China Dependent Companies Need to Prepare for Continued Supply Chain Changes

The Biden administration is moving in the direction first chartered in the Trump years towards shifting supply chains out of China. Companies will need to figure out what’s worth the risk, and what’s not.

“The country of origin and entity valuation may no longer be the centerpiece of supply chain risk,” said Megan Brown, a partner at Wiley during a one-hour webinar on Tuesday titled “National Security Concerns in International Supply Chains: New Laws, Policies, and Funding.” She said that companies need to think of how they manage risk beyond the first-tier supplier and maybe even the second-tier supplier. Washington is going to keep pressuring China, whether it’s tech companies that are part of Beijing’s civilian-military fusion, or companies believed to be sourcing goods from forced labor among the Uyghur population in Xinjiang.

“What if you find out that one of your key vendors is now on the naughty list,” Brown said. “Think about how you would react to that and how would you respond if a government agency you are contracting for started asking you questions about it.”

One got the sense from today’s webinar that Wiley is telling its clients to prepare for supply chain shocks in China. Biden isn’t going to relent.

“Biden is clear-eyed on the issues in terms of supply chain security and a whole of government approach being needed,” said Wiley senior public policy advisor Nova Daly. “I think Biden is very willing, from what I heard, to address it and it is one of the single issues that have bipartisan support.”

Daly mentioned Senator Chuck Schumer’s (D-NY) Strategic Competition Act as an example. China hates this. They’re finding op-ed writers in the U.S. to sing their tune in English-language state-owned media like this one from Monday in CGTN, that argued against the SCA.

Other bills in Congress such as the CHIPS Act for semiconductors, and the Holding Foreign Companies Accountable Act, mainly for China companies listed on the NYSE and Nasdaq that allows for three years to be compliant with the Sarbanes-Oxley rules for third party accounting audits (which we think is too long of a time frame), were also mentioned on the call.

Wiley’s attorney’s recognized that companies will have a hard time dealing with the supply chain restrictions in some sectors. And noted that they would have to reach out to the government to make their case as Washington also does not want companies to be locked out of export markets, or lose business.

However, the China rivalry is now pitting the Defense Department and to some extent the Department of Commerce against Wall Street and the U.S. Chamber of Commerce.

“The Made in China 2025 plan has really alarmed the U.S. government because of their non-market dynamics; it’s something we have never seen before at this scale,” said Nazak Nikakhtar, a Wiley partner and former assistant secretary of industry and analysis at the International Trade Administration under Trump. “There is a true integration with the private sector in Beijing making sure that strategic sectors grow. China puts a lot of intervention into private markets that a normal market economy doesn’t have,” she said, warning: “I expect more control of exports and a continued examination of where those rules can be expanded and where the gaps in the rules can be tightened up so they don’t give U.S. companies an out. Every company in every industry will have its own unique challenges and the better they are understood, the better the government can move forward,” she said about the need for the private sector to work with the government on China policies.

Nikakhtar said that the Chinese government has built up a “massive manufacturing base” that counts on government support that “hallows out competitors” worldwide. She said the U.S. needs both offensive and defensive actions, including maintaining Section 301 tariffs.

What Biden’s done so far:

• February 24 Executive Order instituting a formal review of critical supply chains.
• A 100-day review of active pharmaceutical ingredients, critical minerals and rare earth elements, semiconductors, and large capacity batteries
• A one-year review on measuring health and resiliency of defense, public health, ICT, energy, transportation industrial bases as well as agricultural commodities and food production.

Companies are still trying to get exemptions from tariffs because many of the items they need to manufacture here are solely sourced in China.

We believe that the U.S. should make those items here, or entice our allies to do the same, where appropriate. The G7 nations are meeting in the U.K. later this year and are supposed to discuss just that.

In the meantime, companies also face the risk of appearing “woke” in the U.S. and asleep at the wheel in China. Early last year, the NBA and this year Major League Baseball have been particularly hit on social media platforms and in popular culture in general for their silence on what Biden’s State Department calls “genocide” of the Uyghur Muslim population in Xinjiang. The NBA has since been more open against China’s treatment of the Uyghurs.

“If you value freedom and laws, and I think companies do, then in order to keep your IP safe and your future innovation safe, then I think they will come to realize that you can’t keep all their eggs in one basket,” said Daly, without singling out China.