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The shortage of protective gear at a time of utmost need has revealed the fragility of global supply chains -- and the extent of the U.S.'s reliance on China. © Illustration by Michael Tsang
The Big Story

How Trump's China obsession undermined the coronavirus effort

As the US scrambles for life-saving gear, White House shuts out the world's largest supplier

MARRIAN ZHOU, Nikkei staff writer | North America

NEW YORK -- Artura Taylor has spent the last few months desperately searching for personal protective equipment. Her Texas-based medical supply company is a contractor for New York state, the epicenter of the U.S. COVID-19 outbreak. Through the early months of this year, as tens of thousands of people became infected and death rates soared, the gear needed by front-line workers quickly fell into short supply.

"It's heart-wrenching to think of the things that everyone is going through on the front line in the hospitals, and you're not able to get them what they need," Taylor told the Nikkei Asian Review.

Then, in March, she got wind of a connection -- a clinician in Dallas who knew a Chinese doctor at Harvard, who had links with PPE manufacturers in China.

"This was like, 'Oh my God, there's a light here,'" she said. "We can get this stuff from China."

Smaller distributors like Taylor have never had to organize their own imports in the past, relying instead on big aggregators such as Fisher Scientific. Now, with supplies scarce, they have been forced to venture out and source those themselves. That means looking to China. Before the pandemic, over 90% of the PPE used in the U.S. was made overseas, with China the biggest supplier, according to the U.S. Department of Health and Human Services.

Even in the depths of the coronavirus pandemic, U.S. President Donald Trump has doubled down on his strategic rivalry with China.   © Reuters

For Taylor, the experience ended in failure. The Chinese company, speaking via its middlemen, demanded a minimum order size of 2 million units, a letter of intent of purchase and credit upfront -- none of which Taylor's client, the U.S. government, was set up to provide. Eventually, she offered to connect the supplier directly to the CEO of one of the U.S.'s largest health care product distributors. But by the time she had made contact, their interest had lapsed.

"It really embarrassed me. ... This is for the sake of humanity. You guys have the supplies, let's make this happen," Taylor said, the frustration clear in her voice. "You don't have time for cat-and-mouse games. ... All of these little companies that were approached by Chinese companies, who were not in the supply chain before, start thinking, 'Oh, I can make all this money.' And then they disrupt the channel."

The desperation for PPE has been deeply felt across America. As the number of coronavirus deaths has shot past 120,000, state officials and health care companies across the U.S. have been scouring the planet to find medical supplies. The shortages at a time of utmost need have revealed the fragility of global supply chains, and the extent of the U.S.'s reliance on China. Yet in the depths of the pandemic, with citizens dying for lack of physical protection, U.S. President Donald Trump has doubled down on his strategic rivalry with China.

The president continues to blame the Chinese government for the pandemic's spread, and during a recent Fox News interview threatened to "cut off the whole relationship" with Beijing. Since the crisis began, Trump has extended a ban on telecom equipment made by the Chinese giant Huawei Technologies, mused publicly about ending a "phase one" limited trade deal signed in January and asked adviser Peter Navarro to draw up a list of Chinese products to target in a tit-for-tat trade dispute over lobsters. In early June, the administration threatened a ban on Chinese airlines flying into the U.S., which would have further disrupted the medical supply chain.

"The desire of the U.S. to decouple from China has been made all too clear," said Howard Yu, a professor at IMD Business School. "But a look at the manufacturing sector tells us the reality and the cost involved. In theory, the U.S. can indeed disengage from China by insourcing all manufacturing, but doing so will require major investment without generating new sales. This is a hard call in normal times -- harder still during the pandemic."

Bottlenecks and chaos

The PPE crisis in the U.S. accelerated in February when China, struggling to contain its own outbreak, temporarily restricted exports of medical supplies. Cut off from their source, American hospitals quickly burned through their stockpiles.

"We started to see that the utilization of N95 and other face masks went up 17 times more than [usual]," said Mike Alkire, president of Premier, a hospital group purchasing organization. "[China was locked down,] so all of a sudden you've got this huge amount of demand and then the supply is cut off for an additional six weeks. We didn't get our first shipment starting until March 13."

The result of China's shutdown was chaos in the supply chain. There were only a handful of domestic PPE manufacturers in the U.S. before the outbreak began. Moving to fix the deficit, the Food and Drug Administration expedited applications to help new manufacturers come onstream, while the government invoked the Defense Production Act, preventing ventilators and PPE from being exported. But despite some high-profile companies, such as Ford Motor and Nike, shifting their production to turn out medical supplies, there was no way to fill the gap.

President Trump holds a mask with the presidential seal, following a tour of a Ford Motor plant in Michigan that has been manufacturing medical supplies during the pandemic.   © Reuters

Even when China resumed exports in March, supplies were still short and American buyers were forced into competition with one another.

"Unfortunately, without a national system of procurement, all 50 states are competing for crucial supplies," a spokeswoman from the Washington State Department of Enterprise Services told Nikkei. The state has been placing orders every day, but only around 3% of them have actually arrived.

Private companies have also entered the market. Taylor said that she had received purchase requests from companies such as The Walt Disney Co., Dell, MGM Resorts International, Volkswagen, American Airlines and ExxonMobil as industries prepare to return to work. But she is still trying to fill back orders.

The increasing demands of states and international corporations has made it difficult for less well-funded organizations to access the PPE that they need. Taylor said one night she received an email from the Philadelphia Housing Authority.

"'I need help,' he said. 'I represent 18,000 of the most underserved people.' ... And he was just pleading," Taylor said. "It brings tears to your eyes when you think about people out there who are on such a low income bracket that they have no resources at all."

Taylor was not alone in her experience of dealing with potential suppliers in China. Unscrupulous middlemen and fraudsters have also tried to insert themselves into the supply chain. Bill He, senior managing director at FTI Consulting -- who has been helping clients to identify credible suppliers in China -- told Nikkei that he knew of at least one ventilator factory that put a sign on its factory gate warning buyers not to trust anyone who claimed to represent the factory because it could not take any more orders. "It's truly a zoo," He said.

Even companies that have been able to secure supplies have struggled to get them to where they are needed. The U.S. government has greatly reduced the number of international flights in order to prevent the spread of the virus. Urgent medical supplies usually travel in the belly of passenger planes, and as those spots became scarce, the price of airfreight rocketed.

With only a few passengers, it is very cost-inefficient to send empty airplanes to China to pick up products. "So many companies have made the decision not to [send planes] because that wouldn't be profitable," said Stephen Meyer, senior research director at consultancy Gartner. "So that has constrained logistics capability."

Michael Einhorn, president of New Jersey-based medical supplier Dealmed, told Nikkei that the cost of flying in products has, at times, jumped 1,000%. At one stage, he had to pay nearly $200,000 for single shipments -- of "not large amounts" -- coming from Shanghai.

Ronald Reuben, CEO of health care supplier Medicom, said freight fees have increased roughly 30% for his company. To complicate matters further, sometimes companies have booked space on a plane but their shipments never arrive at the airport.

The Trump administration was aware of the bottleneck. To alleviate it, in March it initiated "Project Airbridge," a scheme in which the government would pay for air shipments of PPE. Led by Trump's son-in-law Jared Kushner, the program included health care giants such as McKesson, Cardinal Health, Medline Industries and Henry Schein. However, smaller suppliers were excluded.

"There was a big uproar because a lot of companies, such as us, that were involved in importing products that actually [go to] hospitals in New York City, didn't get access to the program," Einhorn said.

Despite a persistent and severe shortage of PPE in the U.S., Project Airbridge stopped scheduling flights in early May.

"They shouldn't have terminated the program; they should've revamped it," Dealmed's Einhorn told Nikkei, adding that many products are still on back order. "There still is a need, and private companies such as us, we're not going to import products and fly them in if other companies are getting it for free. ... That's one of the reasons we stopped."

Dealmed turned to shipping by sea about two weeks ago. What the company sacrifices in time -- it takes about 23 days for products to arrive by ship -- it makes up for in quantity and lower fees, Einhorn said.

President Trump tries on a face shield at the Ford Rawsonville plant in Michigan in May.   © Reuters

Customs control has also been burdensome. In early April, China tightened restrictions on exports of PPE products to battle the flood of counterfeit goods. However, the move drew criticism because it slowed down the export process for products and suppliers that were already certified.

"People are really stretched right now; they're going to go to any options to try to get products," Alkire of Premier said. "It was great for organizations that historically hadn't provided us products, but for manufacturers who have provided us products for years -- high-quality products -- that was a burden."

Reuben of Medicom said they had "a bottleneck of products" where their containers would reach Chinese customs and be turned back. However, he said the process has since improved.

Customs control on the U.S. side has also contributed to delays, though to a lesser extent. The FDA in early May reversed a decision to allow emergency use of N95 respirators made in China, according to an FDA letter sent to health care providers. The agency pulled authorizations for roughly 60 Chinese mask makers, after government testing found their products did not work properly.

American manufacturers are ramping up their capacity in China -- with the support of the government. 3M, one of the largest American health care suppliers, said in early May that it has been "working with the Trump administration to import a total of 166.5 million respirators from 3M's overseas manufacturing facilities in China and other Asia locations." The company said the imports had already begun and will continue over the coming months.

3M will also double its global production capacity to 2 billion per year in the next 12 months, including factories in China, according to a company spokeswoman. The company also has warned that demand for N95 respirators will outpace supply for the foreseeable future.

The current crisis has confirmed, for many, just how unthinkable it is to attempt cutting China out of the supply chain.

"[With] the interdependency between the two countries today, it's beyond my imagination what the world will look like if you truly cut up everything," FTI's He said. "When I want to buy a hundred million gloves, there's no supplier from any other country [than China] that can even entertain that."

However, the Trump administration has increased its hostile rhetoric toward Beijing throughout the pandemic. Even as government agencies worked to secure Chinese supplies, Trump and his allies in the Republican Party have aggressively pushed the conspiracy theory that the novel coronavirus was released from a laboratory in Wuhan. Those working to keep supplies flowing disapprove of the stance.

"I just think it's too dangerous. ... We need to put a hold on everything until we get a handle on the coronavirus situation," said Einhorn of Dealmed. "We don't want any hiccups to the supply chain."

Doubling supply

The coronavirus pandemic and an impending recession in the U.S. could have created political space for a pause in the White House's economic battle with China. However, Trump has continued to pursue his desire to bring manufacturing back to the U.S. and overturn a wide trade deficit that he interprets as a strategic defeat for America. That deficit stood at around $420 billion in 2018, but slipped back to $346 billion in 2019, thanks to the imposition of high tariffs on many Chinese goods by the U.S.

In mid-May, Trump threatened to impose new taxes on U.S. companies that outsource manufacturing. "You know, if we wanted to put up our own border, like other countries do to us, Apple would build 100% of their product in the United States. That's the way it would work," Trump said during a Fox interview. He gave no details as to how the tax plan would work.

Labor costs and regulations mean that manufacturing in the U.S. is still substantially more expensive than in China. If a company is considering investing millions of dollars into a new factory to make products whose equivalent can be imported from Asia at lower cost, it would "really have to think twice" before committing, said William Hsiao, an economist at Harvard University.

"[Trump] is really turning the coronavirus [outbreak] into a political campaign," Hsiao said. "Some of his ideas, I call it half-baked, if not half-crazy. Market competition [pushed] the buyers to buy from China. That's a very natural outcome of a globalization of economic relationships."

U.S. buyers of medical goods -- and other imports -- have become more alert than ever to the challenge of overreliance on China, and some are now looking to diversify their supply chains.

Alkire said that his organization has signed more long-term contracts with domestic and nearshore manufacturers in Central America and South America to boost production capability.

"I think that you're going to look at a much more diversified supply chain," Alkire said. "But that doesn't mean that you're not going to have production in [Asia]. It just means you're going to have more resiliency and more diversification of where the product is actually being manufactured."

Dealmed's Einhorn agrees. "I don't think people are going to terminate their relationships with Chinese factories," he said. "China has the capacity and production that no one else has, and I think people underestimate that. ... But I think that people are slowly going to [be] broadening their options."

Medicom has two factories in Shanghai and three in Wuhan, the initial epicenter of the outbreak. When asked if the new challenges would prompt them to leave China, Reuben immediately shut down the possibility. "We employ almost a thousand people working in China. We have a strong brand name in the Chinese market -- it is as much for the local market as it is for exports," he said. "We will be in China for the long term. We like China."

The same is likely to be true for many American businesses, not just in the medical sector. U.S. technology companies and other manufacturers have begun to move some elements of their supply chain out of China and into Southeast Asia. However, China is the only place where currently they can source at the scale and price that they need.

"You can't just force the market to change," said Xiaobo Lu, political economy professor at Columbia University. "You always have to depend on demand. You can't just force businesspeople to behave in an irrational way."

The pandemic adds a further complication to the White House's desire to decouple from China. The relative strength of the U.S. economy before the pandemic meant that the country was resilient enough to fight its tit-for-tat trade war. That may no longer be the case.

The U.S.'s national unemployment rate jumped to 14.7% in April compared to 4.4% in March, according to the Bureau of Labor Statistics. Unemployment rates in Nevada, Hawaii and Michigan have exceeded 20%. The Congressional Budget Office in late May projected that U.S. gross domestic product will drop 38% on an annualized basis in the second quarter.

Some of the best-known brands in America have declared bankruptcy, including fitness brand Gold's Gym, car rental business Hertz, fashion chain J. Crew, home goods retailer Pier 1 Imports, and department store companies Neiman Marcus and J.C. Penney. Another escalation could hurt the U.S. "much worse than a year ago," Lu said.

With large-scale unrest on the streets of many American cities and elections coming in November, the White House has intensified its rhetorical attacks on China. National Security Adviser Robert O'Brien on May 24 compared Beijing's response to the coronavirus with the Soviet Union's cover-up of the Chernobyl nuclear disaster in 1986. Speaking on CBS, O'Brien also said he is confident that the U.S. will develop a vaccine before China and alleged Beijing will try to steal it.

On the same day, China's top diplomat Wang Yi said at a news conference that the U.S. should stop wasting time on political battles and work with China to fight the virus. "Some politicians," Wang said, "ignore the basic facts and make up countless lies and conspiracy theories."

Wearing PPE, medical personnel prep for the opening of the Baltimore Convention Center as a coronavirus field hospital in April. (EPA/Jiji)

As the war of words continues, the lack of PPE remains a life-or-death concern. One Sunday in early May, Reuben received an urgent phone call at 11 p.m.

One of his largest American customers told him that a dear friend's father was very sick in a nursing home. He had been put in a room on a floor designated for patients infected by the coronavirus, but the facility's health care workers were too afraid to enter for lack of masks or isolation gowns.

Reuben immediately called local hospitals. He guaranteed them that he could deliver PPE to them the following day, on the condition that they could lend equipment to the nursing home that night.

"I know personally five of my friends [whose] parents have all perished because of [the virus]," Reuben said. "This is not politics, this is not business. It's human lives."

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