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After decades of globalization and relative stability, the world is at a turning point. Amidst rising geopolitical tensions, shifting supply chains and states’ embrace of national industrial strategies, policy and corporate decision makers are facing a host of new, challenging questions concerning technologies, markets, and supply chains crucial to economic and national security. These critical and emerging technologies are increasingly and intimately intertwined with geopolitical frictions, if not at their core. Thus, it is important to recognize today’s unique challenges that require innovative thinking and approaches in technology governance to strengthen and build resilient supply chains that are prepared to withstand and can adapt to new geopolitical dynamics.

Interconnected global supply chains based around comparative advantage and lower labor costs linked through complex logistics have proven to be a key component of globalization. However, the interdependence between economies, and the reliance on even geopolitical rivals, has revealed downsides that go beyond pure economic and efficiency considerations. Disruptions, especially during and after the COVID-19 pandemic, have reinforced the need for states to assess risks across a variety of national industries and global market sectors. These domains range from critical food and medical supplies, to automotive, raw materials and other commodity markets, and especially high-tech supply chains, like in the semiconductor ecosystem. To address the issue of supply chain resilience, this assessment evaluates semiconductors as a case study and discusses the risks of disruptions to the supply chain and the measures governments across the globe have taken individually and collectively to strengthen this crucial industry.

Semiconductors, which underpin nearly all current and near-future technology applications in the commercial and military realms, are a key concern for nations’ economic, security, and foreign policies. Governments have chosen to manage dual-use technologies and their supply chains, including semiconductors, comprehensively through new export controls, tariffs, investment screening, and de-risking through investments, subsidies and international cooperation to mitigate risk from growing geopolitical friction. These efforts are primarily driven unilaterally, but collective action and cooperation will be pivotal to ensuring supply chain resilience moving forward for the United States and its allies and partners.

2. Semiconductor Ecosystem Primer

Designed for efficient operations rather than resiliency, semiconductor supply chains can be prone to disruption. To take advantage of massive economies of scale, clustering effects, and regional talent, components of chips can travel more than 25,000 miles and can cross more than 70 borders before reaching their final destination. At its heart, the semiconductor ecosystem consists of three primary phases – (1) design, (2) front-end fabrication, and (3) back-end assembly, testing and packaging. This is followed by systems integration of chips into products such as televisions, video game consoles, personal computers, and cell phones by adjacent industries for consumer goods, industrial goods, as well as defense and space industries. These phases are supported by core intellectual property (IP), electronic design automation (EDA) tools, and raw and processed material inputs, built with a series of sophisticated tools, and incorporate crucial subcomponents.

The semiconductor industry is diverse. It includes some firms that control every aspect of chip production, i.e., integrated device manufacturers (IDMs) such as Intel, Samsung, SK Hynix, or Micron, versus some that leverage the fabless-foundry model. Fabless companies such as AMD, NVIDIA, MediaTek, Huawei/HiSilicon, or Qualcomm design chips, and then partner with foundries such as TSMC in Taiwan, Samsung in South Korea, Global Foundries in the United States, or SMIC in China to fabricate chips to spec on a contract basis. And then for assembly, packaging, and testing the fabless companies leverage those same foundries or outsource to other parties such as Amkor or ASE to complete production. The industry is highly capital intensive and new fabs cost billions of dollars to build and require extensive supporting infrastructure.

The type of chips produced vary based on the role they play in computational processes, with heavy specialization in the industry. Notable variants are logic chips, including CPUs and GPUs, memory chips, including DRAM and storage drives, and power and analog chips, such as capacitors and voltage regulators. In addition, there are supporting components such as printed circuit boards that connect chips.

The primary players for design and fabrication in the industry are concentrated in the Pacific Ocean region. Firms based in the United States, Japan, South Korea, and Taiwan play essential roles in the semiconductor industry. U.S. firms lead in advanced logic chip design (namely Intel, NVIDIA, and AMD) and equipment manufacturing (KLA, LAM, and Applied Materials), Taiwan leads in advanced foundry services and advanced packaging (principally TSMC), Japanese firms (such as Tokyo Electron) lead in materials and equipment manufacturing, while South Korea leads in memory design and fabrication (Samsung and SK Hynix). China leads in legacy ATP and systems integration. The Dutch firm ASML produces the most advanced extreme ultraviolet (EUV) lithography machines used in fabrication, which are essential for advanced chips. Japanese and the aforementioned U.S. firms produce deep ultraviolet (DUV) lithography tools (Nikon and Canon) or other essential leading chip manufacturing materials, tools, and equipment (such as Tokyo Electron, KLA, LAM, and Applied Materials) or EDA tools (Synopsys and Cadence), respectively. These firms are, in turn supported by facilities, equipment manufacturers, and assembly in countries ranging from Singapore, Malaysia, and Vietnam in Southeast Asia, to mainland China in Northeast Asia, to Ireland, Germany, and the Netherlands in Europe, to Israel in the Middle East.

A trade analysis prepared by the Pacific Northwest National Laboratory demonstrates the high level of concentration in Northeast Asia for the semiconductor industry for U.S. imports for 97 key commodities. This is limited to a relatively small group of suppliers for key inputs like photographic plates and goods — used in lithography — and components for tools in semiconductor manufacturing such as dicing machines and polish grinders to the United States and suggests that greater diversification throughout the semiconductor supply chain will be a challenge in some areas. Fortunately, many come from companies in allied countries like Japan, South Korea, and Taiwan. However, a few specific chokepoints controlled by China exist for critical minerals that will require effort to establish viable alternatives. This conundrum of concentration and dispersed inputs provides insight into the fragility of many modern advanced technology supply chains.

3. Risks Abound: Disrupting Global Supply Chains

Along the chain, threats of disruption abound. In recent years, the Russian invasion of Ukraine, the resumption of the Israel-Palestine conflict, the ongoing risk of armed conflict in Northeast Asia, terrorist attacks on vessels in key shipping arteries, maritime accidents, the continuation of U.S.-China trade friction, and the recognition of the exposure of tech linchpins to natural disasters, coupled with potential future pandemics — have all highlighted the necessity to strengthen and diversify chip supply chains. Typologies of supply chain disruptions vary, with some experts focusing on nature of the event while others concentrate on the impact to suppliers and distributor, the frequency of the event, or the scope. States are mostly concerned about the following types of supply chain disruptions: trade remedies, weaponization of supply chains, armed conflict, natural disasters, pandemics, transportation and logistical accidents, and financial crises.

Certain states’ anticompetitive practices and illicit coercion to help domestic firms and undermine foreign competitors present important challenges to the industry. The People’s Republic of China, for example, holds significant control over the mining and processing of critical semiconductor minerals and has retaliated against U.S. export controls by imposing restrictions on the export of antimony, gallium, germanium, and graphite — the latter three are important components in a range of industries, including electronic commodities such as batteries for electric vehicles, but also utilized as semiconductor materials for optics and photonics (gallium nitride semiconductors are superior to silicon chips in some applications) or in semiconductor manufacturing. When coupled with years of IP theft and China’s civil-military fusion policies, considerable risks to supply chains and global trade have accumulated.

Furthermore, U.S.-China trade frictions continue, including over U.S. government export control efforts announced in October 2022 and October 2023 to restrict China’s access to specific advanced semiconductors, including graphics processing units (GPUs) utilized for artificial intelligence (AI) computation, supercomputer components, and semiconductor manufacturing equipment, to prevent the development of chips for use by the People’s Liberation Army. The same measures may also hold back Chinese technology firms in competing and innovating and have further fractured the global market. China has redoubled long-standing efforts to develop semiconductor self-sufficiency with a focus on indigenous tools. Export controls can also harm U.S. companies’ ability to retain their technological edge. This has short- and long-term implications. In the short-term, their inability to sell their most advanced chips or manufacturing tools to China cuts into revenue that is reinvested in research and development to maintain American leadership. And this loss of revenue is not limited to chips or chip manufacturing equipment. A recent study estimated the total cost of export controls targeting China across all suppliers/industries at $130 billion. In addition, the long-term consequences of foreign firms “designing out” U.S. licensed architectures, components, manufacturing equipment or personnel will further increase fragmentation and undermine U.S. firms position in the market.

Supply chains themselves are also a tool of geopolitical competition, which have been weaponized by China and even the United States. The risks of weaponization are essential drivers for de-risking efforts and efforts to reduce or mitigate dependencies. For example, China’s control over critical minerals and rare earth elements contributes to U.S. concerns that Beijing may weaponize inputs, as they have signaled with antimony, gallium, graphite, and germanium. In addition, technology bans, such as the Chinese government’s restrictions on Micron memory products, limitations on the use of Apple iPhones for Chinese government and party officials, and blocking operations of Tesla cars near sensitive facilities, add to the risks for firms. Even U.S. bans on Huawei base stations and rip and replace policies are justified largely through national security concerns. The Japanese government’s 2019 export control policy shift to remove leading South Korean semiconductor firms from whitelists for export licenses of high purity chemicals used in semiconductor manufacturing, including hydrogen fluoride, fluoride polyimide, and photoresists disrupted South Korean firms’ operations and compelled them to develop greater levels of indigenous sourcing. The controls were later lifted and whitelisting restored in 2023. Renewed emphasis on economic security has accompanied this shift in the landscape in technology competition and national economic security.

Yet other more traditional risks are still present. The risks of armed conflict and natural disasters are other significant drivers behind supply chain resilience efforts. The Russian invasion of Ukraine in 2022, for example, disrupted the global supply of neon gas used for semiconductor manufacturing. Prior to war with Russia, two Ukrainian companies produced over fifty percent of purified neon gas used for semiconductor manufacturing, forcing firms such as SK Hynix and TSMC to seek alternative suppliers. Armed conflict also remains a risk on both the Korean peninsula and in Taiwan. The lack of access to chips produced at TSMC in Taiwan due to a contingency in the Taiwan Strait, could cost the United States as much as five to ten percent of current gross domestic product, exceeding the cost of the COVID-19 pandemic or the 2008 global financial crisis.

In addition, natural disasters, including earthquakes, tsunamis, volcanic eruptions, and violent storms, have also impacted the semiconductor ecosystem in the past and are part of future considerations. The 1999 Taiwan earthquake, the 2004 Indian Ocean tsunami, and the March 2011 triple disaster in Japan all had significant impacts on electronics and semiconductor supply chains. The recent April 2024 earthquake in Taiwan resulted in a few fatalities but was notable for the minimal damage and speed at which TSMC’s operations were fully restored.

bodog poker review Finally, global logistics networks on land, sea, and air make global supply chains seamless. Ships blocking maritime arteries or colliding with bridges, rebels attacking vessels on international trade routes, crumbling rail and highway infrastructure, or inefficient customs clearance can undermine and disrupt supply chains, leading to significant delays and costs.

In this context, firms anticipate supply chain risks growing. According to one study, companies should expect supply chain disruptions to occur, even with mitigation strategies in place – with disruptions of one-two weeks occurring every two years, and with disruptions of two months or more every five years. Ongoing practice and resilience investments will allow companies to stay more agile and better positioned to withstand supply chain disruptions but will not totally insulate firms from risks. Geographic position is another factor and firms’ intentions across many sectors are shifting operations out of China as part of diversification strategies. This is reflected in the battery of data assembled about firms’ intentions in China and reshoring generally. The American Chamber of Commerce in Shanghai released a member survey which indicated that, “40 percent of respondents are redirecting or planning to redirect investment originally planned for China, with most looking towards Southeast Asia.” Another recent assessment found that over 70 percent of U.S. companies with manufacturing in China are now either in the process of or planning to shift operations to other countries – which has increased from 60 percent in April 2023 and 57 percent in 2022. Certain firms are not just following a China+1 strategy, but recognizing the risk of concentration in Taiwan, and henceforth are pursuing Taiwan+1 strategies to ensure advanced semiconductor manufacturing is more geographically distributed to mitigate against local and regional shocks.

4. State Responses: Right-Shoring and Resilience

States have responded to the risk of disruption by incorporating advanced technology manufacturing into their national economic security strategies, by providing incentives and grants to attract investments, and by seeking to foster talent development in key industries.

Like-minded states, including the United States, European Union (EU) members, Japan, South Korea, Australia, and India, have individually and collectively recognized the challenges and chosen to tackle them in several different ways. First, many have undertakeneffortstoassesstheir dependencies, vulnerabilities, and relevantchokepointsin specific areas, such as semiconductors or critical minerals, in response to specific risks. Second, leaders have pushed for policies of “right-shoring” to reduce reliance on any single region or country for manufacturing and also begun to grapple with establishing national economic security frameworks suited to their national contexts. Third, some governments have established incentivization policies including subsidies, tax credits, and talent development to better attract or diversify private investment in advanced tech manufacturing to ensure constant access to essential links in the supply chain.

Most notable is the last point on incentivization. The impetus is for governments to attract advanced fabrication facilities or fabs, assembly, packaging and testing facilities, mature-node chip fabrication for defense applications, and systems integration to strengthen semiconductor resilience, especially focused on domestic efforts and investments. The United States, the EU, Germany, the United Kingdom, Japan, South Korea, India, Singapore, and other governments have appropriated funding for subsidies and/or tax incentives to compete for investments from leading technology firms through various “Chips Acts.” State or provincial governments are complementing these efforts with local incentives to build or expand clusters and innovative hubs in their respective region. On the corporate side, leading players such as Taiwan’s TSMC, South Korea’s Samsung, and U.S. firms Intel, Global Foundries, and Micron have announced new investments to diversify their operations in Japan, Germany, the United States, Southeast Asia, and India.

In the United States, Congress has appropriated $52.7 billion for the CHIPS & Science Act, including $39 billion for grants. By December 2023, the first tentative funding notice for a mature-node chip manufacture for defense applicationswas announced. Subsequent preliminary awards and agreements have included focus on advanced and mature node fabrication for logic, memory fabrication, and packaging, including a mix of foreign and domestic firms (See Table 2). These new synergistic policies are not only well-furnished with significant financial incentives but also backed by political will. Nevertheless, administering these programs and getting the funds to the industry is a complex and time-consuming endeavor. Uncertainties may derail promising projects along the way.

Ultimately, these investment decisions are taken by private sector companies and must make economic sense to them. For example, Micron’s announcement of an investment in a back-end facility for memory chips in India and TSMC’s investments and construction of new chip fabrication facilities in the United States and Japan were both in response to new policies and their anticipated financial returns.

Given growing investments in semiconductors and China’s extensive market subsidization, some voices have expressed concern about overcapacity of mature or legacy node chips, which in the past had negative effects on some players as lower prices led to large losses and inhibited R&D investment due to boom and bust cycles in the semiconductor industry. These concerns are not limited to China (although those are the most concerning) – as chips act investments get stood up around the world, the question remains whether sufficient demand will emerge to drive contracts for all the new fabrication capacity, even with projections showing that due to AI and IoT, demand and markets for chips will continue to rise. Nevertheless, industry analysts expect semiconductors to become a trillion-dollar industry by 2030 or shortly after.

5. Building a Collective Supply Chain Raft

Complementing domestic efforts, many like-minded states have chosen to collaborate through bilateral, minilateral, and multilateral technology partnerships to monitor crucial supply chains and to communicate on ways to collectively ensure supply chain resilience in the future, including to coordinate to avoid a subsidy race. States clearly recognize, while extensive domestic efforts are necessary, that globally interconnected supply chains mean they cannot go it alone. Whilemuch of the effort to protect against shocks is national and local, collaboration and coordination with international partners stands as a crucial line to ensure resilience of supply chains. In the case of the United States and its partners, supply chain specific initiatives have been established in response to disruptions. For example, members of the Quadhave established early warning systems, and the U.S.-EU Trade and Technology Council has institutionalized information sharing — both of which are aimed at monitoring semiconductor shortages. The U.S.-India initiative on Critical and Emerging Technology (iCET) commissioned an independent assessment of feasibility for India’s readiness to play a supporting role in the semiconductor supply chain. On critical materials, the U.S.-led Mineral Security Partnership with 14 countries and the European Union intends to target strategic projects in the value chain for crucial minerals and elements used in advanced technology manufacturing. Enabling Southeast Asian states like Vietnam, Malaysia, Thailand, and Indonesia to scale up exports of key commodities, particularly raw materials essential for chip manufacturing is also a priority. The United States, Japan, and South Korea are also cooperating trilaterally on semiconductor supply chain resilience and critical minerals, and quantum computing.

Moreover, a number of chip related efforts through the Indo-Pacific Economic Framework (IPEF) were included in a recent supply chain agreement to build a crisis response network, including simulations, a council to coordinate response actions, and pilot programs to enhance resilience in semiconductors and critical minerals. The IPEF provides a larger aperture for collaboration on salient areas connected to chip supply chains in a key region, but the lack of a market access pillar in the framework remains a drawback for participants. In the Americas, the National Leaders Summit, the United States-Mexico-Canada Agreement, and the Americas Partnership have all included announcements for collaborative initiatives to bolster and monitor trade flows and supply chains for semiconductors, critical minerals, and medical supplies in emergency situations. India, Australia, and Japan have established the Supply Chain Resilience Initiative to share best practices and promote investment matching to mitigate political and economic risk.

With a history of U.S. semiconductor investment in Central America, the role of Mexico and Costa Rica could be crucial moving forward for back-end investments in particular. The U.S. government and industry players also have other options to consider for right shoring close to home for key inputs in the chain including printed circuit boards – such as the Dominican Republic. Both the Trump and Biden administrations have aimed to locate some functions in the supply chain closer to home, which is why there has been renewed interest in building capacity for chips in North America and Latin America. Critically, this is supported by the International Technology Security Innovation (ITSI) fund through the Chips Act, which has $500 million over five years administered by the State Department. Expanding the ITSI fund and widening its scope of projects should be a bipartisan priority for the U.S. government.

At the traditional multilateral level, members of theG7, theG20, and the Organisation for Economic Co-operation and Development, have also reached agreements to intensify monitoring of critical minerals or semiconductors, share risk assessments, or facilitate financial support for supply chain resilience. The United States during the Biden administration has been relatively successful in building up what it calls a “latticework” of partners with a vision for a more integrated approach to manage technology, economics, and security cooperating with allies and like-minded partners when it comes to semiconductors and beyond.

6. CONCLUSION

The ability of states to coordinate and secure supply chains domestically and internationally has taken on new importance. This is especially the case for critical and emerging technologies, yet in times of growing geopolitical tensions all types of goods and commodities with limited suppliers and high concentration can be weaponized for foreign policy objectives. There are considerable challenges governments are facing in building resilient supply chains for semiconductors, including frequent misalignment between partners due to conflicting economic and national security objectives. While many of these new initiatives are nascent, and some may fail, they will contribute at a fundamental level to each nation’s security and economic independence and strengthen the collective.

ORFAmerica_BP26_Chips_Supply_Chain

To read the background paper as it was published on the Observer Research Foundation America webpage, click here.

To view the full report as posted by the Observer Research Foundation America, click here.

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Courtney Brown — Tue, 04 Jan 2022 06:00:33 +0000

Supply chain disruptions have become a major challenge for the global economy since the start of the COVID-19 pandemic. Factory shutdowns (particularly in Asia) and widespread lockdowns and mobility restrictions have resulted in disruptions across logistics networks, increases in shipping costs, and longer delivery times. Several measures have been used to gauge these disruptions, although those measures tend to focus on selected dimensions of global supply chains. In this post, we propose a new gauge, the Global Supply Chain Pressure Index (GSCPI), which integrates a number of commonly used metrics with an aim to provide a more comprehensive summary of potential disruptions affecting global supply chains.

Measures of Supply Chain Developments

Several approaches have been used to assess supply chain problems. Such issues may arise within countries–pile-ups at ports or a shortage of truck drivers, for example—or they may spill across countries—as with a shortage of containers. Our proposed measure is therefore built on variables that are meant to capture factors that put pressure on the global supply chain, both domestically and internationally.

The first set of indicators we draw from focus on cross-border transportation costs. First, we use data on the Baltic Dry Index (BDI), which tracks the cost of shipping raw materials, such as coal or steel. Second, we exploit the Harpex index, which tracks container shipping rate changes in the charter market for eight classes of all-container ships. Finally, the U.S. Bureau of Labor Statistics (BLS) constructs price indices that measure the cost of air transportation of freight to and from the U.S., and we use the outbound and inbound airfreight price indices for air transport to and from Asia and Europe.

We show our measures of transportation costs in the two charts below. In the first chart, we notice that both shipping cost indices have witnessed enormous growth since the beginning of the global recovery from the troughs of the COVID-19 pandemic, although the BDI has begun to slow in recent months. It is interesting to note that the Harpex bodog sportsbook review measure increased considerably more than it did during the recovery from the Global Financial Crisis (GFC), while the rise of the BDI has been on par with that of the GFC period. The second chart below plots the inbound and outbound costs of airfreight for the U.S. and Asia and for the U.S. and Europe. Airfreight costs from Asia and Europe to the U.S. accelerated especially sharply in 2020, as airlines dramatically cut airfreight capacity in response to the pandemic.

Growth of Container Shipping Rates Has Fallen in Recent Months

Sources: Harper Petersen Holding GmbH; Baltic Exchange; Bloomberg L.P.; Haver Analytics.

Air Freight Prices Reached Historic Highs during the Pandemic

Sources: Bureau of Labor Statistics; Bloomberg L.P.

The second set of indicators rely on country-level manufacturing data from the Purchase Manager Index (PMI) surveys. In terms of country coverage, we focus on economies that have both a significant sample length and are substantially interlinked through global supply chains: the euro area, China, Japan, South Korea, Taiwan, the U.K., and the U.S. Note that in case of the U.S., the PMI data start only in 2007, so we combine the PMI data with those from the manufacturing survey of the Institute for Supply Management (ISM). From these PMI surveys, we use the following subcomponents of the country-specific manufacturing PMIs: “delivery time,” which captures the extent to which supply chain delays in the economy impact producers—a variable that may be viewed as identifying a purely supply-side constraint; ”backlogs,” which quantifies the volume of orders that firms have received but have yet to either start working on or complete; and, finally, ”purchased stocks,” which measures the extent of inventory accumulation by firms in the economy.

In the chart below, we plot GDP-weighted averages of the subcomponents of our countries’ manufacturing PMIs. The measures of supply bottlenecks have risen dramatically during the recent recovery period, and this rise has been most notable for the “delivery time” subcomponent of the PMIs across our seven economies.

PMI Subcomponents Have Diverged Substantially from Average Levels in Recent Months

Sources: Harper Petersen Holding GmbH; Baltic Exchange; Bloomberg L.P.; Haver Analytics.

Notes: Each subcomponent is constructed by aggregating subcomponents for the U.S., the U.K., the Euro Area, China, Taiwan, South Korea, and Japan via GDP weights. The “delivery times” PMI subcomponent has been inverted such that readings above 50 indicate longer delivery times.

The Global Supply Chain Pressure Index

The previously discussed variables contain valuable information regarding the state of supply chains across the different regions. However, each measure highlights different dimensions of potential disruptions in global supply chains. Furthermore, the emergence of global supply chains allowed industries across countries to become more interconnected, with air and maritime freight transportation facilitating this interconnectedness. For example, final products produced by U.S. firms are frequently assembled from components and parts manufactured in Asia and Europe. For these reasons, we will construct a supply chain pressure measure that combines data on country-specific supply chain measures with the aforementioned global measures of transportation costs.

Movements in the country-specific PMI components as well as in the transportation cost series can be due to either changes in demand or supply factors. To better isolate the supply-side drivers of each data series, we use additional information available from the PMI surveys for our set of seven economies. More specifically, we collect data on the “new orders” PMI subcomponent, which captures the extent of customer demand for firms’ products and regress the three country-specific supply chain PMI measures (delivery time, backlogs, and purchased stocks) on the contemporaneous value and two lags of this new orders component in an attempt to purge demand factors from these three supply chain PMI subcomponents. The residuals from these regressions for each country will then be used as inputs in constructing our global supply chain pressure index. Regarding the transport cost variables, we use both a GDP-weighted average of the aforementioned “new orders” PMI subcomponents as well as a similarly weighted average of the “quantities purchased” PMI subcomponents for our seven economies. The latter captures the extent of firms’ demand for intermediate inputs (both domestic and foreign), to proxy for producers’ input demand. In a similar vein as for the country-specific supply chain measures, we use regressions based on these two GDP-weighted demand proxies and their lags to cleanse our six global transport cost measures as much as possible from demand effects.

To estimate our GSCPI measure, we thus have available a data set of twenty-seven variables: the three country-specific supply chain variables for each of the economies in our sample (the euro area, China, Japan, South Korea, Taiwan, the U.K., and the U.S.), the two global shipping rates, and the four price indices summarizing airfreight costs between the U.S., Asia, and Europe. All these variables are corrected for demand effects to the greatest possible extent, as described previously. This data set is made up of monthly time series of uneven length: the advanced economies’ supply chain variables all start in 1997, for Japan they start in 2001 and for the other Asian economies 2004, the Harpex index starts in 2001, the BDI goes back to 1985 and the BLS airfreight price indices go back to 2005 on a monthly frequency and are quarterly from 2005 to 1997. Our aim is to estimate a common, or “global,” component from these time series. To be able to do that while also dealing with data gaps, we follow Stock and Watson (2002) and extract this common component for the 1997-2021 period through a principal component analysis while simultaneously filling the data gaps using this estimated common component.

The chart below presents the evolution of the resulting Global Supply Chain Pressure Index (GSCPI) on a monthly basis since 1997. The index is normalized such that a zero indicates that the index is at its average value with positive values representing how many standard deviations the index is above this average value (and negative values representing the opposite).

Global Supply Chain Pressures Remain High but May Have Begun to Moderate

Sources: Bureau of Labor Statistics; Harper Petersen Holding GmbH; Baltic Exchange; IHS Markit; Institute for Supply Management; Haver Analytics; Bloomberg L.P.; authors’ calculations.

Note: Index scaled by its standard deviation.

The GSCPI oscillates over time, with several episodes that are noteworthy. We note a fall and then a rebound in the index during the GFC. While our empirical methodology attempts to purge demand factors before constructing the GSCPI, it is not a perfect measure and its dynamics during the GFC likely still capture some demand components. The GFC-period variation in the index is not as large as the moves seen in later periods, which arguably capture stronger supply-side factors. In 2011, we see a substantial rise in the index, attributable to two natural disasters. The first is the Tōhoku earthquake and resulting tsunami, which had an impact on both Japanese and foreign production, given that the affected regions were a center for automobile manufacturing. The second event involved flooding in Thailand, which inundated seven of the country’s largest industrial estates, affecting the global production chains of the auto and electronics industries. The index rises again during the China-U.S. trade disputes of 2017-18, as firms had to adjust their global procurement strategies.

The spikes in the GSCPI associated with the aforementioned events pale in comparison to what has been observed since the COVID-19 pandemic began. First, we observe that the GSCPI jumps at the beginning of the pandemic period, when China imposed lockdown measures. The index then fell briefly as world production started to get back online around the summer of 2020, before rising at a dramatic pace during the winter of 2020 (with COVID resurgent) and the subsequent recovery period. More recently, the GSCPI seems to suggest that global supply chain pressures, while still historically high, have peaked and might start to moderate somewhat going forward.

Conclusions

Our goal in constructing the GSCPI was to construct a parsimonious measure of global supply chain pressures that could be used to gauge the importance of supply constraints with respect to economic outcomes. In a follow-up post, we will quantify the impact of shocks to the GSCPI on recent movements in producer and consumer price inflation.

Gianluca Benigno is an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Julian di Giovanni is an assistant vice president in the Bank’s Research and Statistics Group.

Jan J. J. Groen is an officer in the Bank’s Research and Statistics Group.

Adam I. Noble is a senior research analyst in the Bank’s Research and Statistics Group.

To read the full commentary from Liberty Street Economics, please click here.

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Jude Althagafi — Thu, 02 Sep 2021 13:02:51 +0000

Reading some of the commentary, one could be forgiven for believing that the United States was a major commercial shipbuilding force in the post‐World War II era until it was brought low by the end of a particular subsidy in the early 1980s. Known as construction differential subsidies (CDS), they were meant to encourage domestic shipbuilding by bridging the difference in price between constructing ships in the United States and abroad (up to a maximum of 50 percent). With these subsidies in place, some argue, the country’s shipyards were in a vibrant state.

The Brookings Institution’s Aaron Klein, for example, has credited these subsidies with helping to deliver 75 ships per year in the mid-1970s—a far cry from the 3 built per year in recent decades—while the Lexington Institute’s Loren Thompson claims their elimination led the United States to quickly go from “the biggest commercial shipbuilder in the world to no longer producing any vessels for international trade.” Earlier this year defense analyst Jerry Hendrix described the subsidies as a recognition by the federal government that a “robust and resilient shipbuilding sector was a critical component of a comprehensive national security strategy.”

But as data from U.S. Maritime Administration annual reports make clear, the sector during this era—at least on the commercial side—was something less than robust (and claimed deliveries of 75 ships per year simply erroneous). Even with these industry handouts in place the United States still languished in shipbuilding mediocrity.

Some facts to consider:

Measured by the number of ships delivered, U.S shipyards only exceeded 5 percent of global output twice (1953, 1954). Most years it did not exceed 3 percent.
From 1951–1981, U.S. shipyards averaged 18 ship deliveries per year. For perspective, during this same period French shipyards averaged 28 deliveries, Swedish shipyards 41, U.K. and German shipyards more than 80, and Japanese shipyards 270.
A 1992 U.S. International Trade Commission report notes that none of the ships built since 1960 were for export (i.e. for customers using foreign‐flagged ships).
The surge of deadweight tonnage during the late 1970s is in large part accounted for by the delivery of unsubsidized tankers to transport oil from the newly opened Trans‐Alaska Pipeline. Fiscal years 1977 and 1978 saw the delivery of 13 such tankers for the Alaska trade with a combined deadweight tonnage exceeding 1,800,000. In other words, much of this temporary bump in shipbuilding output was due to a unique one‐off event rather than the construction differential subsidies.

Plainly, this was an era of strength only relative to the minuscule levels of current output.

As I’ve written before, however, this doesn’t necessarily mean that the notion of shipbuilding subsidies (or more accurately, additional subsidies) should be dismissed. If the construction of large merchant ships in sizable numbers is indeed critical to U.S. national security—a not entirely obvious proposition given the limited overlap between commercial and military shipbuilding—then the industry should be supported in the most efficient and transparent manner possible (which is to say not via the Jones Act, whose U.S.-built requirement should be repealed as part of any deal for new subsidies). But expectations about what such shipbuilding subsidies could achieve must also be properly calibrated and trade‐offs carefully weighed.

More importantly, the conversation around the ills of U.S. commercial shipbuilding must be expanded to include the stultifying influence of Jones Act protectionism. Examining this long‐standing lack of competitiveness and its relationship with the captive market generated by the Jones Act’s total prohibition on foreign‐built vessels in domestic trade is vital to reversing this industry’s declining fortunes. It would certainly be time better spent than reminiscing about a shipbuilding past that never was.

Colin Grabow is a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies where his research focuses on domestic forms of trade protectionism such as the Jones Act and the U.S. sugar program.

To read the full commentary from the Cato Institute, please click here.

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Jude Althagafi — Thu, 26 Aug 2021 13:13:07 +0000

According to numerous reports, skyrocketing global shipping prices and related transportation bottlenecks are hindering the U.S. economic recovery. Indeed, this “shipping crisis” is one of the summer’s most‐covered financial phenomena. Yet bodog poker review barely mentioned outside of a few industry publications is how brand new U.S. tariffs of more than 200 percent(!) are contributing to the problem. And U.S. trade law all but ensures that there’s little we – even the White House itself – can do about it.

American ports and rail terminals are struggling to cope with unprecedented surges of imports from Asia, a situation likely to continue into next year and contributing to both American companies’ supply chain woes and broader inflationary pressures. Shipping containers are piling up by the thousands, leading to port delays, higher shipping costs (both ocean and inland freight), and U.S. exporters – mainly of agricultural products – lacking the empty containers they need to send their goods abroad. Importers, meanwhile, are especially reeling. Firms like the Columbia Sportswear Company, Whirlpool, and Peloton have gone on the record about rising shipping costs and struggles to meet consumer demand. Small businesses are being hit particularly hard, facing the decision to pay three times the typical shipping rate for products that are unlikely to arrive in months. And peak shipping season has just begun. The disruption is such that the CEO of the American Apparel Association even urged consumers to do their Christmas shopping in the summer.

(Sorry, fellow procrastinators.)

Surely, a lot of the problem here is just the global pandemic – for example, a surge of Asian‐made consumer goods to meet an unexpected spike in U.S. demand, combined with still‐muted demand for U.S. products in countries with relatively few vaccinations – doing its thing. Until COVID-19 is under control around the world, supply chain hiccups (and more) will persist. Thus, many of these issues will simply take time to work themselves out – regardless of what the politicians might promise.

However, U.S. trade policy is also likely contributing to the current shipping crunch. In particular, the United States earlier this year imposed extremely high “trade remedy” duties on imports of truck chassis (which are used to haul containerized merchandise around the country) originating in China – by far the largest producer of such products. The duties resulted from antidumping (AD) and countervailing duty (CVD) investigations launched last year by the U.S. International Trade Commission (ITC) and Department of Commerce (DOC), the latter of which calculated for chassis produced by China International Marine Chassis (CIMC), the world’s largest chassis manufacturer, combined final duty of 221.37 percent (177.05 percent AD and 44.32 percent CVD). These estimated AD/CVD measures now apply to any Chinese chassis imports that have entered the from March 4 on. And they apply on top of the 25 percent tariffs that President Trump imposed on a wide range of Chinese imports in a separate “Section 301” case back in 2018.

(We say “estimated” duty rates here because, as discussed previously, the U.S. trade remedies system’s novel “retrospective” approach requires duties to be (1) adjusted periodically for imports that entered the United States during a previous period and (2) then assessed on those imports at the new, recalculated rate once the review is completed years later. This approach creates an additional “uncertainty disincentive” – as if a 221 percent duty weren’t enough! – to import from subject countries and companies. That said, usually rates change modestly during these reviews, so it’s unlikely that the current duty rates on Chinese chassis imports will be substantially lower anytime soon.)

According to importers and industry‐watchers, these duties are undoubtedly affecting the U.S. shipping market for two reasons:

First, chassis available to U.S. freighters have been “stretched to [the] limit” in recent months at most of the biggest transit hubs in the country, including the ports of Los Angeles/Long Beach and New York/New Jersey, and rail terminals in Dallas, Chicago, St. Louis, and elsewhere. Major chassis providers like TRAC Intermodal have also reported shortages in regions like the Seattle‐Tacoma area and throughout the Midwest, where this situation is especially sensitive. Indeed, back in July, chassis shortages contributed to creating a clog of shipments in Chicago that forced Union Pacific and BNSF Railway, two of the largest railroad companies in the country, to temporarily restrict shipments from ports in the West Coast to said hub. As one recent report put it, “[s]hipments from Asia to the U.S. are experiencing extreme difficulties in getting their cargo delivered, mainly due to the acute shortage of chassis to effect delivery of their containers on the U.S. side.” (emphasis ours)
Second, there simply isn’t enough non‐China chassis capacity to meet current U.S. demand. In particular, CIMC can produce 40,000–50,000 units per year, while the five North American chassis manufacturers that requested the U.S. AD/CVD investigations have admitted that it would take them “at least six to nine months” to increase their production to only 10,000–15,000 annual units, and that they would not be able to fulfill new orders until 2022. Refurbishing old chassis, moreover, isn’t possible because every usable unit in the country is being employed because of the current shortages.

As a result of these two market realities, the new U.S. duties will do only two things, neither of which is good for the U.S. shipping crunch: (1) further discourage importers and freighters from bringing new capacity online (thus maintaining the chassis shortage and related shipping bottlenecks); and/or (2) dramatically raise shipping costs, as freighters (importers, ocean carriers, truckers, etc.) suck it up and just buy Chinese chassis then pass on those costs to their customers. On the latter point, freight companies estimate that the new duties alone will add more than $25,000 to the price of each chassis they buy, effectively tripling their price. None of this is good for shipping‐reliant U.S. companies (or consumers) and current inflationary concerns – especially when these higher inland freight costs are combined with higher ocean freight costs brought on by the pandemic.

As one U.S. trucking company representative put it when the new duties were finalized this Spring, “The timing couldn’t be worse.”

Why, then, did the U.S. government (DOC/ITC) not take these unique factors into account when determining whether to apply the new duties? Why not perhaps hold off on implementing them, at least until the shipping crunch abates next year? Given that ports are likely to be jammed up for the foreseeable future and chassis pools are already stretched thin, it would make sense for the government to let freighters purchase additional units of chassis at relatively competitive prices, thereby easing the current chassis shortages, reducing the “detention and demurrage fees” (for holding goods until equipment becomes available) that U.S. consumers are already bearing, and alleviating some of the brutal price pressures and bottlenecks in the current domestic shipping market. Such results would surely be in the national economic interest.

They would also be consistent with the Biden administration’s own stated priorities in the shipping sector. In particular, President Biden issued a July 9 Executive Order targeting (among other things) the very “detention and demurrage” fees that may be exacerbated by a lack of available chassis to transport incoming shipments from ports to their inland destinations. The Federal Maritime Commission is also now fielding a complaint by the American Truckers Association over alleged anti‐competitive practices by ocean liners and chassis providers to restrict truckers’ choice over chassis to haul shipments.

Holding off on the new chassis duties thus seems like a total no‐brainer, right?

Alas, as discussed previously U.S. law prohibits the DOC and ITC from taking these important economic and policy issues into account when determining whether to apply trade remedy measures on subject imports. Instead, the U.S. system effectively runs on autopilot, delivering rents to a small number of well‐connected firms and labor unions regardless of current market conditions or how an agency decision might affect the long‐term health of the U.S. economy or other domestic policy priorities. Many other national trade remedy systems have just this type of “public interest” test; the United States unfortunately does not. And it’s undoubtedly a big reason why we’re one of the biggest users of AD/CVD measures in the world.

To be clear, none of this means that the Chinese government’s subsidization of domestic firms like CIMC must be condoned or ignored. And the United States, just like all other World Trade Organization members, has the right to use its trade remedy system to offset injury to domestic firms caused by dumped or subsidized imports (though of course we at Cato have long complained about these laws’ merits and implementation). But a system that requires U.S. administering agencies to blindly enact 221 percent tariffs (on top of 25 percent tariffs already in place!) on badly needed chassis, while the economy reels from a massive shock to the global and U.S. shipping systems caused by a once‐in‐a‐generation pandemic, makes zero sense – especially when it contradicts the White House’s own economic priorities. Moreover, chassis are relatively unsophisticated pieces of equipment, not jet fighters or nuclear reactors that might possibly raise credible national security concerns that warrant trade restrictions regardless of their economic costs.

A sane trade remedy system would allow for these and other considerations and permit the administering agencies to reduce, delay, or decline to impose duties where doing so would be in the public interest – for example during a shipping crisis that’s hindering the economic recovery and adding to already‐serious inflationary pressures.

Alas, the United States has no such thing.

Scott Lincicome is a senior fellow in economic studies. He writes on international and domestic economic issues, including international trade; subsidies and industrial policy; manufacturing and global supply chains; and economic dynamism.

To read the full commentary from the CATO Institute, please click here.

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Jake O'Keeffe — Thu, 24 Jun 2021 19:02:31 +0000

The global shipping industry is responsible for 3% of our total emissions of CO₂. Green hydrogen fuel, while not yet ready to replace oil or gas bunker fuels industry-wide, does not cause any emissions in use and may be the best possible solution to this problem. However, heavy regulation such as an international carbon tax is required to make sustainable energy alternatives a reality in this industry.

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Over nine billion tons of cargo are shipped around the world’s oceans each year. Global trade relies on marine transportation to move containers and solid and liquid bulk cargo between ports, but the shipping industry relies on huge amounts of fossil fuel energy stored in bunkers on board the vessel to make these journeys.

Burning bunker fuel to drive cargo ships currently leads to approximately 3% of all greenhouse gas emissions. Around 18% of some pollutants found in the atmosphere is directly caused by the shipping industry.

As worldwide trade is expected to increase with a growing population, economic development, and more globalization in coming years, so will the shipping industry’s demand for energy.

As well as a heavy reliance on dirty bunker fuels, shipping also has wide-ranging, negative effects on aquatic ecosystems. Ships releasing ballast water have introduced invasive species into new habitats. The industry is responsible for oil and chemical spills worldwide, as well as accidental and intentional deposits of garbage and dry bulk cargo.

Ship-strikes injure and kill rare megafauna in the oceans, and underwater noise pollution from their large engines disturbs many species of sea life. Around ports, the industry causes severe contamination of sediments in ship breaking and transshipment.

Despite this negative reputation, the shipping industry has traditionally been reluctant to adopt measures to limit its environmental impact. These problems have been widely acknowledged by authorities, conservation organizations, and shipping industry leaders themselves – but little is being done. This shows that the shipping industry may require external pressure – such as better global regulation – to change its act and minimize environmental harm.

Hydrogen in the Shipping Industry

There are some pilot projects underway that aim to show that hydrogen – which emits no greenhouse gases when burned, only water – is a viable replacement for fossil fuels in shipping. However, these are currently limited to a small scale on routes that take in visits to refueling facilities.

This is due to a lower energy density in hydrogen fuels now, compared with heavier petroleum. Liquid hydrogen fuel must also be stored at temperatures lower than -253 ℃ in cryogenic tanks. These heavy containers take up valuable space and weight on a cargo ship.

Some researchers are optimistic that hydrogen fuel can overcome these challenges to become a more viable alternative to fossil fuels. However, hydrogen must be green or at least blue if it will have a positive net impact on the environment compared to oil or gas.

Hydrogen is a product of water electrolysis, a highly energy-intensive process. Hydrogen is an unsustainable fuel unless the energy used for this process itself has no negative impact on the environment.

Blue hydrogen achieves this by capturing carbon released by natural gas used to power electrolysis. Green hydrogen is produced using renewable energy sources such as solar or wind.

When Will the Shipping Industry Embrace Hydrogen?

Although other, cleaner fuel types such as methanol and biofuels have been proposed by some in the shipping industry, hydrogen is the only fuel technology we have today that emits zero CO₂. It should, therefore, be at the center of planning and decision-making for the industry’s long-term future.

Technical challenges could be overcome in a matter of years, according to some researchers. However, fossil fuels will remain cheaper to extract than hydrogen fuel is to produce – at least in the short-term future. To counteract this, worldwide regulatory measures such as a global carbon tax could provide the economic justification necessary for the shipping industry to fully back hydrogen in the future.

Ben Pilkington is a freelance writer, editor, and proofreader with a master’s degree in English literature from the University of Oxford. He is committed to clear and engaging written communication and enjoys telling complex, technical stories in a relevant and understandable way.

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Johnny Morris — Tue, 22 Jun 2021 16:10:50 +0000

While the global logistics industry has not been a stranger to disruption this past year, the congestion at the Port of Yantian in China is starting to impact the market at an exceptionally high level. At the current pace, it’s going to be even more disruptive than the Suez Canal blockage this spring and the ongoing congestion at the Port of Long Beach/LA over the past year. This is due to the magnitude of the trade lanes and exports the port touches. Unlike the Suez Canal incident or other recent port issues, which have impacted a more limited number of regions and trade lanes, the Port of Yantian is a major export hub for multiple large markets like Europe, North America, Latin America and Oceania.

This disruption also came on top of an already brittle logistics system which is currently grappling with several unprecedented challenges, including equipment shortages and decreased schedule reliability, to name a few. Right now, the reliability that the vessel carrying your goods or expected to pick up your goods will show up on time is roughly 5%. At this time last year, it was around 80%+. And, as ocean carriers introduce more blank sailings or skip ports to start improving the reliability percentage, that means the freight that was skipped is now added to the backlog of containers that will flow into the next vessel.

It’s likely we won’t see a large shift in congestion until the demand levels out. And while this market does not lend itself to a silver-bullet solution, there are things shippers can do to keep their supply chain afloat:

1. Be open to hyper flexibility

While flexibility is important any time global logistics are involved, the phrase ‘now more than ever’ holds true here. Currently, delays at the Port of Yantian are ranging from 10-15 days, which is a large jump from the 2-7 day delays we experienced just few weeks back.

Switching between ports, modes, and trade lanes has been an active strategy to avoid these delays, but shippers can’t rely on only adjusting once or twice since other shippers are also making these shifts as they compete for limited space. A good example of how this plays out is in the case of congestion at the Port of Oakland. Over the last few months, as the delays at the LA port were mounting, carriers started diverting sailings to Oakland. The result? Oakland is now also severely congested and suffering from the same unpredictability.

Fact remains, ocean carriers are deploying the most capacity on the U.S. west coast (USWC) routing, and as complexities in the interior of the U.S. continue to be exacerbated (i.e. lack of chassis and rail congestions), carriers continue to limit options for containers moving inland. Shippers need to continue to be flexible in enabling containers terminating on the USWC and leveraging transloading and trucking inland options.

When considering flexibility across modes, keep in mind air may be the solution for a few shipments, but it’s not a feasible option to shift all your ocean freight to air. Instead, exploring a mix of modes, like LCL + air, may offer a more realistic opportunity for your company in a more cost-competitive way. Having the right partner with a global suite of service and technology offerings coupled with scale and a strong inland network, is going to make the difference for supply chains in the market.

2. Prepare for ultra-prioritization

Prepare to make tough decisions on what freight is most important to move. This can be especially difficult for companies importing seasonal items, like patio furniture or pools since their selling window is limited.

With today’s demand, most shippers would classify all their freight as a top priority but shipping it all at once may not be realistic. It’s important to sit down and have those conversations now so when the opportunity presents itself for portions of your freight to move, like in an LCL shipment, you’re ready to make the call.

3. Don’t dismiss historical data

I’ve been in the business 20 years and never seen anything like this in a global magnitude, impacting almost all core trades. However, a unique situation does not mean historical data no longer lends itself to helping us find solutions.

The market will improve, and things will get better. However, these issues tend to be cyclical as we look at the data. We need to build resiliency around supply chain and continue to have options to navigate. While some of these events are hard to predict and plan, there are things that you can do, such as diversifying distribution center locations, sourcing, etc.

Final Thoughts

Until the high demand subsides, the above points will be crucial moving forward. C.H. Robinson has always been focused on working alongside our customers to help them succeed – and that’s no less true during times of incomparable volatility. It’s important to keep an open line of communication and to be open to creative solutions.

Sri Laxmana is the vice president of global ocean product at C.H. Robinson. He is currently responsible for driving the global strategy, revenue and ocean freight volumes.

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Jake O'Keeffe — Fri, 21 May 2021 18:45:11 +0000

This is infrastructure’s big moment in America. The Biden administration has come out swinging, initially floating a $3 trillion package and while the Republican counter-proposals are smaller, the U.S. is on course to initiate the largest investment in our increasingly fragile infrastructure in generations. The big debate will be about what counts as infrastructure, but underneath that are several parallel debates. One of the most important is about the line between military and commercial infrastructure and the interconnectivity of the two, specifically for America’s Navy and the maritime industry. This is but one aspect of an ongoing problem of stovepiping aspects of our infrastructure and national security and treating them like they aren’t related.

Both the Biden and Republican definitions of infrastructure miss a key dimension of modern connectivity: what happens on land often starts at sea. Global commerce is connected to sea-based trade—think about the disruptions that arose when the Suez canal was blocked, or closer to home when the Mississippi river was recently closed for shipping due to the failure of a bridge. Our technology is dependent on the seas as well, in the form of undersea cables that carry the vast bulk of our data.

Enter the SHIPYARD Act bipartisan bills put forward by four Democrats, one Independent, and three Republican Senators and a pair of bipartisan Representatives. The genuinely bipartisan nature of the bills is enough to warrant attention and the substance is on the right track with one major change needed.

At core, the SHIPYARD Act is designed to provide funding, in part by using the Defense Production Act (DPA), to help the U.S. Navy refurbish four critical shipyards in Hawaii, Washington (the state), Virginia and Maine. The full name of the act (somewhat unusually) explains its purpose: “Supplying Help to Infrastructure in Ports, Yard, and America’s Repair Docks.” It’s part of a wider push in Congress to ensure that the United States has the assets it needs to cope with a mounting naval arms race in the Western Pacific and beyond. But the SHIPYARD Act risks focusing too narrowly on the Navy’s own yards and on national security aspects of maritime capacity, overlooking the commercial.

Maritime infrastructure serves both commerce and national security purposes, as well as scientific ones. All three are intertwined; building ships, maintaining ports, maritime engineering, projecting naval power, and engaging in ocean sciences are inherently interlinked. Unfortunately the way the federal government deals with them are not.

In the American conversation of late, we’ve overemphasized the importance of the military dimensions of maritime capacity and given too little thought to the steady deterioration of the U.S. shipbuilding industry. American commercial shipbuilding was a vibrant industry equal in economic size to military shipbuilding in the mid 1970s and employing 180,000 workers in 1980. After then President Ronald Reagan cut subsidies to U.S. commercial shipbuilding, the industry has largely gone away; today America produces less than one half of one percent of the world’s commercial ships. The decline of commercial shipbuilding capacity translates into Bodog Poker increased costs for the Navy in building and maintaining its fleet.

We have become reliant on non-American shipping in a way that we refused for the production of automobiles and aircraft, industries that both have received significant taxpayer subsidies during COVID-19 and the great financial crisis. Now, that issue is nuanced—there’s no immediate trade downside to using non-American shipping, especially when European and Asian allies play such large roles in commercial shipping (as does China, of course). But there are real domestic costs: fewer jobs (especially high-quality jobs not centered around 4-year liberal arts college degrees), higher costs for building and maintaining Navy ships, and reduced movement of commerce between U.S. ports.

There is a difference, however, as cargo can only be shipped between parts of the U.S. using American-built ships. America’s founding fathers desired in our first big law (public law 1-2) that cargo shipped between American ports use ships built in America, an idea currently codified in the Jones Act. Given that America is unlikely to abandon the principle behind its oldest law, then without enough American-built ships, domestic shipping is not feasible.

The result of neglecting domestic shipping and port infrastructure is greater congestion on our nation’s roads and rails as well as more pollution. Transportation is the largest source of greenhouse gas emissions (nearly 30%) and transportation by truck is far less environmentally sustainable than by ship. Freight rail faces different congestion challenges in keeping up with our ever increasing movement of goods on a fixed number of rails. Investing more in expanding U.S. domestic shipping capacity is critical to building a sustainable infrastructure system for the future.

The Biden team stresses a foreign policy for the American middle class. Connecting a drive to strengthen the U.S. Navy to a wider effort to bolster the civilian dimensions of American maritime capacity would reap economic, environmental, military and political rewards. A better plan would build off the SHIPYARD Act but rather than using DPA authority would instead include funding for dredging operations, port refurbishment, American shipbuilding, and ocean sciences. The Navy, the Department of Transport, commercial port operators, and ship builders should jointly develop plans to maximize this investment. Congress needs to recognize the connections between military and commercial shipbuilding and appreciate that an investment in commercial shipping saves Uncle Sam in defense spending and creates quality middle class jobs.

This is infrastructure’s moment, and a moment to think about American infrastructure in the context of the world’s. Widening the aperture and making the connection between commercial and military dimensions of maritime capacity will benefit America’s economy, environment, and enhance our national security.

Aaron Klein is a senior fellow in Economic Studies at the Brookings Institution, focused on financial technology and regulation; payments; macroeconomics; and infrastructure finance and policy. Prior to joining Brookings in 2016, he directed the Bipartisan Policy Center’s Financial Regulatory Reform Initiative.

Bruce Jones is director and a senior fellow in the Project on International Order and Strategy of the Foreign Policy program at the Brookings Institution; he also works with the Center for East Asia Policy Studies. He is also a consulting professor at the Freeman Spogli Institute at Stanford University. Jones previously served as the vice president and director for the Foreign Policy program for the past five years.

To read the full commentary, please click here.

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Anne Allen Hodge — Thu, 29 Apr 2021 20:32:25 +0000

While President Joe Biden will likely strike a more diplomatic tone with China than his predecessor, economists and other observers believe the United States’ rocky trade relationship with its biggest economic rival will remain contentious — which will impact Virginia’s economy.

Under former President Donald Trump, the U.S. and China were immersed in a grueling trade war marked by sanctions and escalating tariffs and amplified by the COVID-19 pandemic. The trade battles presented significant challenges to the Port of Virginia, which counts China as its top trading partner for imports and exports. In retaliation for the Trump administration’s increased tariffs on Chinese imports, China raised taxes on U.S. exports, many of which were shipped from Virginia, including soybeans and lumber. Tariffs on world trade, coupled with the pandemic, led to a more than 4% drop in the Port of Virginia’s 2020 cargo volumes.

During the 2020 presidential campaign, Biden had suggested that he would scrap the tariffs, setting the stage for a reset in the two nations’ tense relationship. However, recent indications point to Biden staying the course — at least in the short term.

“It’s not going to be a wholesale reversal of the Trump administration’s trade policies,” says Robert McNab, director of Old Dominion University’s Dragas Center for Economic Analysis and Policy. “The Biden administration has not said it is going to dismantle tariffs and restrictions on Chinese goods imported into the U.S.”

Trump actually did Biden a favor by taxing Chinese imports, adds McNab, who conducts an annual economic forecast for the state. “Tariffs are now something for the new administration to negotiate with. If China doesn’t agree to reforms, the Biden administration will have no choice but to keep those tariffs.”

McNab says that the new administration will pursue closer ties to U.S. allies, including relaxing tariffs on European goods, while reminding competing nations, such as China, that they must follow the norms and traditions of the international trade system. “The hope is that China will democratize and be a force for good government in the world.”

Keeping a firm stance

U.S. Sen. Mark Warner, who has long sounded the alarm on China’s unfair trade practices and serves as chairman of the Senate’s National Security and International Trade and Finance Subcommittee, is looking for certainty in Biden’s international trade policy. “It is evident that the status quo isn’t working for American businesses, but the slapdash strategy of escalating tariffs without clear policy objectives was never the answer,” he says. “I’m hopeful the Biden administration approaches this problem multilaterally in a way that gives industries in the U.S. a clear vision for a path forward.”

However, Maurice Kugler, professor of public policy in George Mason University’s Schar School of Policy and Government, says that the U.S.’s trade relationship with China is one area where Trump and Biden see eye to eye. Instead of appeasements, Kugler believes Biden will enforce Trump’s tough stance on China. “He is in no mood to accept empty promises and is not going to wait months and months for [China] to pussyfoot around,” Kugler says. “He will be patient up to a point. After that, he’s going to be very tough.”

While the Chinese government has aggressively pushed to reduce or eliminate tariffs, McNab predicts the U.S. government will seek other concessions, such as increased protections against technology theft and currency manipulation, as well as improvements in China’s human rights record. “We have to have tools to bring the other party to the table and convince the Chinese government we are willing to inflict some degree of pain to accomplish policy goals.”

In addition, the administration likely will take a much harder look at various Chinese goods arriving in U.S. ports, including the Port of Virginia, with the goal of producing some of those items domestically. For example, questions have arisen about the wisdom of importing large amounts of medical supplies from China. (This issue led the Trump administration in May 2020 to award Richmond-based drug manufacturer Phlow Corp. a $354 million contract to create an American supply chain for medicines and pharmaceutical ingredients that are now made mostly in China and India.)

“If a large part of the supply chain rests in China, there is increased vulnerability to decisions of the Chinese government,” McNab says. He adds that returning portions of the supply chain to the U.S. would benefit Virginia industries, such as advanced manufacturing.

Impact on Virginia

China was the Port of Virginia’s top trading partner in 2019, with approximately $2 billion in imports and $10 billion in exports. Last year, China was the second largest export destination for Virginia goods and the state’s largest source for imports.

“The trade war has had a huge impact on Virginia businesses,” says Warner. “These tariffs affected billions of dollars of goods across essentially every facet of the Virginia economy. In the short term, businesses either have had to pass these costs along to Virginians or eat the cost — meaning less investment, fewer jobs and limited growth.”

Virginia farmers are concerned about losing access to lucrative global markets, Warner adds. “Meanwhile, other countries, including China, have taken advantage of our haphazard trade policy to secure access to new markets and chip away at our influence in other parts of the world. It’s going to be a heavy lift for our producers to fully recover.”

Virginia’s exports to China declined from $1.7 billion in 2017 to $1.2 billion in 2018 and 2019 after tariffs were implemented, notes Stephanie Agee, vice president of international trade for the Virginia Economic Development Partnership. Decreases were especially evident in agricultural and forestry products, which China began seeking from other nations. China, however, remains an important trade partner to the commonwealth. It is routinely Virginia’s No. 1 source for imports, a distinction unchanged during the Trump-era trade war. “I don’t expect that status to change dramatically in the next few years,” she adds.

In January 2020, Trump and Chinese Vice Premier Liu He inked the Phase One trade commitment, which obligated China to purchase $200 billion in additional U.S. exports. Virginia’s exports to China rose to $1.8 billion in 2020, as a direct result of Phase One, Agee says. While the agreement initially curbed the trade war between Washington and Beijing, China quickly fell behind in its commitment, meeting only 58% of its 2020 purchasing targets.

“Phase One was viewed with high skepticism from the moment it was announced,” McNab says. “China was never going to fulfill the terms of the Phase One deal. In international trade negotiations, China has the habit of ignoring provisions of things it doesn’t like.”

American businesses’ underlying concerns were not addressed in Phase One, Warner says. “We need a real framework rather than vague purchasing commitments and an IOU from the Chinese Communist Party. I’m confident that once we have that framework, Virginia industries can get back to work rather than trying to parse when and if tariffs will be lifted.”

Kugler suggests bringing in the World Trade Organization to alleviate tensions and mediate a settlement between the two superpowers. He adds that WTO Director-General Ngozi Okonjo-Iweala, a Nigerian-American economist who joined the organization in March, is an honest and objective broker. “That would be the most conducive way of handling the situation. Otherwise, we will be headed for an economic catastrophe of losses of trillions of dollars for the world economy.”

Multilateral approach

The Biden administration has pledged to partner with U.S. allies to better compete with China while pressuring China to modify unfair economic policies. Warner believes that could be an effective tactic, as does Agee.

“It could force China to the negotiating table, but it’s complicated,” she says. Europe relies on China as a trading partner, while the U.S. has been embroiled in an ongoing dispute with its European trading partners regarding aircraft manufacturing subsidies that has also involved dueling tariffs. “That could impact the U.S.’s ability to bring allies to our side on China.”

Forging trade agreements with allies contrasts with Trump’s go-it-alone, America-first approach. “If there was one significant flaw with the Trump administration’s approach to China, it was that it was bilateral instead of multilateral,” says McNab. “The Trump administration was unable to bring the power of the global community to bear upon China.”

However, as tensions escalated with China, the U.S. set its sights on trade relationships with other Asian nations, which has opened new trade possibilities.

“Southeast Asia as a whole has become a market of greater interest for imports and exports,” Agee notes. For example, Vietnam has become an important export market for Virginia’s agricultural and forestry products as multinational companies seek lower-cost alternatives outside China to establish food processing and furniture manufacturing operations.

However, no other trade partner can rival China’s size. “Even if all those countries dramatically increase their imports, there are no possibilities of replacing China as the size of an export destination,” Agee says.

The Biden administration also must determine whether it is in America’s best interests to view China as a collaborator or a competitor. “Obviously, collaboration involves a trust factor on both sides,” says Michael Ligon, vice president of corporate affairs for Richmond-based Universal Corp., a leading global supplier of leaf tobacco.

Ligon chairs VEDP’s advisory committee on international trade, which partnered with other Virginia agencies in 2019 to develop the state’s International Trade Strategic Plan. One of the first international trade initiatives developed by a U.S. state, the plan seeks to increase Virginia exports by 50% by 2035. Achieving that goal could potentially add 150,000 export-driven jobs and almost $18 billion in annual exports to the bodog online casino billion currently generated. During its 2021 session, the General Assembly allocated $1.5 million to further implement the plan.

“Virginia is now 41st in exports per capita,” Ligon notes. “We’re looking to move into the top 20, which would put us ahead of many Southeastern states.”

That could also lead to additional dealings with China. Regardless, American and Chinese economies will remain interdependent. “We can’t ignore China, and China can’t ignore us,” McNab says. “Given the close economic ties between the two countries, it’s in everybody’s interest to talk and resolve differences peacefully.”

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Anne Allen Hodge — Wed, 10 Feb 2021 19:42:30 +0000

Christmas trees should be packed away by now, but U.S. importers may still be waiting for their holiday packages — and the impact likely will be felt for another big holiday: Easter.

Historic volumes at the nation’s ports have knotted the flow of trade so badly that containers filled with December’s holiday items still are being processed through the ports, according to data and analysis from ImportGenius.

“Based on the analysis of roughly 75,000 U.S. import records from August 2017 to present, which we identified as related to Christmas, it is very clear that the shipping snarl resulted in a significant deviation from the traditional Christmas import schedule,” said William George, analyst at ImportGenius.

“November imports in 2020 were at the highest level seen over the past four years and were nearly double the values we found for 2017 and 2019. January imports are also double or nearly triple the volumes we’ve seen for past years, which suggests that a lot of people’s shipments were literally too late for Christmas.”

George warned: “The delays visible in the Christmas data, and the trends already evident in our Easter data, strongly suggest that Easter imports as a whole will be similarly impacted.”

These late shipments in the end will eat into the gross margins of retailers. American Shipper shared the findings with the National Retail Federation.

“Retailers want their cargo as soon as they can get it,” said Matthew Shay, CEO of the National Retail Federation. “This is critically important for all retailers, and especially important for retailers that were forced to close their stores temporarily when the pandemic first hit. Having stores open now and fully stocked will help support economic recovery for retailers and will provide customers with access to the goods they need.

“No retailer wants to have empty shelves or have to put items they receive late immediately on discount. These added costs of the delays ultimately have to be absorbed by the retailer.”

Through deeper analysis, the spike of containers processed during the Dec. 15-Jan. 31 timeframe compared to 2017, 2018 and 2019 shows an incredible increase.

Even if a container were processed on Dec. 15, it’s highly unlikely those products would make it to a retailer’s shelf in time for Christmas. If they did, the products would not be listed at full price. The ripple effect of this slowdown shows the retail industry’s unrealized profits. Bottom line: The profits could have been higher.

“We are still seeing Christmas decor and products coming in,” said Brett Rose, CEO of United National Consumer Suppliers. “Unless a retailer has the ability to pack it away, they are forced to dump it into the off-price market at a huge discount. We are seeing an influx of Christmas product available.”

The Port of Los Angeles is ground zero for the congestion and delays. While there are many compounding reasons behind the container bottleneck, there is at least one issue that can be addressed and fixed — the vaccination of the supply chain.

The state of California did not put longshoremen and truckers in the “essential worker” category for vaccinations. Currently, the human element of the supply chain, arguably the most important in moving out the containers, is not working at full capacity.

“With the supply chain severely strained, it’s critical that our longshore workers be vaccinated immediately,” said Port of Los Angeles Executive Director Gene Seroka. “I, along with other maritime leaders, have been advocating for this since early December.

“Unfortunately, we now have more than 800 Southern California dockworkers staying home due to COVID. These workers have answered the bell every day since this pandemic began, moving goods to each of our 435 congressional districts. We are overdue to make this happen.”

For the flow of trade to be healthy, you need all pieces of the puzzle to be in good physical shape. While the U.S. landlord ports have no control over the efficiencies of the terminals and carriers, vaccination is something that canbe managed.

“We know there are many issues impacting port operations today, including an essential workforce impacted by COVID-19, equipment availability and a stressed system,” Shay said. “First and foremost, we need to ensure the supply chain workforce, including longshoremen and drivers, has access to quickly get vaccinated and safely keep the nation’s commerce moving. Their access to the vaccine is critical to our economic recovery.”

While support for the vaccination of these men and women goes as high up as the Federal Maritime Commission, without the Biden administration stepping in, the risk to the supply chain continues.

As a result, supply chain management has never been more important for importers. The race for delivery has vessels either making the Port of Oakland their first stop to avoid the congested Port of Los Angeles, or importers selecting vessels destined for the East Coast ports.

“The container ports along the East Coast are booming with the e-commerce surge,” said Bill Doyle, executive director at Maryland Port Administration. “Retailers, freight forwarders and BCOs are making the decision to avoid the congestion along the West Coast and are booking on ships that are traveling through the Panama Canal. Since July 16, we have had 11 new ships arrive into our port. We have unloaded approximately … 18,674 TEUs.”

In an interview with CNBC, Peloton CEO John Foley explained the company’s response to the delays. “With the last couple of months with the congestion at the ports, we’ve had to reschedule some members’ bike and treadmill deliveries. That is frustrating to them and that’s frustrating to us.”

The company recently announced it invested $100 million into expedited shipping to help alleviate the delays. “If one member gets a reschedule, that is one reschedule too many for our taste,” the company stated.

But the added expense for “faster” shipping does not guarantee a speedy delivery because of the port congestion.

“We continue to talk to our members and government officials about the ongoing issues at the ports, the impact these issues are having on the retail industry and ways to help address the congestion,” Shay explained. “Retailers continue to work with their transportation providers to find solutions to quickly move cargo that is currently sitting at ports, while also exploring alternate gateways.”

The next retail holiday that is seeing supply constraints is Easter. While February is not fully compiled, it is clear imports for the Easter holiday are behind, even compared to pre-trade war levels where frontloading was not part of the supply equation.

These interruptions can be a boon for some. United National Consumer Suppliers, which is a distributor from everyday consumer products to specialty items, is no stranger to helping retailers add to their shelves. Rose added his company is fielding requests from supermarkets to supplement their Easter products this year. “No retailer wants to have empty shelves.”

Analyzing the trade data of Albertsons, Easter imports are off their historic levels.

With a struggling economy, dollar stores may be a popular destination for consumers to buy Easter products. While the chain has the ability to store product for those familiar with the company, Easter imports are way down from its historic levels. (99-Cent Only Stores and Albertson’s did not respond to a request for comment.)

This congestion in the supply chain shows no signs of changing anytime soon. China’s slowdown in the feeder service, which started in December, will exacerbate the congestion. Once that integral maritime route reopens, there will be an artificial surge of containers in March/April.

The plug in the container system has some retailers fast tracking their domestic back-to-school orders.

“We started receiving orders for back-to-school items in January,” Rose said. “Normally we have retailers reaching out in June.”

The pandemic buying habits of the consumer are the accelerants on this container inferno, and they have Rose concerned about the supply of summer merchandise.

“With everyone home last summer, the pandemic buying of outdoor products depleted a lot of inventory,” he said. “Now with these delays, you could see a slowdown in the supply chain replenishment in patio furniture, fire pits and other outdoor items for this summer season.”

Shay added the supply chain disruption is an ongoing issue for retailers as they manage to meet consumer demand. “The bottlenecks and congestion we are seeing at our ports, both on the water and in the terminal, highlight the need for a truly 21st century supply chain that can handle these issues.”

The delicate balance of supply and demand has been off kilter since the pandemic started. By the tale of the containers, it doesn’t look like this balance is coming back anytime soon.

Lori Ann LaRocco is senior editor of guests for CNBC business news. She coordinates high profile interviews and special multi-million dollar on-location productions for all shows on the network. Her specialty is in politics, working with titans of industry. LaRocco is the author of: “Trade War: Containers Don’t Lie, Navigating the Bluster” (Marine Money Inc., 2019) “Dynasties of the Sea: The Untold Stories of the Postwar Shipping Pioneers” (Marine Money Inc., 2018), “Opportunity Knocking” (Agate Publishing, 2014), “Dynasties of the Sea: The Ships and Entrepreneurs Who Ushered in the Era of Free Trade” (Marine Money, 2012), and “Thriving in the New Economy: Lessons from Today’s Top Business Minds” (Wiley, 2010).

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Emily Kachinski — Fri, 29 Jan 2021 17:41:22 +0000

One of the most serious challenges President Joe Biden faces is China’s growing military power and the technologies behind that. He and his advisors underscore that, in contrast with the Trump administration, they will work closely with European and Asian allies to address this challenge. This collaboration will be challenging as the China challenge is so multi-faceted and different allies bring different perspectives to each facet.

Most European and Asian governments agree with the United States that China’s growing military might presents a strategic threat in Asia, and that its industrial subsidies and forced technology transfers are a problem. That said, they were repelled by the Trump administration’s unilateral power-based tactics and differed with it and among themselves about the nature of the threat China presents.

The Biden administration must recognize and work with these differences. In particular, it must bring a nuanced approach to the issue of national-security controls on the leakage of critical technologies that promote China’s military capabilities.

Japan is all too aware of the consequences of this leakage: it lives daily with Chinese incursions into its air and maritime space. European countries do not “feel” the problem the same way: they are farther away and have more difficulty disentangling economic issues from national security concerns.

Europe is, however, becoming more sensitive due to China’s human-rights violations in Xinjiang, its stifling of Hong Kong’s political voice, its disregard for international law in the East and South China Seas, its bombastic coronavirus “diplomacy” over the past year, and the complaints of industry about its economic policies. All these concerns have already had an impact on European policy, as the EU has toughened its laws against subsidies and dumping, introduced a “screening mechanism” to regulate acquisitions of European companies, and updated its controls on technology exports.

The Biden administration can build on these steps, but it must understand and work with the nuance of the changes in European policy, while at the same time helping Europe better understand the nature of the problem.

The Changing National Security/Technology Problem

Working with Europe to stem the leakage of critical technologies that could boost China’s military capabilities is important because the types of technologies relevant to defense has broadened and because the EU’s role in this has changed significantly.

Traditionally, the United States and its allies relied on their technological dominance to offset Russia and China’s numerical military superiority, with tactical nuclear weapons in the 1960s and precision and stealth technologies in the 1970s and 1980s. These first two “offset strategies” were driven and owned by governments working with large defense contractors. This made it easier for governments to control the export of the relatively limited universe of “dual-use” technologies that had civilian and military applications, whether by requiring licenses under the Coordinating Committee on Multilateral Export Controls (CoCom) or through screening foreign acquisitions of firms (for example, by the Committee on Foreign Investment in the United States, or CFIUS).

The Obama administration recognized that the U.S. lead in “dual-use” technologies had eroded, and that the commercial sector had developed a wide range of new technologies that could have military applications, including in sensing, computing, data analytics and deep bodog online casino machine learning, communications and systems integration, robotics, genetic engineering, and many other fields. This explosion in “dual-use” technologies as well as in the universe of companies developing them led the Obama administration to develop a “third offset strategy,” predicated on working with the private sector in the United States, Europe, and elsewhere to stay one step ahead of the “quick followers” in China and elsewhere.

At the same time, the Defense Department saw China using open and covert means to acquire a wide range of advanced technologies. The report it commissioned from the CEO of the cyber-security firm Symantec, Michael Brown, on Chinese technology acquisition practices was completed at the end of 2016. It led in 2018 to the Trump administration’s tough approach to China’s “technology theft” (the trigger for the trade war) as well as to the adoption of the Foreign Investment Risk Review Modernization Act and the Export Control Reform Act. Both acts are tied to the ongoing U.S. government effort to identify “emerging and foundational” dual-use technologies that should be subject to export and investment-screening controls, which Washington hopes other countries will help enforce.

Europe’s Evolving Approach

The same trends—the technological advances of China and Russia, the broadening expanse of dual-use technologies, and the growing number of Europe’s own high-tech firms—have changed Europe’s approach to technology and national security as well—although perhaps not as much as the United States might want.

Despite enormous strides in integration, European countries jealously guard their sovereignty over national security and defense. Under the treaties creating the EU, national security is explicitly reserved as a “competence” of member states.

This creates tensions with export controls in the EU and European Economic Area (EEA), as the non-military part of “dual use” falls into the EU’s single market, in which products flow freely. Member states accordingly limited the EU role in export licensing merely to transposing into EU law decisions made in other fora: the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual Use Goods and Technologies (CoCom’s successor), the Nuclear Suppliers Group, the Australia Group (for Chemical Weapons), and the Missile Technology Control Regime. This grudging inclusion of the EU ensured that those member states not in the different multilateral arms-control regimes would also control exports of designated items.

This grated on the European Commission, which believed the single market and common commercial policy justified a more substantive EU role. It therefore jumped on the European Parliament’s anger at reports that European surveillance and crowd-control products were used to suppress the Arab Spring, and recommended in 2016 that the EU revise its export-control regulation significantly to allow the EU to license things and technologies that had not been listed by the multilateral regimes. While this initiative was supported by the European Parliament, the member states had serious reservations about giving the EU more powers in this domain, leading to four years of debate.

Similarly, the European Commission leapt on the concerns caused by a surge of Chinese investment in 2015-2016, including the acquisition of one of Germany’s leading robotics companies, KUKA, as well as the attempted acquisition of Aixtron, a German firm that makes key inputs for semiconductor production. The European Commission’s 2017 proposal for an EU “screening mechanism” for inward investment sidestepped member-state sensitivities by making the EU a center of exchange of information about foreign acquisitions of firms. It also succeeded in excluding “competitiveness” and “reciprocity” from the scope of the review, as these go against the EU’s generally open approach to foreign investment. As a result, this proposal was adopted in 2019, and entered into force in 2020.

The EU’s New Export-Control Regulation

The reluctance of member states reluctance to have the EU wade into dual-use export controls was worn down by the growing concerns about China’s technology acquisition as documented by the business sector and the U.S. and Japanese governments, including with regard to Huawei and 5G. But China’s repression of the Uighurs and its heavy-handed approach in Hong Kong also changed the calculations, especially as the European Commission and European Parliament couched the need for a new regime as critical to protecting human rights.

The new regulation—which was agreed by the EU Council and the European Parliament last November but is not yet formally adopted—makes important changes to the EU export-control system that allies can work with as they strengthen efforts to prevent the leakage of dual-use technologies to China and Russia. Indeed, even the change in the form of the law, from a regulation of the Council to one of the Council and the Parliament, is important, as it engages the EU itself in an issue once considered the purview of the member states.

Further, new provisions allow the EU to adopt “autonomous” export-control authorizations for cyber-surveillance equipment/technology (Article 4a) and for other purposes (Article 8a). While the former got attention in the human-rights debate, the latter is potentially more important. The new EU approach in both cases is bottom-up: the move to require an EU-level export license must start with a member state adopting a licensing requirement (that is, the European Commission cannot itself propose products or technologies to be controlled).

In the case of cyber-surveillance equipment/technology, if a member state lists something that is not restricted by the four main export-control regimes noted above, that starts an automatic process that compels the other member states to follow suit within a specific period. The EU can adopt a licensing requirement when all have done so.

Article 8a on other “autonomous” EU controls is far more nebulous. It starts again with a member state requiring a license for equipment/technology on public-security (including terrorism) or human-rights grounds, but then simply requires notification of the European Commission and other member states without further elaboration. But the article gets some power from a preambular paragraph, which explains that this is meant to be to “enable the Union to react rapidly to serious misuse of existing technologies, or to new risks associated with emerging technologies” by helping member states coordinate their response to a new risk, although they should also thereafter start efforts to “introduce equivalent controls at the multilateral level.”

Article 8a also refers to the “end-user,” which arguably allows the EU to adopt export-licensing requirements for specific end-users and/or end-use. This is particularly important with respect to China, although most EU governments dislike establishing controls by destination country.

Making the Best of It

For many, the EU’s new investment-screening and export-control laws will appear feeble next to the immediate threat of China’s growing ability to project military power in Asia. But any effort to stem the flow of technologies to China’s military establishment must be multilateral, precisely because the range of technologies and the number of firms developing them has expanded so much. While U.S., Japanese, and other authorities will naturally work with the European countries that are members of Wassenaar and NATO, the EU process is also essential to plug leaks through the EU/EEA Single Market.

In helping strengthen the implementation of the EU laws, the United States and other countries can and should ramp up information and intelligence sharing with their European counterparts at the national, EU, and NATO levels. This is critical to explain that China, Russia, and other countries could use certain technologies for military purposes. They will also need to find countries that are willing to help launch the EU processes by listing certain technologies (and possibly end-uses/users). Finally, as it develops guidance for the investment-screening and export-control laws, they can work with the European Commission, whose guidance documents, such as those on dual-use research and electronic licensing, can be very influential.

In so doing, however, the United States and other countries should make clear that their interest is based on national security and/or human rights. Although the EU has more powers in economic policy, concepts like “competitiveness” and “reciprocity” are too easily used for policies that undermine the EU’s generally open approach to trade and investment. They will also need to emphasize their intent to bring any controls ultimately to the multilateral level, as this remains politically important in Europe.

Achieving effective European action on preventing the leakage of critical technologies to China will not be easy, in part as EU engagement in this area is still novel. But a concerted and well-thought through approach will be appreciated by Europe’s allies and could be effective as well.

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