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Beijing’s Tightening

Supply Chain Policy Raises

Risks for U.S., Allies’ Firms

November 2020
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Implications

Beijing’s control and direction of PRC firms’ behavior may impact the viability and security of the U.S.’ and its allies’ firms in and outside of the PRC.

Actions

U.S. and allied country firms, particularly in the tech industry, should assess the risk that their links to the PRC could be substantially outcompeted or coopted by growing state support of PRC-controlled high-tech industries. They should similarly remain vigilant against the threat of forced technology transfer and industrial espionage that have become integral to the PRC’s development strategy.

The CPC perceives a threat to the global economic order it prefers

Ongoing trade tensions with the United States and the economic and political repercussions of the COVID-19 pandemic have prompted CPC leadership to reassess the long-term viability of the PRC’s extensive integration with global markets. Beijing’s concern is exemplified by a study published by the Bank of China (BoC) in July, which argued that as the U.S. increasingly prefers to avoid relying on industries outside of its own or its allies’ territory, regional markets will grow much more significant.

The CPC condemns calls for decoupling, and prefers to continue the 2001-2019 growth trend of the PRC’s role in globalization and the expansion of its access to international markets. Beijing is also mobilizing policy measures to hedge risk against regionalized markets that may arise should the United States or other major trade partners substantially reduce their economic engagement with the PRC. The BoC study further assessed that—given its geographic advantages—the PRC could come to dominate a regional supply chain encompassing itself, Korea, Japan, and most of ASEAN.

Beijing elevates policy of industrial clustering to raise PRC competitiveness, post-pandemic

Aiming to strengthen the efficiency and competitiveness of PRC enterprises and assert CPC control over relevant supply chains, Beijing is elevating the priority of high-tech “clustered supply chains” or “industrial clustering” [集群式产业链 / 产业聚集] which were already components of its pre-2020 development strategies.

  • Beginning as early as May, speeches attributed to CPC General Secretary Xi Jinping in May highlighted the “dual-circulation” [双循环] development model, wherein the domestic market comprises “internal circulation” and the international market the “external circulation.”
  • “Dual circulation” is designed to entice foreign companies inside the PRC’s borders and within One Belt One Road (OBOR, a.k.a. the Belt and Road Initiative) international expansion program with promise of access to its huge consumer base, which in turn further stimulates growth and facilitates partnerships that create opportunities for exploitation of international financial and technological resources, including forced technology transfer. Indeed, support for industrial clusters explicitly includes provision of funding, land, infrastructure, and talent through talent recruitment programs—programs which have been repeatedly implicated in theft of intellectual property abroad.
  • Increased reliance on domestic demand, according to researchers affiliated with the CPC, will help insulate the PRC from external demand shocks while also “propelling the development of global industrial chain clusters … and strengthening the connections and interactions between economic development zones along the Yangtze River and the [OBOR] routes.”
  • Even those who question whether the PRC can be supplanted in global supply chains, anticipate growing risk for PRC industry, post-COVID. Huang Qifan, the deputy chair of the Financial and Economic Affairs Committee of the National People’s Congress, advocates the continued pursuit of industrial clustering to reduce the risk posed by relying on imports.
Beijing elevates policy of industrial clustering to raise PRC competitiveness, post-pandemic

Beijing’s renewed emphasis on promotion of state-supported industrial clusters increases the direct and indirect threat of disruption to U.S. supply chains. The U.S. pharmaceuticals industry is highly dependent on PRC manufacturers for precursor chemicals and for some active pharmaceutical, for example, but so too are Indian manufacturers who also supply the U.S. The PRC pharmaceuticals industry is also expanding rapidly into Africa, Latin America, and Asia, in part via the Health Silk Road, a component of Beijing’s OBOR international expansion program.

U.S. and allied country firms can begin assessing the risk that the CPC’s renewed emphasis on supply chain and overall economic policy designed to promote PRC great power status may pose to their interests by asking what the likelihood is that:

  • The PRC begins subsidizing direct competitors as part of their initiatives in support of high-tech enterprises?
  • U.S. companies providing goods and services to the PRC are rendered redundant by PRC competitors co-located with clients in industrial clusters?
  • Clients are politically pressured to shift suppliers to local or regional sources altogether?
  • The PRC identifies technology held by the firm as a desirable target of acquisition, and how would this translate into risk of talent program espionage?