Where House Ways & Means Is Right (And Wrong) On China

by Kenneth Rapoza, CPA Industry Analyst

A recent Ways & Means Committee meeting shows Congress is not on the same page with the post-pandemic reshoring of critical supply chains. Relying on allies is too kumbaya for us. The US Congress can only influence, and truly depend, on one supply chain—our own.

One of the biggest takeaways from last week’s trade hearing in the House Ways and Means Committee was that while everyone agrees something has to be done to take some critical supply out of China, missing was the notion that bringing more of it home was not only good from a security standpoint, but particularly good in an economy crushed by the worst pandemic since the 1918 Spanish Flu.

The hearings showed some of the members of the Ways & Means Committee are living in la-la land. What good is it to talk about “diversified” global supply chains when the U.S. Congress can only influence one supply chain—our own. That’s where we need to invest and where Congress needs to help private companies rebuild capacity.

We won’t get critical medical supplies, including masks and personal protection equipment, back without tariffs that make China products more expensive. Nor will it be easy without long-term government contracts awarded to manufacturers, like a defense contract, so they know how much they need to invest, and how many people they can hire to produce it over a period of time. Aren’t New York and California states large enough to do this on their own?

A diversified supply chain is good, but we cannot control what Germany and Mexico make as an alternative market to China. We can control what we make.

Try imagining Xi Jinping telling China that they should rely on Malaysia and Vietnam for surgical masks in a pandemic instead of making the bulk of it at home.

Everyone agrees that the pandemic exposed the vulnerabilities of an overreliance on China as the go-to manufacturing hub. As the Chairman of the House Ways and Means Committee said last week, the fact that we are not making most of these critical medical items at home is an “absurd and sad reality.” We must think about our strategic manufacturing capacity “both in the Covid crisis and what comes next,” said Earl Blumenauer, Committee Chairman and Democrat from Oregon. “I’m confident that trade policy is an important part of the answer.”

Some companies have sprouted up here and there to make masks and PPE. Most of them were in the textile business.

Prior to the pandemic, at least 50% of key medical supplies were coming from China. In some product categories, it’s more like 90%. Since January, China has increased its production fivefold and is cementing its role as the global supplier of personal protection equipment post-pandemic.

Without incentives and long-term procurement contracts, U.S. companies will never compete with China.

Back in March, when the northeast went on lockdown, masks coming in from China were hard to find. Backorders were common. The world was all ordering the same thing, from the same place. Prices rose as middlemen and brokers got in on the deal to cash in on the crisis.

Washington made calls to companies to see if they could pick up the slack. The only way to do it cost-effectively was to automate. But the machines to make masks were all made in China and Taiwan.

As an example of longer-term procurement contracts, FEMA and the Department of Health and Human Services put in an order for around 600 million masks for one manufacturer consortium we spoke with about this. Instead of sewing T-shirts, they started using the same equipment to sew masks. With retail closed pretty much nationwide even today, making medical equipment allowed them to keep more of their employees instead of laying them all off. A few were spared, as a result.

Daniel Davis, an Illinois Democrat who attended the hearing on July 23 asked panelists from the business and medical communities why the U.S. doesn’t have this supply at home.

Kim Glas, president of the National Council of Textile Organizations,answered:“We are not fully utilizing the domestic production that is in our backyard.”

Prashant Yadav, a lecturer at Harvard Medical School, said “If PPE and masks and medication didn’t all come from China, we would have been better off.”

True, yet Yadav was talking about sourcing PPE supply from other countries; countries that may need these critical supplies for themselves should such a crisis happen again.

“The pandemic showed that it is vital to have medical products like PPE here. We cannot rely solely on China. We need tax incentives to make the U.S. more medically independent,” said Vernon Gale Buchanan, a Republican Representative for Florida.

A big disappointment on the call for us was Buchanan’s colleague Stephanie Murphy (D-FL) who said that all this talk of bringing some medical gear back home was akin to protectionism: “All answers are not tax cuts to businesses. Having exclusive domestic sources is counterproductive. The goal should be diversification, not complete domestication of supply chains,” she said.

We disagree with that position. Although we are not sure at this time what percentage of PPE that hospitals in her district of Orlando purchased during the pandemic came from China, we are sure that any strategic, critical supply of a good should be majority made in the U.S.

Earlier this year, Florida Senator Marco Rubio highlighted Prestige Ameritech, the largest domestic surgical mask manufacturer, as the Senate Small Business of the Week. “We can and should make critical medical equipment, including PPE, right here,” he told us. “It’s vital that we take steps to increase our domestic industrial capacity to reduce our vulnerability to China.”

We think there are people on the House Ways & Means Committee, including Chairman Blumenauer, who agree with that statement. Our hope is that it becomes the majority view in both political parties.

If we cannot agree on reshoring more manufacturing, we should at least agree to reshoring those items deemed strategic. Medical goods are as critical as any item out there.

“The status quo is unsustainable,” said Rubio. “The industrial capacity of a nation still matters. Our nation’s critical vulnerabilities and supply chain risk in key sectors are a result of decades of Washington and Wall Street pushing policies that offshored our industrial base to countries like China. It’s unfortunate that it took a global pandemic to see the ramifications of those decisions,” he said.