This paper introduces a new supply chain measure called revealed comparative dependence (RCD), based on publicly available national and global trade data. The paper shows how high RCD can be used to identify product classes where the United States is excessively dependent on Chinese imports.
The paper suggests that RCD can be used to inform the Biden Administration’s industrial policy. The Department of Commerce can use RCD to publish a list of high-vulnerability goods. Policymakers can pay special attention to goods on the list to reduce dependence on China, while considering rolling back tariffs on goods not on the list.
The Biden Administration wants to improve the resilience of U.S. supply chains — the ability to recover quickly from a supply disruption anywhere in the world. A key element is preventing a supply chain crisis “from hitting in the first place.”
But China is the elephant in the room. It is both a strategic competitor and the United States’ largest trading partner outside of North America. The concern is that China might weaponize its industrial might for geopolitical gain — something it may be doing now (Keeley 2018) and for which the United States is admittedly ill-prepared. The economic damage to the United States from a war with China5 would be considerable, as Babbage (2023) described:
U.S. supplies of many products could soon run low, paralyzing a vast range of businesses. It could take months to restore trade, and emergency rationing of some items would be needed. Inflation and unemployment would surge, especially in the period in which the economy is repurposed for the war effort . . . Stock exchanges in the United States and other countries might temporarily halt trading because of the enormous economic uncertainties.
To avoid such a scenario, some China hawks call for a complete decoupling of economic ties, but President Biden doesn’t want to eliminate the substantial economic benefits arising from international trade. His industrial policy is one of selective decoupling, focusing on foundational technologies, critical/essential goods, and goods made from forced labor.
Selective decoupling, however, implies acceptance of vulnerabilities in economic and national security. Managing these vulnerabilities is arguably Biden’s biggest challenge in enhancing the resilience of U.S. supply chains.
In this paper, we offer an approach, based on a novel metric, to characterize and respond to these vulnerabilities. We apply this approach to a subset of traded goods, advanced technology products — a focal point of industrial policy in both China and the United States. We derive lessons for policymakers and offer some policy recommendations consistent with Biden’s industrial policy. We make no presumption as to the merits of Biden’s policy; we take it as given, and our aim is to improve its effectiveness.
