The new, more threatening era underlines the urgency of what should have already been priorities. We need a much bigger defense budget; we need an all-of-the-above energy policy that takes full advantage of our Saudi Arabia-like bounty of fossil fuels; and we need to use public policy to ensure we are meeting national needs not necessarily fulfilled by the free market alone.
Much of the latter involves the economic competition with a mercantilist China that doesn’t play by our rules and has the ultimate goal of accumulating economic and strategic advantages to eclipse us on the world stage.
This isn’t an indictment of international trade as such — even unfair practices by most countries aren’t of high consequence. However irksome Canada’s timber policies may be, Ottawa is not going to leverage them to eventually wage war on the United States. Nor does every jot and tittle of our trade relationship with China matter. At the end of the day, it matters little how many U.S. soybeans China imports, an obsession of President Donald Trump during his trade battles with Beijing.
No, our focus should be on maintaining a first-class military, winning the high-tech race with China, and reducing our vulnerabilities in the event of a war that disrupts supply chains and our access to key strategic materials and goods.
A robust market economy is a foundational national strength of the United States, but it is not sufficient to achieving these goals and, in some cases, militates against them. It will be painful for some free-market-oriented Republicans to admit this, yet public policy has to be flexible enough to take account of circumstances — principles have to be tempered by prudence.
We need to restore the defense-industrial base, which has atrophied considerably. At the famous “Last Supper” in 1993, Clinton Defense Secretary Les Aspin had a dinner with big defense contractors at the Pentagon and told them consolidation had to be the order of the day as the defense budget was about to fall off a cliff. Now, we need an equivalent meeting of the minds about how to expand capacity as the defense budget presumably kicks into a higher gear.
At the moment, we can’t build enough missiles to replenish our stocks quickly enough in a conflict — military leaders complained about diminished stock during the campaign against ISIS in 2015. We can’t build new submarines on schedule or maintain the ones we have. In general, the Navy doesn’t have enough capacity to repair its ships in peacetime, let alone a war. Air Force depots, too, are lacking.
All of this will require major new investment.
A model of the potential synergy of government and private industry in such areas is how Elon Musk’s SpaceX has revitalized the U.S. space program. For years, NASA had come to rely, humiliatingly (and dangerously and expensively), on Russian rockets to get to space. Then, it opened a competition for private companies to build spacecraft. Musk came out ahead and has shaken NASA out of its decadeslong bureaucratic mediocrity.
We need massive support for research and development, the predicate for technological advancement. Robert Atkinson of the Information Technology & Innovation Foundation, who has thought deeply about new strategies to make the U.S. more competitive, notes that 60 years ago, we led the world in government investment in research and development, but have become a laggard since then.
We should avoid shooting ourselves in the foot on anti-trust grounds. Atkinson points out that when NXP, a Dutch semiconductor company, bought a U.S. maker called Freestyle, the Federal Trade Commission required NXP to divest an important part of its operation ultimately to a Chinese company as a condition of the merger. Our regulators shouldn’t be doing China’s work for it.
We should temper our enthusiasm for tearing apart Big Tech. Atkinson notes that these firms, increasingly out of favor on the left and the right, invested 86 percent more in R&D in 2019 than the Chinese government did.
We need to begin decoupling from China in key areas. An economy in which state-owned industries are so important isn’t a true partner in free trade, not to mention China’s technological theft on a massive scale by every means possible.
Derek Scissors of the American Enterprise Institute suggests, among other things, using the Defense Production Act and Section 232 of the Trade Expansion Act of 1962 to put a ceiling on the Chinese content of imports used by the military, including medicine.
We need to deploy public policy to secure the supply chain for strategically important goods. The pandemic put a focus on pharmaceuticals. An emphasis lately, for understandable reasons, has been semiconductors. They are a crucial constituent part of a modern economy, necessary to the production of everything from jets to cars to smartphones and driving innovation in all other sectors of the economy.
Even though the U.S. created the industry and still leads in chip design, our share of global semiconductor manufacturing has fallen substantially, from nearly 40 percent 30 years ago to 12 percent now. More importantly, the U.S. basically doesn’t manufacture the most advanced semiconductors, with Taiwan and South Korea accounting for all of this production. Taiwan is obviously directly in the crosshairs of China and any supply from South Korea could be disrupted if there’s a war in Asia.
U.S. companies don’t usually make business decisions — in this case, whether to manufacture chips or not, and whether to make them in the United States — based on the national interests of the United States. That’s not their role, and most of the time, it’s completely fine. Indeed, it enhances our economic strength.
This is different. These companies also aren’t making their decisions in the context of a level playing field, where every country plays by free-market rules. Foreign countries don’t hesitate to provide government support to the manufacturing of semiconductors on their soil. Beijing, of course, is a prime offender.
“China,” Stephen Ezell, also of ITIF, writes, “is using massive industrial subsidies to stand-up new semiconductor enterprises from whole cloth with government support or to substantially capitalize enterprises that wouldn’t be competitive and would likely fail if exposed to genuine market-based global competition.”
The CHIPS Act that just passed the House spends $52 billion to support domestic production of chips and research and development. Surely, some of these funds will be misallocated or prove unnecessary (and the broader House bill includes extraneous spending), but the legislation is, directionally, a welcome step away from unilateral disarmament.
It is much the same story with rare earths, the 17 metals used in the manufacture of magnets essential to weapons and electric cars, among other products. The U.S. created the industry, but China has leaped ahead since. A key inflection point, a report in Reuters notes, was when General Motors sold off its rare earth magnets division to a consortium including Chinese partners in the 1990s. China got access to U.S.-created designs. The U.S. is now down to one rare earth mine and no longer processes rare earth minerals — the one mine, in California, relies on Chinese processors.
To place ourselves at the mercy of an adversary in such an important and sensitive area is insane. And China knows the leverage it has. It briefly blocked exports of rare earths to Japan a decade ago, and has issued similar warnings to the U.S.
Restoring U.S. capacity has to be a priority. Sens. Tom Cotton (R-Ark.) and Mark Kelly (D-Ariz.) have co-sponsored a bill to prohibit defense contractors from buying rare earths from China, one of a number of ideas to address the problem.
If Russia’s war in Ukraine doesn’t literally “change everything,” it should change enough in the U.S. to make us address deficiencies in our economic and security posture that have been tolerated for too long.