Chinese manufacturing practices may be costing the U.S. more than money and jobs, a U.S. advisory panel report warns.
As China demonstrates a greater willingness to use its growing military might to pursue its overseas interests, many of which are contested or controversial, Chinese manufacturing and material production practices may be “hollowing out” the U.S. defense industrial base, the U.S.-China Economic and Security Review Commission (USCC) asserted Wednesday in its annual report to Congress.
The report further claims these practices may impact military readiness and eventually weaken the U.S. military.
Excess production and overcapacity, particularly with regard to China’s production of raw materials like steel and aluminum, have negatively impacted global markets.
“Beijing has repeatedly stated its commitment to eliminating excess capacity, yet progress has been extremely slow — and in most cases nonexistent,” the report claims. “Reforms have taken a backseat to policies aimed at maintaining employment and economic growth.”
“Without production capacity reductions, utilization rates for a variety of products have declined below optimization levels, while a surge of Chinese exports has suppressed commodity prices and flooded global markets,” the USCC explains.
The impact on foreign markets is especially evident in the U.S. steel industry, where U.S. steel producers cut thousands of jobs and reported net losses of $1.43 billion in the fourth quarter of 2015 and $233 million in the first quarter of 2016. “U.S. industries are struggling, with steel and aluminum producers shedding capacity, cutting employment, and reducing capital expenditures,” Wednesday’s report revealed.
The U.S. International Trade Commission approved higher tariffs on Chinese steel dumping this year, yet the tariffs have reportedly done little to curb China’s impact on the U.S. steel industry.
“Along with reduced profits and mass layoffs at U.S. steel factories, the influx of Chinese steel poses national security risks to the United States,” the report notes.
“As U.S. steel manufacturing jobs have been eliminated or moved abroad where manufacturing costs are lower, the United States’ critically important defense industrial base has been dramatically reduced,” the USCC argues. “The influx of unfairly priced steel and aluminum imports from China [may be] hollowing out industries that are essential for maintaining the critically important defense industrial base.”
Existing laws require that metals used for defense purposes, such as steel armor plating — a vital component used in ground combat vehicles, ships, and submarines — be melted domestically. But there is an exception in the event that a suitable domestic producer capable of meeting U.S. defense requirements cannot be identified.
If China “hollows out” the U.S. defense industrial base, thus eliminating domestic capacity and reducing America’s stockpile of raw materials, the U.S. may be forced to import components from China and other foreign sources, potentially exposing the U.S. to vulnerabilities.
The dangers and risks include lower quality components, unexpected supply chain breaks, unwarranted price hikes, and even intentional import tampering.
The weakening of the defense industrial base is not strictly limited to raw materials such as steel and aluminum. It also extends to high-tech components like semiconductors, which go into a number of U.S. military platforms and weapons systems, including the F-35 Joint Strike Fighter.
Access to the Chinese market is increasingly important for U.S. companies, but there are pitfalls.
U.S. technology firms are required to “outsource a portion of their manufacturing facilities and supply chains to China as a price of market entry.” While this allows for greater exports and sales growth for the company, it “may erode U.S. competitiveness and technological advantage going forward,” the USCC explains.
Chinese counterfeiting — the production of fake products — of semiconductors and other products has also deeply affected American companies, leading to significant job cuts and billions of dollars in losses. Between 2005 and 2016, over 40,000 U.S. semiconductor workers lost their jobs.
The U.S. has encountered multiple problems with semiconductors imported from Chinese sources. In a 2014 case, fake semiconductors from Hong Kong and mainland China were sold to the U.S. military for installation in a batch of nuclear submarines. The counterfeit products were discovered prior to installation, but “the outcome if they got through … would be horrible,” the distributor admitted in court.
Defense contractors reported that in a period of just two years, there were 1,800 counterfeiting cases involving over one million parts, and 70 percent of the cases were traced back to China.
In August 2016, the Department of Defense announced a policy designed to reduce the risk of counterfeiting by requiring “military contractors and subcontractors to use electronic parts from original manufacturers or authorized distributors before turning to other, risky sources of parts.”
Nonetheless, the “hollowing out” of the defense industrial base remains a national security concern. “The U.S. defense industrial base provides our warriors with the weapons they need to win on the battlefield,” Brigadier General John Adams said in a 2013 report, but the security of that base may no longer be guaranteed.
The extent of the problem is unknown. In its report, the USCC advised Congress to conduct a thorough investigation into the impact of Chinese manufacturing and production practices on America’s military readiness and to take action accordingly.
The USCC’s report struck a nerve in China, which rejected its findings.
“The commission churns out reports on China year after year with the same old platitudes, which only serve to expose its prejudice and stereotype towards China,” Chinese Foreign Minister Geng Shuang said Thursday in response to the USCC’s report.
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