Trade Actions Could Be Part of Supply Chain Initiative, Including a Section 232 Investigation

The administration issued a lengthy report after a 100-day review of supply chain vulnerabilities that recommends a lot of reshoring of manufacturing, in semiconductors, critical minerals and pharmaceutical ingredients, but also suggests a "trade strike force" to be deployed against unfair foreign trade practices that have hurt domestic companies that contribute to critical supply chains.

However, that report, released June 8, says that the Supply Chain Trade Strike Force, which would be led by the U.S. trade representative, would not just retaliate against foreign countries, such as when that country bans exports on a critical good. It would also examine the impact of U.S. tariffs or other trade policies "that may inadvertently create supply chain challenges for U.S. battery production." The Department of Commerce will also evaluate whether it should initiate a Section 232 investigation into neodymium magnets, which are used in motors.

Rep. Jackie Walorski, R-Ind., a House Ways and Means Committee member, said she is not aware of any domestic production of neodymium magnets. There is one manufacturer that closed six years ago, and a new company is planning to re-open it, but it could still only provide less than one-fifth of U.S. demand. Walorski said in a phone interview that the next time an administration trade official appears in front of the committee, she'll be asking what the point of tariffs on imported neodymium magnets would be, if there is no domestic source.

One of the major anxieties among policymakers when it comes to supply chain vulnerabilities is the concentration of many manufacturing sectors in China. "Supply chain resilience should be incorporated into the U.S. trade policy approach towards China, including in the ongoing review of U.S.-China trade policy," the report said. "The Administration should also examine existing U.S. trade agreements to identify ways to strengthen collective supply chain resilience."

The report says that the U.S., even if it spends money to reshore mining and manufacturing, cannot make everything it needs in critical areas. As it works with trading partners, "it must take steps to ensure that the manufacturing and mining that takes place abroad supports supply chain resilience and meets high labor and environmental standards," the report said. "As detailed in this report, the global race to the bottom in search of lowest-cost production has led to the proliferation of critical mineral extraction, processing, and recycling operations in locations with weak environmental regulations, labor standards, and governance."

The report noted that the Labor Department's list of goods produced by child labor or forced labor includes 32 goods made with child labor in the mining sector, and 13 goods made by forced labor in that sector. "Strategic and critical materials on this list include cobalt, tin, tantalum, and tungsten," the report said.

The report said public opinion could turn sharply against imports associated with human rights violations, so companies should increase supply chain due diligence to identify other sources for inputs. "Modern consumers, market economies, and even some non-market jurisdictions are increasingly demanding that private sector supply chains conduct extensive due diligence and achieve higher production standards. This dynamic is playing out across many different types of supply chains, from clothing to chocolate, and critical minerals and materials are no exception," the report said.

The report noted that a number of companies that use minerals are already used to heightened due diligence due to conflict minerals law in the U.S. and, soon, in the European Union.

The report proposes establishing an end-to-end supply chain in North America for vehicle batteries or other high-capacity batteries, as it says that even where the U.S. mines minerals used in those batteries, they're exported for processing. There is some battery manufacturing domestically, but it's assembling cells that come from Asia. "[I]t is reasonable to expect that China could restrict exports of any or all of the battery supply chain materials it produces, due to trade tensions with the United States or a simple prioritization of domestic customers for its battery materials. Alternatively, China could dump processed materials or finished anode and cathode materials on global markets to reduce competition," the report said.

The report said more research is needed to understand the impacts of tariff structure changes -- there is a 3.4% tariff on lithium-ion cells and battery packs, and higher tariffs on artificial graphite and lithium oxide. Korean battery packs and cells enter tariff free under the free trade agreement with Korea, but exports of Korean packs fell in 2020 and 2021, the report said. Battery cells, cobalt, nickel and lithium from China have additional Section 301 tariffs of 25%, while battery packs from China face a 10.9% tariff due to a 7.5% Section 301 tariff. Imports from China in 2020 and 2021 rose significantly, as did those from the EU.