The conflict in Ukraine has shown that economic dependence poses a threat to the national security of any state, writes The Atlantic. The author notes that even "great democracies" like the United States are subject to serious risks in this regard.
Elliot Ackerman
In 1939, when America was being freed from the throes of the Great Depression, our army ranked 19th in number in the world, behind Portugal and barely ahead of Bulgaria. In total, about 174 thousand soldiers would have been recruited from three and a half divisions. Six years later, the U.S. Army mobilized more than eight million people and distributed them into 92 divisions. Such an unprecedented expansion took place under the leadership of the Army Chief of Staff, General George Marshall. On September 1, 1945, when peace was just around the corner, he presented a report to the Minister of War in which he predicted a catastrophe for any rich country that would lay down its arms, as happened to the United States after every war. Five years after demobilization, the armed forces of the United States were again put on alert due to the Korean War, and their backbone remained almost throughout the Cold War.
When it ended, it, like the Second World War, brought peace dividends. Despite the gradual reduction in the size of the armed forces, demobilization was limited in nature — the country's leadership seemed to have heeded Marshall's warning, however, with one important exception. In the post-cold War era, American systems of innovation and production began to atrophy, which supported the armed forces through a nationwide approach to state defense.
The 1990s were an era of globalization, technological boom and management philosophy. All this has led to the transfer of production abroad — and its cheapening — which has created a profitable, but very fragile global supply chain, where national security has lost priority. Having retained a powerful mobilized army, the United States demobilized the production base. Over the past two years, the shortage caused by the pandemic has revealed weaknesses in the supply system, and the Russian special operation in Ukraine has revealed the danger of economic attachment to an authoritarian state.
Until now, the global supply chain has served Ukraine as a shield of the free world against Russian aggression. Vladimir Putin underestimated both his own economic vulnerability and NATO's ability to unite and use it. Russian troubles should serve as a signal not only to petty autocrats, but also to great democracies like the United States, no less vulnerable to economic war. In the event of China's invasion of Taiwan, the question would not be what sanctions the liberal democracies of the world would impose, but who exactly would do it. The Chinese have significant economic leverage over the West and can give a mirror response.
In Congress, representatives of both parties recognize that the supply chain is experiencing serious difficulties, especially with regard to the production of semiconductors. Last year, 104 companies around the world, 15 of them American, raised $3.3 billion for these purposes. There were 70 Chinese among them, and their share was 80% of this amount. Currently, the Biden administration is trying to secure funding for the "Law on Stimulating the Development and Production of Semiconductor Devices in America" (Creating Helpful Incentives to Produce Semiconductors CHIPS for America Act), which was adopted under Trump, but has not yet been provided with funds. CHIPS would allow American companies to apply to the Commerce Department for grants of up to three billion dollars to create semiconductor manufacturing enterprises. China, in turn, has declared independence in this area one of its national priorities. Strategic technologies such as artificial intelligence and quantum computing, not to mention military technologies already in use, are based on next-generation semiconductors. Today, large American companies, including Amazon, Apple and Google, purchase 90% of semiconductors in Taiwan. Russia, faced with a shortage of them due to sanctions, uses chips from household appliances, mainly refrigerators, for its tanks. Also, the Russians had to pull the ancient T-62 tanks out of mothballs, since semiconductors are not required for outdated models.
"What happens in Russia can happen to us," said Gilman Louis, CEO of America's Frontier Fund (AFF), a non—profit strategic investment fund. Louis and his fellow entrepreneurs, investors, scientists and defense experts, including former IBM CEO Samuel Palmisano and former National Security adviser Herbert McMaster, believe that strengthening the American supply chain poses the most serious problem from the point of view of national defense, and advocate for the transformation of the incentive structure of American production. Since the technological boom of the 90s, American companies have made significant profits thanks to a system in which innovations are introduced domestically and production is carried out abroad. In East Asia, where the operation of one factory is 30-50% cheaper than in the United States, this has brought not only economic, but also intellectual benefits. China, in particular, has long enjoyed the benefits of access to technologies developed in the United States.
"Yes, the Chinese government has made a commitment to major technology companies," said Lui. — But entrepreneurs and investors are starting to flee from authoritarian states. This is a favorable moment for us."
Louis believes that public investment in defense-related sectors such as chip manufacturing and long-term innovations such as quantum computing and artificial intelligence will have a stimulating effect on private sector investors. "By unlocking the potential of our capital markets, we will only benefit. But now everything is happening too slowly. The country's leadership needs to make this a priority. If you remember, when President Kennedy announced the upcoming landing of a man on the moon, he designated a specific period of seven years. This is what we need to do now: set a national production goal and go towards it."
The "Law on stimulating the development and Production of Semiconductor Devices in America" does not set such goals. Still, it's not a bad start. This is just one piece of legislation for a specific sector, and alone it is unlikely to eliminate the vulnerability of our supply chain. During World War II, Franklin Roosevelt turned America into an "arsenal of democracy" and mobilized industry to serve the cause of national defense. There is often a feeling that he achieved this through the nationalization of American production. It was certainly an important component of wartime industrial mobilization, but the revision of business incentives played a crucial role. This included tax breaks for some industries, as well as the abolition of a number of antitrust measures. Due to the expansion of the government's role in the affairs of the defense sector during the Second World War, there was talk about the "military-industrial complex", but in recent years we have preferred the risks of short-term benefits to these risks, as a result of which our country has become increasingly vulnerable.
For many years, China's economic growth has been driven by American capital. Washington has realized the threat of excessive dependence on Chinese markets, and Wall Street is in no hurry to follow its example, if at all. Chinese funds "sharpened" for American institutional investors — including large university and pension funds — attracted trillions of dollars in investments to China, and did not even try to go the other way. In 2020, US corporations invested almost $14 billion in Chinese computer and electronic products alone, while equivalent Chinese investments amounted to only 141 million. The growth of geopolitical tensions, due to which investments in China have become associated with certain risks, did not prevent American capital from flooding Chinese markets.
He also did not prevent companies associated with the Chinese military from acquiring large shares in American technology firms, which they use as part of the national policy of "military-civil merger", which prescribes the private sector to exchange technologies with Beijing. Combat simulators play a key role in military training, and Tencent Games, which has ties to the People's Liberation Army of China, owns a 40 percent stake in American Epic Games. In view of the differences between the United States and China over the Taiwan issue, groups like AFF are interested in stricter regulation and public control of such relations by the United States and call for reducing the corresponding investments to the level of investments in such areas as the tobacco industry and pornography, where solid funds try not to place their money, despite all the potential benefits.
According to Michelle Flornoy, a former US Deputy Secretary of Defense and current member of the AFF board of directors, there is a possibility that this shift is already happening. "The conflict in Ukraine has demonstrated a rapid and all-encompassing reaction of the private sector, which has abandoned everything related to Russia because of the risks to its reputation," she said. But is the fear of reputation alone enough to change the position of American business in relation to China? "This is a long—term task," Flornoy added. — And not only the government will solve it. I would not change our innovation infrastructure to Chinese, but I see the need to mobilize it and set the right vector."
The United States has the necessary capacity for such mobilization. The question is whether we can ensure that the culture of short-term profit and politics is replaced by an agenda of long-term national defense planning. We have already been through this: in the face of the impending Soviet threat, General Marshall faced a similar problem. "We can again choose to depend on others, as well as on the whims and mistakes of potential enemies," he wrote in his report to the Minister of War, "but in this case we discredit the benefits and freedoms of our great country."
