The COVID-19 cri­sis has ampli­fied the war­ning: depen­den­ce on Chi­ne­se pro­ducts is a key vul­ne­ra­bi­li­ty for Western nations

By Ian Madsen
Poli­cy Analyst
Fron­tier Cen­tre for Public Policy

Many key phar­ma­ceu­ti­cal ingre­dients used in North Ame­ri­ca repor­te­dly come from Chi­na or, in the case of gene­rics, India.

In turn, India imports key ingre­dients from Chi­na. So diver­ting imports from Chi­na to India might not redu­ce our depen­den­ce on Chi­ne­se manufacturers.

In addi­tion, Chi­na rese­rves the right to pro­vi­de its citi­zens with vital drugs befo­re expor­ting them.

Chi­na has for years domi­na­ted non-stra­te­gic exports such as toys, house­wa­res, con­su­mer elec­tro­nics, ligh­ting pro­ducts and fur­ni­tu­re; gar­de­ning and land­sca­ping equ­ip­ment and tools; har­dwa­re and power tools; appa­rel, texti­les and footwear.

Ordi­na­ri­ly, depen­den­ce on a major pro­du­cer for more impor­tant pro­ducts need not be wor­ry­ing. Unless, of cour­se, that fore­ign pro­vi­der has pro­duc­tion pro­blems, social disor­der, an epi­de­mic like COVID-19, civil war, revo­lu­tion, natio­nal disa­ster or diplo­ma­tic stan­doff with Cana­da, the Uni­ted Sta­tes or the­ir allies.

But Chi­na is also the major, some­ti­mes sole sup­plier, of a wide varie­ty of stra­te­gic or cru­cial items.

Among the­se more vital goods are com­po­nents for avio­nics and other defen­ce elec­tro­nics and optics uses, inc­lu­ding some parts of com­pu­ters. Inde­ed, half of the prin­ted cir­cu­it boards used in U.S. mili­ta­ry elec­tro­nics come from Chi­na. A key com­po­nent in solid roc­ket engi­nes is sole­ly made in China.

Some of the­se com­po­nents are used by defen­se con­trac­tors such as Nor­th­rop Grum­man, Honey­well and Loc­khe­ed Mar­tin. Cana­da, of cour­se, pur­cha­ses air­craft from U..S contractors.

Apple’s iPho­nes are made in Chi­na, which also con­trols the out­put of micro­chips in Taiwan.

The Chi­ne­se have moved far up the value cha­in, making incre­asin­gly sophi­sti­ca­ted or spe­cia­li­zed pro­ducts, with few com­pe­ti­tors. They’re a major sup­plier of elec­tri­cal machi­ne­ry and fac­to­ry equ­ip­ment. They also pro­du­ce many com­po­nents for vehic­le and heavy equ­ip­ment manufacturers.

Emble­ma­tic of our depen­den­ce on Chi­na is the rare earth issue. The­se exo­tic metals are used in defen­ce elec­tro­nics, night vision sys­tems, magnets in elec­tric motors, and other spe­cia­li­zed, high-tech­no­lo­gy pro­ducts, many of them with impor­tant, even cru­cial mili­ta­ry applications.

Whi­le the­se metals don’t con­sti­tu­te a big mar­ket, they’re cru­cial in making many of the­se stra­te­gic, inno­va­ti­ve pro­ducts. And they’re dif­fi­cult or impos­si­ble to substitute.

Chi­na no lon­ger has a mono­po­ly on pro­du­cing them, but it refi­nes the vast majo­ri­ty of the rare ear­ths pro­du­ced. Ore is ship­ped to Chi­na for refi­ning, then expor­ted to indu­stries aro­und the world.

Chi­na tem­po­ra­ri­ly cut off ship­ments to one big impor­ter, Japan, during a ter­ri­to­rial waters dispu­te in 2010, sen­ding pri­ces for the­se sub­stan­ces soaring. The­re are suspi­cions that it mani­pu­la­tes the mar­ket by flo­oding or with­hol­ding pro­ducts to under­cut poten­tial new pro­du­cers or refi­ners.

The U.S. Defen­se Depart­ment has signed an accord with the Cana­dian govern­ment to sup­port the deve­lop­ment of new rare earth mines and refi­ne­ries. Japan pro­po­ses to invest in a rare earth refi­ne­ry pro­ject in Texas.

Con­si­de­ring it’s 10 years sin­ce Chi­na fle­xed its musc­les by with­hol­ding rare ear­ths from Japan, then flo­oding the mar­ket to kill off com­pe­ti­tors (such as Moly­corp), it has taken a long time for Western powers to ful­ly appre­cia­te how depen­dent they are on many pro­ducts from China.

The COVID-19 cri­sis has ampli­fied the war­ning: this is a key vul­ne­ra­bi­li­ty for com­pa­nies and nations, and can thre­aten the very health of a nation’s people.

As China’s tech­ni­cal and indu­strial indi­spen­sa­bi­li­ty grows, the dan­ger of being held hosta­ge by the Com­mu­nist Par­ty of Chi­na also grows.

Time is run­ning out for Western govern­ments to diver­si­fy sup­plies of pro­ducts that are key to living stan­dards and inter­na­tio­nal competitiveness.

It’s time to wake up and deve­lop plans for new sup­ply lines for vital goods. Hope­ful­ly our leaders will rever­se this major stra­te­gic error and diver­si­fy sup­ply – and per­haps bring home much of pro­duc­tion – whi­le there’s still time.

This redi­rec­tion stra­te­gy could be part of any futu­re eco­no­mic relief packages.

Not eve­ry­thing can or sho­uld be made in North Ame­ri­ca, Western Euro­pe or other frien­dly pla­ces. But much of it sho­uld be moved out of risky regions that have dubio­us regard for intel­lec­tu­al pro­per­ty, human rights or the rule of law.

Care­ful inve­stors look at geo­gra­phi­cal diver­si­fi­ca­tion, depen­den­ce on sin­gle sup­pliers, quali­ty and relia­bi­li­ty of local health servi­ces, and juris­dic­tio­nal poli­ti­cal and legal risk. Apply­ing tho­se fac­tors, Chi­na doesn’t measu­re up well. 

We can, and sho­uld, do bet­ter. Our health, safe­ty, pro­spe­ri­ty and futu­re inde­pen­den­ce depend on it.

Ian Mad­sen is a senior poli­cy ana­lyst with the Fron­tier Cen­tre for Public Poli­cy.

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