Dependence On Any One Foreign Nation is Unhealthy; In the Case of China, All Too Literally So

Commentary, COVID-19, Economy, Ian Madsen

Of late, it has been remarked that most of the active ingredients for key pharmaceuticals in North America come from abroad – usually from China; in the case of generics, often from India. In turn, India often imports its key ingredients from China. So, diverting imports from China to India might not actually reduce ultimate dependence on Chinese manufacturers. China reserves the right to provide its own citizens with vital drugs before exporting them.

Export categories that China dominates, such as toys, housewares, consumer electronics, lighting products and furniture; gardening and landscaping equipment and tools; hardware and power tools; apparel, textiles and footwear and similar imports that are not crucial or strategic are not cause for concern. Ordinarily, even dependence on a major producer for more important, vital products need not be worrying.

Yet it would be if China or another major single foreign provider of these products has production problems, social disorder, an epidemic (already occurring, now, of course), civil war, revolution, national disaster or diplomatic standoff with Canada, the United States or their allies (this happened with Japan in 2010, with the Philippines and Taiwan in other years). However, there are a wide array of other goods for which China is the major, sometimes the sole supplier. Apple’s iPhones, made in China, are only the most famous example. Taiwan, in turn, is dependent on producing iPhones in China, and microchips for the Chinese market, too.

Among these more vital goods are components for avionics and other defense electronics and optics uses, including some parts of computers. Indeed, half of the printed circuit boards used in US military electronics come from China. A key component in solid rocket engines is solely made in China.

China has moved far up the value chain, into increasingly more sophisticated or specialized products, with few competitors. They are a major supplier of electrical machinery and factory equipment. They produce many components for vehicle and heavy equipment manufacturers, and for aircraft. Some of these components are used by defense contractors such as Northrop Grumman, Honeywell and Lockheed Martin. Canada, of course, purchases aircraft from US contractors.

Emblematic of the China-dependence problem is the rare earth issue. These exotic metals are used in defense electronics, night vision systems, permanent magnets in electric motors in wind turbines and electric vehicles, and other specialized, high technology products, many of them with important, even crucial military applications. While these metals do not constitute a big market, they are crucial in making many of these strategic, innovative products, and difficult or impossible to substitute. China no longer has a monopoly on producing them, but it refines the vast majority of the rare earths produced; ore is shipped to China for refining, then exported to industries around the world.

China temporarily cut off shipments to one big importer, Japan, with which it had a territorial waters confrontation in 2010, sending prices for these substances soaring. There are suspicions that it manipulates the market price by flooding or withholding products to undercut potential new producers or refiners. The US Defense Department has signed an accord with the Canadian government to support the development of new rare earth mines and refineries. Japan is proposing to invest in a rare earths refinery project in Texas.

Considering that it is now ten years since China flexed its economic and ‘diplomatic’ muscles by withholding rare earths from Japan, then flooding the market to kill off competitors (such as Molycorp of California) it has taken a long time for Western companies and powers to fully appreciate how dependent they are on many products that come mainly, or solely, from China.

The COVID-19 crisis has amplified the warning that this dependence is a key vulnerability to companies, nations, and the very health of the people in them. As China’s size, wealth, technical and military prowess and industrial indispensability grows, the danger of being held hostage by the Communist Party of China, also grows, with its determination to dominate and pacify its immediate neighbourhood (bullying of South Korea, territorial disputes in the East and the South China Sea, and with India).

The repressive authoritarian nation’s increasing economic and strategic power will allow it to ever more easily render any potential opposition elsewhere mute and supplicant (especially hapless impoverished lands that owe billions of dollars to Beijing for dubious ‘One Belt, One Road’ infrastructure projects), time is running out for Canadian, American and other Western governments to diversify supplies of key products and components vital for national economies and the industries – and military forces – that are key to improving living standards, international competitiveness, and remaining relevant.

Ottawa, Washington, Taipei, Tokyo, Seoul, New Delhi and the rest need to wake up and develop plans to create vital new suppliers of the essential products that are mainly sourced, at present, in our principal geopolitical and military adversary. In the twentieth century, the industrialists of the time were internationalists, but the elites of the day did not allow their nations to become dependent on what later became their enemies: Nazi Germany, Imperial Japan or the Soviet Union. There remains hope that the current crop of leaders will reverse this major strategic error and diversify sources of supply, if not bring home much or most of production – while there is still time.

Perhaps this new redirection strategy could be part of any sequel bills to the huge economic relief packages now wending their way through the creaking bureaucratic labyrinths. Not everything can or should be made in North America, Western Europe or other friendly places, but much of it should be moved out of a risky, oppressive, adversarial ‘frenemy’ with dubious regard for intellectual property, human rights or the rule of law.

Among the things rational investors, including corporate ones, should look at when considering where to place a financial or physical investment bet are: geographical diversification, dependence on single suppliers, quality and reliability of local health services, and jurisdictional political and legal risk. Judging by those factors, China’s attributes and record are mediocre, at best. We can, and should, do better, for our health, safety, prosperity, and future independence. The COVID-19 crisis and the Hong Kong protests were clear signals. We should heed them.

Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.