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CvT: US-China Manufacturing Takes a Lesson from the Pandemic

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Manufacturing has been a long-standing pressure point between the United States and China. The politics surrounding manufacturing continue to strain relations between the two countries, demonstrated through events from the US-China trade war to the COVID-19 pandemic; highlighting the inequities in manufacturing and the devastating economic and social consequences of having an ill-equipped supply chain system. Although the pandemic acted as a wake-up call for US manufacturing, the focus on recovery post-pandemic and a new presidential administration provides hope for the US to level the playing field currently dominated by China.

Pragmatic roots taken to extremes: US manufacturers go offshore for savings

From the start of the 2000s, US companies gradually offshored more business to China. The decision to offshore production was a conscious effort to take advantage of China’s low-cost manufacturing, which subsequently allowed US companies to require fewer employees and achieve a greater net-profit at the same time. As companies realized the potential for profit boosts through offshoring manufacturing in China, the US manufacturing sector began to experience an overall decline. Between 2001 and 2019 alone, the US has experienced an 18.9% decline in manufacturing jobs, translating to a loss of 2.9 million jobs in the sector. Additionally, in the early 2000s, 15% of the S&P 500 was composed of manufacturing companies. However, as of 2020, manufacturing companies now account for less than 9%, experiencing a two-point drop in 2020 alone.

One major downfall from this change in production is the US has become comparatively ill-equipped to produce the same essential items– creating a dependency on offshore suppliers. Although the US still holds the spot for the second-largest manufacturer behind China, there is no longer the same level of demand for goods manufactured in the US. Instead, the US relies on foreign manufacturers for an assortment of goods like healthcare and surgical items, semiconductor chips, and even smartphones. Concerning healthcare specifically, the US Department of Health and Human Services (DHS) states 95% of surgical masks and 70% of respirators used within the US are manufactured abroad. The US’ inability to manufacture medical equipment domestically proved especially detrimental at the height of the pandemic. The pandemic left two central questions for the US: now that a vaccine has begun to roll-out worldwide, what weaknesses did the pandemic expose in the US manufacturing system, and how did China manage to rise above the challenge?

When one door closes, another opens…

Several factors contributed to China’s manufacturing and economic success during the pandemic. China increased manufacturing early through strategies like giving subsidies to factories producing medical equipment, being one of the top producers for specialized fabric, and increasing factory automation. As a result, China experienced a 450% increase in surgical masks or over 115 million units produced by the end of February. In terms of factory automation, by the end of 2020, China presented a 22.2% year-on-year increase in factory automation, largely through devices like robotics. Lastly, other factors like a swift lock-down strategy contributed to China’s success. China is notorious for the restrictive quarantine policy it implemented in January 2020, which locked down a city of 11 million but ultimately proved successful in limiting the spread of COVID. Together, these factors helped China rise above the pandemic as the only country to experience economic growth in 2020 and citing a 6.5% increase in its Q4 GDP.

Lessons learned from a disruptive COVID

While China weathered the storm, the US quickly learned from its missteps at the beginning of the pandemic. Following a shut-down to the American supply chain system and resulting dependence on China for PPE production, the US is slowly transitioning to a more localized supply chain. To combat the supply chain shortage, local suppliers like 3M and Prestige Ameritech increased production, the FDA and CDC allowed healthcare workers to use equipment regulated by the Institute for Occupational Safety and Health, and demand for manufacturing jobs increased. Heightened tensions between the two countries already made offshoring production less efficient, and the pandemic was the needed catalyst to bring manufacturing back home. As a result of increased factory capacity, employment growth, and swift policy changes, the US manufacturing output steadily increased throughout 2020, with a near 2% increase in December.

The awareness surrounding US manufacturing vulnerabilities raised by COVID-19 also carried over into the US political scene. Through the presidential campaigns of 2020, both candidates supported onshoring and stimulating domestic manufacturing. The Biden administration has specifically defined a post-pandemic economic recovery plan called “Build Back Better.” Biden’s recovery agenda targets American manufacturing and includes strategies like tariffs against Chinese imports, changes to the tax code, and closing loopholes to deter offshore production. The Biden administration has also proposed a US$400 billion infrastructure initiative using American-made products to jump-start the industry and an additional US$300 billion to aid research and development. Biden has announced his intention to launch the Build Back Better plan within his first 100-days in office, along with a US$1.9 trillion rescue plan, which includes investment into US manufacturing of PPE. However, some have questioned if “Build Back Better” will be enough, a sentiment also echoed by the previous administration.

A new (old) arena for competition?

The topic of manufacturing continues to provoke tensions between the US and China. China and the US remain the largest and the second-largest manufacturer in the world, respectively. However, China remains miles ahead of the US manufacturing sector in its manufacturing output, employment in the industry, and automation. The inequities between China and the US manufacturing system came to light at the peak of the COVID-19 pandemic. The US felt the consequences of having a weakened supply chain as its hospitals depended on countries like China for essential items like PPE and medical supplies. In contrast, China had the infrastructure to boost production early during the pandemic and continued to expand manufacturing in other industries. The demand from China’s manufacturing sector is one of the central reasons China was the only major economy to see economic growth at the end of the year. However, it seems the US intends to learn from its shortcomings. The US has steadily increased support for its domestic manufacturing sector and, by the end of 2020, presented an increase in total output. As 2021 begins with a new presidential administration pledged to address the US supply chain and manufacturing system, only time will tell if the US can effectively compete with China.

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