Decoupling and Reshoring From China will be Hard: China Holds Most of the Cards

Commentary, Government, Ian Madsen

Several factors have merged to induce Western governments and the firms they preside over, to find substitute supply chains for China-dominant ones that they now depend on. These factors include growing public revulsion at the repressive and persecutory policies the Chinese Communist Party (CCP) has for its ethnic, religious and other minorities or critics; the increasingly aggressive expansionary moves it has made into territories or territorial waters of its neighbours; and the vindictive law enforcement and trade actions it has taken and continues to threaten to take, against foreign nationals and governments. However, this ‘decoupling’ will be neither easy nor quick.

During the COVID-19 pandemic, many nations found themselves short of the personal protective equipment (PPE), ventilators and other medical supplies that China cornered the market on just as the disease exploded. It was also discovered that many of the products needed by hospitals were made in China, as were many of the components that go into others. China also makes many of the chemical precursors to medicines, medical instruments and some generic drugs and other medical products.

In recent years, it has also become alarmingly apparent that China produces much of the raw material for advanced electronic, electromagnetic and optoelectronic devices. Moreover, China produces products such as permanent magnets for electric vehicles and wind turbines, smartphones and other telecommunications products, consumer and commercial electronic and computational devices and components for defence electronics. These raw materials, under the umbrella name rare-earth elements (REE’s), are found worldwide, but new deposits take years to prove up and bring to commercial production.

China mines about half of the world’s REE output and refines about 80 per cent of it. The U.S., Canadian, EU and Australian governments started years ago to encourage more exploration, development and refining of REE’s in the West, but there is still little in the way of results. Western firms and nations are still nearly as dependent on China for these materials, key to advanced industrial production, as they were before the problem was recognized and addressed.

Exploring these minerals costs many millions of dollars. Developing the mines costs, in some cases, including the cost of related infrastructure, hundreds of millions of dollars more. Building refineries to scale to cleanly and efficiently produce REE concentrates usable by manufacturers can cost upwards of a billion dollars. To ensure profitability, any enterprise that builds a refinery must ensure that it will have a ready market that is willing to take hundreds of tonnes of product annually. So far, few firms have been willing to guarantee commitments, of either building the refinery or buying the product.

If there are insufficient inventories of REE’s, defence contractors and their suppliers will be unable to make the airplanes, missiles, drones and other devices, products and components that are used to equip not just American armed forces, but NATO and ‘Quad’ (U.S., Japanese, Australian and Indian) forces that may have to confront China in disputed territories in the South China Sea or if the CCP threatens to or actually attacks Taiwan, which it considers its own territory. Western allies could find themselves without adequate replacements for components or full aircraft, ships and other vital gear, including all the instruments and armaments that they use to enforce their will against adversaries. While any military, diplomatic or trade confrontation with the CCP is occurring, Beijing can withhold the very materials Western nations require to maintain their reconnaissance and combat capacity. 

Another major strategic vulnerability is in microprocessor and memory chip manufacturing.  Taiwan Semiconductor, the world’s largest, most advanced maker of such chips, has large, if more outdated facilities in mainland China; other, crucial ones on CCP-coveted Taiwan; and only a few in Western-allied nations. In a serious conflict with China, these vital chips will be held hostage by Beijing.

Decoupling will be difficult; the Bank of America last year estimated it could cost the U.S. alone a trillion dollars to replicate existing investment or suppliers’ assets in China to the U.S. or its allies, but UBS found in a survey that 76 per cent of the firms it contacted were seriously considering reshoring. This is something firms are reluctant to do; just as they are reluctant to anger Beijing.

Nearly all products used by consumers, firms and governments in Western industrialized nations have at least some components that are made or otherwise supplied by Chinese firms and are thus susceptible to intervention by the CCP when it becomes aggrieved at some statement, action, policy or law in those free societies. Beijing knows that the West is, at present, limited in scope in reducing dependency on China. While it has benefited tremendously from international trade and investment, it is prepared to bite that hand that feeds it and has shown this hostile attitude abundantly in recent years. 

Reshoring will be arduous, time consuming and expensive, but continued dependence on and vulnerability to the whims and strategic aims of the CCP is something that is certainly even worse. Canada and other nations have kowtowed to and tippy-toed around the would-be world-dominators in the Forbidden City for years now and have nothing to show for it. Assertion of sovereignty and resolve in the face of tyranny and aggression are not only called for, they are crucial and will be costly.

 

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

Photo by Markus Winkler on Unsplash.