop a mine and refinery in Western Australia that could produce 50,000 tonnes of battery-grade lithium. First production, however, isn’t scheduled until late 2024.

The review Biden has commissioned of America’s key supply chain vulnerabilities comes late in the day and any recommendations will take some years, and probably billions of US taxpayer dollars of incentives and subsidies, to make a material difference.

With a major pandemic-inspired push by most of the developed economies to reduce their over-exposure to China by diversifying their supply chains, re-shoring vital activity where practicable, the world is experiencing a significant turning point in what for decades has been the increasingly China-centric globalisation of manufacturing.

Business Briefing

Start the day with major stories, exclusive coverage and expert opinion from our leading business journalists delivered to your inbox. Sign up here.