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House GOP China Task Force Report Proposes Tax Breaks, Grants, Regulatory Easing to Fight China Dependence

October 08, 2020

By Kenneth Rapoza, CPA Industry Analyst

The House Republicans released their China Task Force report. Here's what we liked about it.

A few days ago, the newly formed House Republican China Task Force, chaired by House Homeland Security Chairman Michael McCaul, produced its 141-page magnum opus on the China threat to the US. It is part of a slow moving, three-year effort that highlights China’s rise as being problematic. The Task Force was formed in May and has 14 House Representatives plus McCaul. The report was sent to House Minority Leader, Kevin McCarthy, on September 30. House Democrats opted out of the Task Force.

Although readers will be hard pressed to find buzzwords like jobs, labor and manufacturing in the report, it does speak our language on reshoring of critical supply chains. It addresses what Senator Dan Sullivan (R-AK) recently called an “outrageous” dependence on China. 

“This pandemic exposed various US supply chain vulnerabilities, the dangers of (our) overreliance on China, and the need for a more robust domestic medical and technological manufacturing capacity,” report authors wrote.

House members representing 11 different congressional committees addressed strategic competition with the CCP in the following ways: ideological competition; supply chain security; national security; technology; and lastly, economic and energy competitiveness. 

The key word here for us is “security” because while all these issues are critical, security is the one with the potential to galvanize the Congress, the administration, and the public into action.

This is the one way to get Washington on board with shifting supply out of China and bringing manufacturing back home. Not only will it contribute to the economic well being of a nation recovering from a pandemic born in China, but it will ultimately reduce our “outrageous” dependence on China for just about everything you can imagine.

The Task Force interviewed current and former government officials from both parties, business executives, ambassadors, and various outside experts. In total, they spoke with 130 different people to get insights into what solutions are needed for taking action against China.

Here are some highlights from the report:

Supply Chain Security

Securing medical and other national security supply chains by:

  • Providing aggressive, smart and targeted tax incentives to accelerate our research and development and production of crucial medicines, medical supplies, ingredients, tests and vaccines.
  • Create a grant program necessary to catalyze domestic production of important technologies and designing tax incentives to secure US supply of advanced semiconductors.
  • Overhauling the federal permitting process for mineral development and prioritizing advancements in mineral refining so neither industry nor the defense industrial base are reliant on China.

Worth noting, some groups representing medical and pharma industry multinationals are largely against efforts to reshore and prefer maintaining the status quo. There seems to be a growing consensus however to move some critical supply out of China, but no consensus among industry to bring it home. Supply chains being complex and no one final item being made without dozens, or even thousands, of other components going into it, we think that a push to manufacture as much of it here as possible is a win-win for manufacturing labor, and for the security matters brought up in this report. These two things need to be central to all China policy.

The report noted that China “controls the bulk of the global supply of critical and strategic minerals” which are vital to many components used by defense contractors. The demand for these minerals should steadily increase as the global economy adopts new technologies such as long life battery cells, ultimately placing the US at a growing disadvantage “unless critical steps are taken to shift production and sourcing away China,” report authors wrote. The risk of supply disruptions is amplified by our paucity of domestic supply on some critical metals.

In electronics, while the US is considered a leader in semiconductor design, we have a roughly $2 billion deficit with the world in the semiconductor manufacturing trade so far this year, according to the Bureau of Economic Analysis’ trade figures released this week.­­ 

According to the China Task Force report, nearly 90% of the world’s semiconductors are made outside of the US while the Chinese government is spending billions on its Greater Silicon Valley project. The name says it all.

China’s “massive subsidies and state directed predatory industrial policies have undermined critical supply chains, and in some cases hallowed out critical industries in the US” the report recognizes. McCaul and the 14 House Republicans, using insights from those they interviewed, concluded that the US response to China has been “slow” to establish a “threat specific supply chain strategy.”

Like the Democrats, however, the Republicans want to work more with allies – specifically the so-called D-10 – the top 10 Democracies – to form a manufacturing coalition of sorts that is less reliant on China sourcing.

“Congress and the Administration should make securing the supply chains of the most strategic products for national security and health requirements a top priority,” the China Task Force said.

The report offered some other positive recommendations under the headings Economics and Energy. Here are a few of our favorites.

  • Ensuring that no US taxpayer dollars support any China state owned enterprises.
  • Ensuring Chinese companies are held to the same financial disclosure standards as American companies listed on the US stock exchanges.
  • Continue to advance US energy security in order to be a global counter against China, particularly on the nuclear energy front.

We currently have tariffs on imported solar panels, set to expire next year. China’s stated policy is to dominate this industry globally.

Lastly, in what will be music to many of our members’ ears, the China Task Force has called out the World Trade Organization for its lackluster approach to China.

Although the Task Force wants to reform the WTO, rather than leave it, it recognized as we have long ago that China has “abused its membership” and has blocked consensus on new rules by claiming developing country status with entitlements to special and differential treatment.

The report says Congress should work with the Trump Administration to develop a strategy to select a new WTO director general who understands China’s non market economy and its “threat to the system”.

The full report can be seen here.

In the Obama years, Democrats were relaxed about the China threat, when they were not eagerly welcoming Chinese imports and investments with open arms.

Leading Democrat Adam Schiff (D-Calif), head of the House Intelligence Committee, marked a major shift in Democratic thinking on China when he published an article on September 30 stating that the US intelligence agencies, and Washington itself, was basically asleep at the wheel on the China threat.

“We are witnessing the resurgence of authoritarianism across the globe, and it poses a growing challenge to the very idea of liberal democracy. China, with its expanding economic, military, and diplomatic might, is at the forefront of this neoauthoritarian challenge,” he wrote. “Beijing seeks to build a world in which its ambitions are unchallenged and individual freedoms give way to the needs of the state.”

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