The United States’ dependence on critical manufacturing and global value chains that rely on production based in China could prompt Congress to consider actions that lead to greater burdens on U.S. companies. A recent report from the Congressional Research Service states that while the ongoing COVID-19 pandemic is highlighting these challenges with respect to medical supplies and pharmaceuticals, they could also occur with respect to other industries in the future.
(Sandler, Travis & Rosenberg has launched a new resource page to help members of the trade community keep track of the latest COVID-related policies and procedures and understand how best to respond. ST&R will also be conducting COVID-related webinars this month on the regulatory and policy framework and the impact on trade.)
Because of China’s role as a global supplier of personal protective equipment, medical devices, antibiotics, and active pharmaceutical ingredients, the report states, reduced exports of these goods from China have led to shortages in the U.S., which has limited domestic stockpiles and insufficient domestic industrial capacity. This reduction in exports is attributable to several factors. One is that the Chinese central government commandeered medical manufacturing and logistics down to the factory level and directed all medical-related production, including U.S. companies’ production lines in China, for domestic use. Another is that Chinese firms and logistics operations struggled to return to full capacity as the pandemic widened due to government policies and restrictions.
This experience could be repeated in other sectors and industries, the report suggests. “COVID-19 provides a direct learning experience—potentially more compelling than any war game or natural disaster simulation—about the direct effects and costs of a serious disruption or cutoff of critical supplies from China to the United States,” the report states. For example, Beijing could elect to nationalize production and distribution, or restrict exports, of other goods for health or other reasons, which could deny access to critical supplies to the U.S. and other countries that depend on open and free markets for their supply chains. In such a case, the U.S. could face shortages of products typically imported from China such as raw materials, intermediate industrial inputs, and consumer products.
To protect against such a situation, as well as to respond to the ongoing pandemic, the report identifies several options for congressional action. However, these options would likely increase cost and other burdens on U.S. companies and could affect sectors beyond medical supplies.
For example, Congress may consider the potential longer-term advantages and disadvantages of diversifying U.S. supply and incentivizing production of health supplies in the U.S., possibly in collaboration with other countries. Similarly, U.S. firms with operations in China or that depend on production in China may be prompted to diversify away from China and begin establishing new supply chains.
In addition, the report states, Congress could consider whether to request that the president invoke his authority over the U.S. government’s collection of data on corporate activity abroad for statistical and analytic purposes. These corporate surveys could obtain specific supply chain information about the status of PPE and medical supply production, distribution, and export policy facing U.S. companies overseas, including in China.
Importantly, the report notes that such surveys could also cover other sectors of potential congressional concern, not just those associated with the COVID-19 pandemic. This information could inform legislation that Congress has already passed or is considering with regard to overseas supply chains, including sourcing from China.
Congress may also want to consider additional policy measures to defend against the potential for China to overwhelm global markets as it leans on exports for economic recovery, the report states. Rather than waiting until market injury has occurred to seek damages, for example, Congress may want to be watching trade patterns for signs of import surges and oversee the administration’s potential use of safeguard measures. Similarly, the report states, a broader liberalization of U.S. tariffs on Chinese goods could further expose the U.S. economy to Chinese excess industrial capacity at a point of economic downturn. The report also cautions against a liberalization of U.S. import requirements (e.g., relaxing product certification requirements), noting that such measures in the past “created some of the challenges the United States is facing now, such as loosening requirements for U.S. pharmaceutical firms to report on shortages and how they classify imported content for finished products that qualify as U.S. products.”
For more information on the direction Congress may take and how to best position your company to respond, please contact trade consultant Nicole Bivens Collinson.
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