September 9, 2021
This time last year, I was scouring grocery stores (as well as Amazon and even eBay) for any spare containers of Lysol, Clorox, or any other industrial-strength cleaning product I could get my hands on.
I thought I’d nearly struck gold one Sunday afternoon when a trip to Home Depot yielded two whole bottles of Clorox. “We just got the shipment in,” the salesclerk explained with excitement as she rushed to put the bottles out on display… almost as quickly as the customers grabbed them from the store’s shelves.
“Remember,” she called out, “only two per customer!”
As I pushed off my cart with those two precious bottles of cleaner, I asked myself a few questions: “How is it that months after the onset of the pandemic, we’re still facing a run on these disinfectants? Why are we still struggling with a supply issue? And why are we needing to ration a product that is so simple and cheap to manufacture?”
The answer was – and is – quite simple: It’s because of our foreign supply chain.
You see, those cleaning products that we all love so much are part of a vast supply chain, most of which originates in China.
Indeed, the raw chemicals needed to make Lysol or Clorox are manufactured in China and then shipped to the U.S. Given the breakdown in our global supply chain associated with the coronavirus, many of those factories overseas were shut down, and the U.S. was unable to receive its regular shipments of goods from China… hence the run on cleaning agents.
You’ve got to wonder… As a developed nation, why are we allowing ourselves to be so dependent on foreign countries that we can’t even keep Lysol or Clorox wipes on store shelves in the midst of a viral pandemic?
Meanwhile, it’s not just chemicals. Remember last year when we couldn’t get ventilators or masks?
Or how about the semiconductor chips embedded in our televisions, phones, cars, and all other electronic devices?
The semiconductor supply issue began in early 2020, and as we approach the final three months of 2021, it’s still plaguing the industry.
The Computer Chips That Power the World Are Mostly Made in Asia
The heart of the issue is that we don’t manufacture these critical semiconductors here at home.
Rather, 75% of the world’s semiconductors are currently made in Asia.
So when semiconductor factories in Asia were forced to shutter due to the coronavirus, the ripple effects were felt around the world.
Suddenly, car and electronic manufacturers didn’t have chips. A backlog began and swelled, resulting in increased prices on many electronics… and a major shortage of chips.
In fact, our overdependence on Asia for these semiconductor chips (and just about everything else) is partly what’s fueling the current inflation in our economy, with producer prices increasing at a record rate of 7.8% and consumer prices jumping 5.4%… and still climbing. Granted, the Fed’s money printing and Congress’ spending certainly are contributing to inflation as well, but our outsourcing of products is a big part of the problem, too.
Amid the ever-increasing demand for tech products tied to this new work-from-home culture, and with the inability to secure components, U.S. companies are losing out on business opportunities while consumers get stuck paying higher and higher prices.
It’s a lose-lose for America and American businesses.
But maybe not for long…
Bad for Business
The U.S. is beginning to realize that all this outsourcing is not only bad for politics (consider the friction we’re experiencing with China while trying to protect Taiwan, our ally and semiconductor capital of the world), but is simultaneously bad for business.
It’s a potential one-two punch… The government is recognizing the challenge, knowing that U.S. taxpayers and the U.S. military are on the hook to protect Taiwan against China thanks to the importance of the industry, while U.S. businesses are asking whether the supply-chain headaches are really worth the theoretical production expenses saved.
After all, if you can’t meet your customer demand because you’re dependent on factories halfway around the world, then you’re missing out on major revenue opportunities.
The End of Comparative Advantage?
A more inward, nationalist onshoring approach would certainly be a revolutionary (and much needed) way to think about our economy. It’s an approach that many traditional economists might disdain because they’d prefer to recognize the historic “competitive advantage” of trade.
Adam Smith, writing on absolute advantage in trade in his famed 1776 Wealth of Nations, concluded that,
If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished… but only left to find out the way in which it can be employed with the greatest advantage.
Other economists have also advanced the idea of comparative advantage by pointing out that some countries have a national ability to provide certain products and services at a better and cheaper rate – something that was, indeed, quantifiable.
In his collection of essays, The Economist Refuted and Other Early Economic Writings, Robert Torrens wrote in 1808…
[I]f I wish to know the extent of the advantage, which arises to England, from her giving France a hundred pounds of broadcloth, in exchange for a hundred pounds of lace, I take the quantity of lace which she has acquired by this transaction, and compare it with the quantity which she might, at the same expense of labour and capital, have acquired by manufacturing it at home. The lace that remains, beyond what the labour and capital employed on the cloth, might have fabricated at home, is the amount of the advantage which England derives from the exchange.
In other words, it would make sense for England to trade broadcloth for lace if it were easier for England to make the broadcloth and vice versa.
But what do you do if and when “the lace” is actually a necessity… whether it be cleaning products to kill a deadly virus, drugs to manage a disease, or technology components that are so necessary that their absence could compromise the underlying security and economic health of a nation?
These are the issues we now face.
At present, I’d argue that we have effectively “comparative advantaged” ourselves out of some vital industries. And that’s had huge implications for jobs and security.
But that’s about to change…
If you’re considering buying a new phone, this shocking tale could change your mind. Get the full story now.
The Move to Onshore Semiconductor Manufacturing
To its credit, the Biden administration – like the Trump administration before it – recognizes the dangers of being overly dependent on foreign producers. As such, Biden has proposed $52 billion to assist the semiconductor industry in bringing more manufacturing “on shore.”
The federal government is smart to look at new ways to insulate the U.S. from the pressure associated with having such a sensitive industry overseas. Not to overdramatize, but those who control the chips are effectively controlling the electronics. For national security reasons, we have every reason to want to ensure that these chips are made here at home.
This is why in January of 2021, Congress passed legislation within the National Defense Authorization Act that included provisions many hope will lead to more U.S. production of semiconductors. The provisions include incentives to encourage the construction or modernization of facilities related to the “fabrication, assembly, testing, advanced packaging, or advanced research and development of semiconductors.”
Currently, the most sophisticated production of semiconductors, the five-nanometer node, is happening in Taiwan and in South Korea (Samsung). These countries are providing the chips for U.S.-based tech giants like AMD, Facebook, Google, Nvidia, Qualcomm, and others. Historically, Intel had been the chip provider of choice for most American companies, but it has struggled to keep up with foreign competitors.
Meanwhile, the industry itself, as I mentioned, is smart to recognize the importance of onshoring this production because of the lost business opportunities associated with production and shipping delays.
An American Manufacturing Renaissance
If the government and the private industry could work together on this issue, then there could be a huge opportunity for a new kind of American manufacturing renaissance.
If we manufacture these technology components at home instead of abroad, then more Americans will be employed in high-skilled manufacturing jobs, profits will become more reliable for the companies in the supply chain that need these components, and the U.S. military might save a ton of money on its Southeast Asia operations. It’s a win-win-win.
But Taiwan certainly isn’t taking any chances…
Perhaps seeing the writing on the wall, Taiwan’s multibillion-dollar semiconductor giant TSMC plans to offshore a new semiconductor plant in Arizona. Reuters reported that the company intends to invest $12 billion to build the plant. It says that long term it hopes to build up to six factories in the U.S. over the next 10 to 15 years.
This is good news for Arizona and for the tech companies that need these chips. Meanwhile, the renewed focus on technology is positive as well for the U.S.-based semiconductor giant Intel. And, perhaps most importantly, onshoring this industry is great news for the country. There’s an opportunity to redirect some of our military funding into projects that we need, to grow jobs at home, and to ensure greater security in the technology we use every day.
Interestingly, as big as our world gets… in some ways, turning inward – and focusing on our own domestic strength in key industries – is one of the best ways to ensure a prosperous future.
Meanwhile, don’t hold your breath on the Lysol or Clorox… In time, it would benefit Congress and American companies to find more ways to ensure production lines for anything we truly need, including disinfectants.
But Rome wasn’t built in a day… So, it wouldn’t hurt to stock up ahead of the upcoming flu season.
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Publisher, American Consequences
With Editorial Staff
September 9, 2021