Entering
the White House on January 20, 2017, the next President will confront a
daunting challenge: ensuring continued US preeminence in military capacity.
That edge, which America has enjoyed for a quarter century, is being
systematically blunted by competitors. The roots of American advantage lie in
an interlinked set of social, political, economic and technological factors. In
particular, the United States has exploited the self-reinforcing benefits of
being both economically dominant and technologically advanced. Now, however,
globalization is driving countertrends in the diffusion of knowledge and
wealth. The eroding American techno-economic lead is a chronic risk to US power
that will require enormous national effort to overcome.
In articulating their Third Offset Strategy, US defense and security
officials are signaling an awareness of this problem. They should understand
that the nation’s techno-economic position is underpinned by the remarkable
dynamism of its private business sector. US corporations are the world’s most
valuable by far, because they are the most profitable, the most productive and
innovative, and highly globalized. Almost two-thirds of the world’s most
valuable firms are American. They rule over many strategic industries. This
position has been achieved with the considerable support of other US
institutions: the American workforce foremost, but also the government,
universities, research organizations, capital markets, and the military.
Recognizing the continuing importance of nurturing this symbiotic ecosystem,
the Pentagon has long funded organizations like DARPA, and now is reaching out
to the private sector in new initiatives such as DIUx.
There is a general consensus that key technologies addressing both civil
and military needs increasingly are merging. A good example is machine autonomy
enabled by artificial intelligence, which is a clear dual-use application.
“Civil-military integration” is not new, of course, but what is different now
is the sheer sophistication and resources of the private sector relative to the
government. American firms are independently capable of extraordinary feats of
initiative: sparking the shale fracking revolution, for instance, and launching
rockets into space. This is welcome testimony to the nation’s model of
capitalism. But it should give pause to policymakers, because there are reasons
to believe that the motivations of the private and public sectors are
diverging. What’s good for big business may not necessarily be good for America.
Reaping
globalization’s harvest
Modern globalization, pioneered by Washington’s own institutions, has
both raised millions out of poverty and spurred a worrying leap in inequality
between rich and poor, skilled and unskilled, and some economic sectors and
others. The US as a whole may have prospered for a generation on this
unprecedented expansion of international commercial integration, but the plight
of the American worker is plenty visible in 2016’s election campaign.
Globalization has also seen an epochal shift in the relative balance of power
between countries, and between governments and companies.
The archetypical US economic success story today is the multinational
corporation, culturally American but spreading far across the planet. The allegiance
of such firms is not to Washington but to their shareholders. Half of their
profits come from overseas. They deploy sophisticated strategies to minimize
their tax burdens stateside. They may exploit regulatory arbitrage too. They
build their factories and laboratories overseas — to tap local talent, get
closer to markets, exploit financial inducements, and meet countries’
“localization” requirements which are rising by the day. These multinationals
often outsource wherever they can. Their supply chains are complex,
disintegrated and fragmented, and growing less American. In short, they have
intelligently embraced a model of worldwide commerce enabled by a relatively
benign era of liberal American economic hegemony.
That era may be ending. The geopolitical environment is becoming more
conflictual as new powers, enriched by trade, assert their own interests. The
financial crisis that started rumbling in the United States a decade ago still
reverberates. Much of the world faces lower growth or outright stagnation,
inequality, deflation and low interest rates. The domestic discourse in many of
the world’s democracies has grown febrile. Against a darkening security
backdrop and rising nationalism and protectionism, America paradoxically is
wealthier but less secure, ever indispensable and interconnected yet also more
vulnerable.
Along came
China
If the world were becoming merely more equal or less unipolar, that
would be one thing, for the US would still enjoy relative pre-eminence.
Assuming it remained competent as an alliance sponsor, it could be confident of
organizing a prevailing coalition in all circumstances. But the rise of China,
a highly disciplined rival with vast economic potential and commercial
ambition, is of greater concern to US long-term strategists. To understand why,
we need to look again through the prism of business. As strategically
nettlesome as the Kremlin or Teheran may be to Washington, the US can badly
damage them with sanctions. Russian hackers are superb but Russian technology
companies make little the world wants. American companies hardly tremble in
fear at the Iranian Revolutionary Guard’s business acumen and reputation. China
is another matter altogether.
Like America, China is a multi-dimensional power. Today it is China’s
economic dynamism that is most startling but, as American twentieth century
history shows, techno-economic ascendancy could eventually translate into
political, military and cultural leadership as well. China’s economy is
remarkable for its sheer size (larger than the US by some measures) but
especially its savings and investment rates, among the highest ever seen.
Because it owns and controls its domestic financial system, Beijing can channel
some of this $5 trillion of annual savings into practically any endeavor it
wants (by comparison, US gross national saving is about $3.5 trillion). Much of
China’s savings will be misallocated, but this can still do great harm to
others. For example, energy and capital subsidies to metal smelters result in
Chinese overcapacity spilling out and destroying profitability worldwide. Yet
if Beijing’s omnipotent bureaucrats are occasionally misguided, Americans
shouldn’t doubt the dynamism of Chinese commerce.
The Chinese have cultivated a market that may prove to be fatally alluring
to multinational companies. Beijing constantly tips the playing field with
technology-for-access deals, ensuring that intellectual property flows in one
direction: to China. If foreign companies now find it a less friendly place to
do business, that is intentional. After all, China is still a more open market
than Japan and Korea were at a similar stage of development. As the welcome
mats for foreigners are withdrawn, Chinese firms are becoming stronger. Though
often highly indebted, they remain well funded by state banks and are
encouraged to pursue overseas acquisitions for advanced technology. Europe is a
principal target. Owners and managers there often are eager cash sellers.
European governments like those in Berlin and London are puzzlingly acquiescent
in approving sensitive sales without demanding reciprocal investment access to
China.
No other large country has thrown itself on China’s financial mercy like
America has. One is the world’s greatest saver and the other the world’s
largest debtor — an incongruity solved by their huge and mounting bilateral
trade imbalance. This in turn has led to Beijing’s accumulation of trillions of
dollars of official reserves, much of which are direct claims on Washington.
Whether such interdependence stabilizes their political ties is questionable,
but ironically it ensconces the greenback as the world’s main reserve currency,
however much Beijing resents that. Beyond the headlines of US foreign
indebtedness are more profound shifts in the relationship. Chinese firms do not
yet threaten America’s high-technology bastions like aerospace, semiconductors
and healthcare — but they plan to. Helped in part by US trade policies,
universities and corporations, China is moving up the value chain, making
lavishly funded state-led breakthroughs in new areas of science.
The future can be glimpsed in mid-tech industries like solar panels and
lithium batteries, where western producers are steadily being edged out. China
already produces about seventy percent of the world's electronics. Upstream, it
accounts for more than half of world metals demand, and much of its supply as
well. First in obscure rare-earth metals, then in steel and now in aluminium,
when China moves in, once-proud American mills fall silent. The question is not
just whether such industries are “good” for the country, but also whether they
are strategically essential. Will the next US warfleet head into combat built
on recycled soda cans, Chinese chips, and the forbearance of overseas
creditors?
Solving
different problems
America's strategic planners must seek a clear-eyed assessment of US
weaknesses and strengths. They need to understand where, when and how their
networks could be placed at risk; they need to understand the exposures of
potential adversaries too. They will be well served by following the money, by
watching some of the world's most powerful actors — multinational corporations
— and by considering several crucial issues.
First is the obvious acknowledgment that the civilian and military
sectors, though interacting and overlapping extensively, are tasked with
solving very different problems. Put bluntly, peacetime accumulates capital,
and war destroys it. There must be no conflation between the ideas of
commercial rivalry and military warfare. Although they may both be elements of
a broader strategic competition, they are entirely distinct. Certain activities
— codebreaking, stealth, directed energy and nuclear weapons — should never
fall within the civil sector's ambit. It is vital that US public agencies
maintain research leadership in these fields. As private industry
makes increasingly impressive progress in fields like genetics, those
agencies must continue to support them in basic research. Where the state does
not lead the private sector in knowledge, then at least it must not fall
behind.
Second is the recognition of divergent interests, even where
civil-military integration makes sense. Silicon Valley, Manhattan and the
Beltway are separate worlds with deep cultural differences. Many businesses do
not welcome interaction with the US government and especially with its security
agencies. Some don't wish to collaborate on principle. Others can’t be
bothered; Uncle Sam is a highly demanding customer. To be sure,
adversarial public-private tension is natural, even healthy. More
problematic would be if global multinationals defy Washington's entreaties in
order to comply with Beijing’s. That day may not be far off. To multinationals,
the dragon's wrath is a fearsome threat to which the US must be sensitive.
Third, because its development model appears successful and
institutionally coherent, China finds itself compared in ideological terms with
the United States. Policymakers in DC must ask whether Beijing’s governance
model might indeed provide a mobilization advantage over America, both in
peacetime and in a security competition. The US once was a much more
interventionist state; there is no golden rule preventing the next President
from reversing liberalization in order to assert more control over the economy.
There is one aspect in which China is disadvantaged, however, and the next US
administration would do well to heed it: because its ruling Party is embedded
everywhere, domestically and abroad, Chinese firms may never be considered
multinational. They will be distrusted in many jurisdictions. Their “corporate
power” deficit derives directly from the high level of state influence in
China's “mono-national” networks.
Fourth, although prudent US planners must assume that China will be a
viable long-term competitor, they should also recognize its other difficulties.
Their counterparts in Beijing fret about their own industrial vulnerabilities —
specifically oil, which is hard to substitute and for which Chinese import
dependence is rising as America's falls. Beijing has also linked its currency
to the dollar, making it highly exposed to US monetary policy and to
Washington’s power over global financial affairs. The easy money the Federal
Reserve issued to repair the American housing sector has been kryptonite to
China, where debt is growing radically. China is a monumental experiment to
smash through the middle income barrier with brute monetary force. For all its
tremendous progress, huge socio-demographic, financial and ecological hurdles
await. Both America and China are flawed giants.
Finally, a review of US trade, investment, innovation and infrastructure
policy is overdue. Globalization has served both America and China well — but
not symmetrically, nor has it benefited everyone in either country. Multinational
firms and financiers have prospered, but American workers have struggled. The
US now finds itself strategically vulnerable, dependent on China for capital
and goods, and tangled in an embrace which is assuredly undermining its
innovation lead. Diversifying global networks is a priority for both countries.
Yet this must be a subtle exercise. Preferential trade policies alone are an
imperfect tool. The proposed Trans-Pacific Partnership is criticized (within
the US and other signatories) as blatant advocacy for corporate interests.
Likewise, China will face resistance to its “One Belt, One Road” if it is a
mercantilist scheme to clear the pathway for its bulging business ambition.
The next President’s inbox will be a formidable array of urgent and important
national challenges. The tyranny of the urgent will, as usual, prevail. Yet
whatever emergent crises come and go in the Situation Room, there, on the Oval
Office desk, will be the great task of sustaining American techno-economic
leadership especially vis-à-vis China. It demands an intentional, comprehensive
strategic-industrial policy. This is one problem that isn’t going away.
Julian Snelder
is a New Zealand-Netherlands dual national, resident in Asia for more than 25
years. He worked for the management consultancy McKinsey & Company for
eight years, then for Morgan Stanley for eight years, the latter role as head
of technology investment banking for Asia. Since 2005 he has been director and
partner in an emerging market investment fund. Mr. Snelder has worked
extensively in China, India, Japan, Korea and Taiwan. He has advised corporate
and government clients on mergers and acquisitions, fundraising and capital
investment, business planning and budget planning, privatization, and
industrial policy. His particular interest is the broad application of
commercial information and manufacturing technologies to matters of national
security. He writes regularly on this topic and has contributed to publications
of the United States Naval War College.
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