Government Intervention in Supply Chains Tricky, Witnesses Say

One idea is that producers should communicate to the Commerce Department about possible pinch points in their supply chains. John Miller, general counsel at the Information Technology Industry Council, told ranking member Roger Wicker, R-Miss., that business won't do so unless there is some kind of legal protection from disparagement clauses in contracts, or defamation charges. "Companies want to share this information but there’s not a clear path to doing it without these type of protections," he testified July 15.

Duke Global Value Chains Director Gary Gereffi said that policymakers need to think about what they mean by supply chain resilience. He said firms think of operational efficiency, and evaluate their risk management to try to have resilient supply chains for their products. But he said the government may want to think about supply chain resilience across an industry, or even how supply chains affect environmental issues, national security or the domestic economy.

James Lewis, director of the strategic technologies program at the Center for Strategic and International Studies, said that for more than 20 years, the global supply chain of U.S. businesses lowered costs and increased efficiency. "But that era is over," he said. He blamed "the rise of a predatory China that will use any means to displace competitors in its quest for global primacy." In his written testimony, he also said the pandemic is causing countries to want to increase domestic production.

The business owner on the panel, Lex Taylor, CEO of a mid-size manufacturer in Mississippi, pointed to issues that the China package does not address, such as the spike in shipping costs and the spike in the cost of steel. He said, "We are facing price increases weekly and in some cases every 24 hours" for steel, and that the cost of a container has grown from $4,000 to $18,000. Taylor blamed generous unemployment for a shortage of truck drivers, and said the problems in receiving supplies mean he can't take on as much work as he would like, because he cannot deliver on time to his customers.

Huge corporations are facing the same constraints, according to testimony from Richard Aboulafia, an aerospace consultant who spoke about the aerospace supply chain. He said that Lockheed Martin had planned to build 130 Joint Strike Fighters last year, and could only deliver 123 because it couldn't get all the parts it needed in time.

Aboulafia thanked Congress for the Paycheck Protection Program, which saved aerospace manufacturers when demand for flights fell by 66%. But he said he thinks the recovery will be a huge challenge, as companies need money to hire workers to meet returning demand, but may not have the cash or ability to borrow to do so.

IBM Research Director Dario Gil and Miller both praised the CHIPS Act and said it's important to fully fund it, and to continue supporting semiconductor manufacturing for the next 10 years. They said the SEMATECH initiative of the 1980s shows that industrial policy can help in the space, when there is a close relationship between companies and government actors.

Several witnesses cautioned about going too hard in the direction of decoupling. Aboulafia pointed out that China is the biggest export market for planes, and asked if tighter military end-user rules will prevent sales.

Miller, in written testimony, said: "Lack of clarity in scope and process in any rulemaking, legislation, or other policy mechanism makes for an uncertain business environment and threatens the ability of companies to compete with foreign companies not subject to U.S. or similar foreign requirements. Overbroad policy approaches or approaches that duplicate or conflict with existing mechanisms, such as those embodied in the prior administration’s Executive Order on Securing the Information and Communications Technology Supply Chain (ICTS EO), stifle U.S. innovation, technological leadership, and competitiveness."

Sen. Rick Scott, R-Fla., asked witnesses what companies should be doing, as he suggested that the government cannot afford to spend tens of billions subsidizing chip production.

Aboulafia said that if the Pentagon offered better forecasts about its aftermarket purchasing, that would help the aerospace industry, as aftermarket parts are a major contributor to company profits. But he said another issue that comes to mind for him is that many large firms in the space have an adversarial approach to their supply chain, demanding deflation in terms, and he said they see them as parties that should be "crushed for profit. I’d like to see more of a partnership between the primes and the subs and perhaps this crisis will illustrate the rather vulnerable nature of the supply chain."