How U.S. Surrendered Manufacturing Base to China

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Two weeks after Ford Motor Company’s CEO, Alan R. Mulally, mused publicly about developing electric vehicles in China, a U.S. senator has proposed a law to stop American businesses that receive federal funds from what he terms “giving away” taxpayer-funded Intellectual Property to the Chinese. 
Sen. Jim Webb (D-Va.), soon to retire from a single term in the Senate, proposed the legislative language as an amendment to the controversial China currency bill just approved by the upper chamber. While the Senate kept the bill amendement-free, expect Webb to look for a new carrier in the frenzied final months of his tenure.

As Sen. Webb recently stated on the Senate floor, absent national security imperatives, “if a private company has developed technology on its own, and it makes a business decision to transfer that technology ... in a place like China ... we are obligated to respect the free marketplace. But it’s a different case,” Webb went on, “when the American taxpayer has financed the development of these technologies through federal funding assistance.

While Ford publicly touts that it took no federal bailout funds in the fall of 2008 – even running television ads condemning its Michigan competitors Chrysler and General Motors – the automaker has not been so vocal about the $5.9 billion loan guarantee it received from the Department of Energy the following year to upgrade to “green manufacturing” technologies at five Ford plants in the American Midwest. 
What caught Webb’s eye in Ford’s potential partnership with China was that the car manufacturer must now share proprietary processes for electric vehicles as the price of admission to the Chinese automotive retail market. As the senator noted, “Federal dollars that go toward R&D funding ... are supposed to be making American businesses competitive and generate American jobs – not ... help develop other industries, such as those in China.” 

Companies in the U.S. rarely admit they’re handing over the recipe to their secret sauce; yet China’s “indigenous innovation” policy, which aims at reducing dependence on foreign technology, coupled with a see-no-evil stance toward IP piracy create conditions where trade secrets are near impossible to protect.  

Given that none of this is news to U.S. companies, why would Ford or any other information-intensive enterprise want to manufacture in China? For years, the attraction was lower wage rates; today, there is mounting evidence that the wage gap is narrowing, to the point where manufacturing will begin flowing out of China and back to the U.S.

So if lower labor costs are no longer the attraction, what is? The magnet drawing American automakers to China these days isn’t metaphorical: It is quite literally the Rare Earths magnets and other metals-based components critical to batteries and parts necessary for mass electric vehicle production. Just as we have seen with solar panel and wind turbine producers, China has the metals – and where the metals are, manufacturing will follow.

At present, China accounts for 97 percent of global Rare Earths production, while the U.S. – once the world’s leading Rare Earths supplier – provides less than 1 percent. It’s not that the U.S. lacks Rare Earths reserves: Data from the U.S. Geological Survey shows China holds 36 percent of the world’s Rare Earths reserves, while the U.S. is home to 13 percent. In fact, until mining commenced late last year at California’s Mountain Pass mine, the U.S. had not produced a single gram of Rare Earths since 2002. As metals analyst Jack Lifton puts it, “China didn’t gain a monopoly in the rare earths. The U.S. gave it to them.

Getting back into the game isn’t easy - not when the U.S. ranks dead-last among 25 mining nations, hobbled by a ball-and-chain permitting regime that takes 7 to 10 years to bring a new mine into production.  
For American automakers who don’t have 7 to 10 years to wait for American-mined resources, Beijing’s message is unmistakable: If you want access to critical metals, we strongly suggest you set up your manufacturing plants here in China. And don’t forget to bring us your Intellectual Property on a flash-drive.
Indeed, Ford’s move was followed just days later by Honda’s announcement that in response to “rare earths supply concerns” it would expand its China production of hybrid and plug-in electric car components - itself a response to a similar move by Toyota last month to end-run rare earth export quotas by expanding Prius production in China. In a story first broken in the Beijing media, General Motors - beneficiary of a $50 billion infusion from U.S. taxpayers - has joined with General Electric to develop and build electric car charging stations in China, a move book-ended by GM’s September deal to develop a new electric vehicle platform with its Chinese joint venture partner.  
Even if the Webb amendment does becomes law, will a few new lines in the U.S. Code stem the flow of U.S. intellectual property into China?  Not as long as China holds a near-monopoly on the critical metals needed to make next-gen electric vehicles a global reality - and not so long as America’s deep-set denial about the need to develop its own resources gives companies like Ford little choice but to play by China’s rules.  

With apologies to soon-to-be-former Sen. Webb, who at least is focused on the problem - and to Sir Winston Churchill, grammarian - the U.S. can pass all the laws it wants, but we can’t have a resurgent domestic manufacturing base if we lack the materials manufacturing is based upon.

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