Originally published for a Naval War College course.

The naval historian and strategist Alfred Thayer Mahan expressed that the reason for maintaining a strong navy and sea control is to facilitate a blockade and “derange” a country’s international trade, subsequently disrupting its economy and society.¹ In a globalized world with highly consolidated supply chains, certain economic powers no longer need military force to achieve that end. In the case of China, for example, former Australian Prime Minister Tony Abbott remarked recently that “the Beijing government sees trade as a strategic weapon to be turned on and off, like a tap.”² In a conflict with the United States, the first and most damaging moves by China may be to cut off exports or block critical supply lines at regional choke points. It is becoming increasingly clear for many that “structural weaknesses in both domestic and international supply chains threaten America’s economic and national security.”³ The United States needs to utilize the instruments of national power in a comprehensive and coordinated strategy to enhance the stability and security of its critical supply chains, in particular due to China’s outsized ability to affect them.

Over the last several decades, communication and shipping advances have led to trade expanding throughout the world. Suppliers and consumers can reside almost anywhere and interact almost instantaneously. Countries seek to maximize leverage of their comparative advantages and individual companies seek to leverage economies of scale, resulting in increased consolidation of suppliers. Rapid communication and global shipping advances allow merchants to minimize stored inventories and lower costs with “just-in-time” processes. While these trends reduce expenses and maximize profit, they also lead to increased risk.

China in particular has advanced its economic growth by attracting various manufacturing and production industries to the country and shipping the products worldwide. This focus on supplying the world yielded a trade surplus in China of $535 billion in goods in 2020.⁴ Comparatively, in 2020 the United States experienced a trade deficit of $677 billion in goods with all countries⁵ and a trade deficit of $310 billion in goods with China alone.⁶ This large demand for Chinese goods represents a strong bargaining position for China and a significant impact to America if China should consider slowing or stopping the shipments due to rising tensions.

In addition to producing many of the goods imported into the United States, China is increasing its control of the seas and maritime choke points through which many others travel. It already commands the world’s largest naval force and is utilizing an impressive shipbuilding infrastructure to grow aggressively: China has tripled the number of naval platforms under its control in only two decades.⁷ Most of these forces are concentrated in the Western Pacific, which makes them more competitive in the region compared to other widely dispersed forces. This concentrated power gives China increasing influence over a region that receives approximately 60 percent of maritime trade and hosts an estimated one-third of global shipping.^{8 9}

The United States accepts significant risk from importing critical products with very few suppliers worldwide and requiring critical materials with little or no domestic production. For example, the Taiwan Semiconductor Manufacturing Company (TSMC) makes 24 percent of the world’s semiconductor chips and more than 90 percent of the most advanced versions.¹⁰ In 2020, approximately 79 percent of chip production occurred in Asia¹¹, while the United States manufactured only about 12 percent (down from 37 percent in 1990).¹²¹³ Additionally, the United States led the world in rare earth material production prior to the 1980s, but now China controls 85 percent of global refining capacity.¹⁴¹⁵ Similarly, nearly 90 percent of generic active pharmaceutical ingredients are now produced in facilities overseas, matching the trend of companies shifting production of various products overseas over the last fifty years.¹⁶ In recent remarks on efforts to address supply chain bottlenecks, President Biden declared “never again should we have to rely too heavily on one company or one country or one person in the world, particularly when countries don’t share our values…”¹⁷

In the same way that a National Defense Strategy and National Military Strategy follow the President’s National Security Strategy, the United States should publish a National Economic Strategy that guides and describes the nation’s coordinated approach for developing and implementing its economic power. This guidance would provide an overall strategic assessment of and plan for the long-term route forward for the U.S. economy to compete with other countries. Additionally, the United States should create or designate an institution to develop and oversee the coordination between various government entities with interests in a national economic plan. In the last several years, the President with advice from his National Economic Council seems to have played this role, using executive orders to direct assessment and action.¹⁸ However, other government entities are also directing policy or engagement that should be coordinated.¹⁹ Indeed, a whole-of-government approach²⁰ that incorporates feedback from the private sector and other countries will be necessary to be most effective.²¹

The U.S. should use national intelligence and informational resources to identify highest risks and areas of opportunity. The Intelligence Community should develop and grow a new division to focus on international economic competition,²² which would evaluate strategic risks, trends, and assets and be used to inform the above assessments and policy-makers.²³ Identifying critical resources and likely bottlenecks or instability in advance would allow the U.S. to be proactive rather than reactive. The U.S. should gather and host large economic datasets to be leveraged by private companies as a public good or infrastructure, allowing them to compete more effectively both at home and abroad. Companies and the government should optimize artificial intelligence and machine learning with these datasets to identify areas of opportunity or risk.²⁴

Next, the government should coordinate diplomatic and economic actions to incentivize shifting economic support from countries on which the U.S. is over-reliant to other markets or supply chains. Tariffs could be used as economic or diplomatic instruments by applying them to imports from countries with outsized market shares or countries that do not share environmental, labor, or other values with the United States.²⁵ Such action would lead to diversifying the targeted supply chains either through domestic production or suppliers of different nations.²⁶ Diplomatic engagement²⁷ would be valuable prior to implementing the tariffs to work with other partners for stable access²⁸ and negotiate trade agreements with financing or production-increasing measures.²⁹ Engaging with foreign companies with particular expertise or experience to bring critical manufacturing to the U.S. would also enhance supply chain stability.

The government should also coordinate regulations to bolster domestic industries. The U.S. should consider targeted investment through regulations in federal contracting and “Made-in-America” purchase requirements for critical materials.³⁰ Tax incentives or subsidies could be offered to U.S. companies that are willing to work with preferred foreign or domestic suppliers or fill the production gaps themselves, even in light of likely higher expenses due to environmental regulations, taxes, and labor costs. Using revenue from tariffs on the same products could help level the playing field for U.S. companies and better represent the full cost of production, while also combatting the effects of any unfair practices in other countries.³¹ The U.S. Trade Representative should be empowered to propose enforcement actions against countries utilizing such unfair practices in their critical supply chains.³²

In addition to diplomatic and economic solutions, the military plays an important role in maintaining freedom of navigation and supporting key industries. Given the power China is projecting into their local region, the U.S. Navy will be important in maintaining navigational freedom for global shipping in those major trade routes and should continue targeted power projection into strategic choke points. Using the intelligence assessments and data analytics from above, the Department of Defense (DOD) should optimize and expand its Strategic and Critical Materials Stockpiles. The DOD could also work with other government entities to offer subsidies or tax incentives to private companies willing to maintain similar stockpiles of critical goods. Lastly, the U.S. Strategic Command should investigate ways in which the U.S. can develop and leverage strategic deterrence in the economic realm.³³

The alternative to implementing coordinated government action as described above is continuing to allow primarily market powers to shape critical supply chains. While in theory this should be most efficient and cost-effective, the reality is that doing so will optimize for short-term profit and undervalue long-term risks. The time horizon and scale of the issues are such that the theoretical rational actors in the economic system are actually real people who inadvertently avoid accounting for long-term, systematic risks.

Most of the solutions offered will work against the lean and efficient economic model that generally optimizes for profit but, if planned and coordinated together, those effects can be minimized while providing for better stability, reliability, and security in national critical supply chains. The redundancy and reliability will be buffers in the supply system that allow for increased national security by lessening the risk of systematic failure, even if under economic attack from a foreign actor.

— See this post for an update from 2024

Footnotes

1. Nicholas Lambert, “What Is a Navy For?” Proceedings, Vol. 147, No. 4 (April 2021) ↩

2. https://www.politico.eu/article/china-using-trade-as-a-weapon-says-australias-tony-abbott-in-call-for-stop-on-tech-sale/ ↩

3. Biden-Harris Administration Executive Order on America’s Supply Chains response: 100-day Review Fact Sheet, June 2021 ↩

4. https://www.bloomberg.com/news/articles/2021-01-14/china-s-trade-surplus-hits-record-as-pandemic-fuels-exports ↩

5. https://www.census.gov/foreign-trade/statistics/historical/gands.pdf ↩

6. https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china ↩

7. U.S. Government, Advantage at Sea, December 2020 ↩

8. https://chinapower.csis.org/much-trade-transits-south-china-sea/ ↩

9. The global impact of closing or restricting maritime choke points is evident from the 2021 grounding of the 1300-foot container ship Ever Given in the Suez Canal. Blocking a canal that carries as much as 13 percent of global maritime trade and ten percent of seaborne oil shipments for six days threw the carefully choreographed global shipping system into disarray, with impacts lasting many weeks after the event. ↩

10. https://www.cnbc.com/2021/10/16/tsmc-taiwanese-chipmaker-ramping-production-to-end-chip-shortage.html ↩

11. https://www.cnbc.com/2021/10/16/tsmc-taiwanese-chipmaker-ramping-production-to-end-chip-shortage.html ↩

12. https://www.wsj.com/articles/the-world-relies-on-one-chip-maker-in-taiwan-leaving-everyone-vulnerable-11624075400 ↩

13. TSMC operates 12 fabrication facilities and almost all of them are located in Taiwan and China. This concentration of the facilities adds significant risk to the overall semiconductor production chain due to the possibility of local earthquakes, droughts, and geopolitical tensions. The United States is building a fabrication facility in Arizona that is scheduled to begin production of 5-nanometer technology chips in 2024, but the more advanced 3-nanometer technology chips planned for production will still only be produced in Taiwan. ↩

14. https://www.atlanticcouncil.org/commentary/transcript/brian-deese-on-bidens-vision-for-a-twenty-first-century-american-industrial-strategy/ ↩

15. In the 2010s, China imposed export quotas on rare earth materials, which motivated the U.S. government to reevaluate its strategic position with respect to critical minerals for the first time since 1973. In its study, the U.S. Geological Survey found the U.S. to be “entirely reliant on foreign nations” for 20 of 23 critical materials and noted an increased “risk for supply disruption owing to political, social, and other factors.” ↩

16. https://www.atlanticcouncil.org/commentary/transcript/brian-deese-on-bidens-vision-for-a-twenty-first-century-american-industrial-strategy/ ↩

17. Remarks by President Biden on Efforts to Address Global Transportation Supply Chain Bottlenecks, October 13, 2021 ↩

18. Recent examples include: Strengthening Buy-American Preferences for Infrastructure Projects (2019), Promoting Energy Infrastructure and Economic Growth (2019), Securing the Information and Communications Technology and Services Supply Chain (2019), Addressing the Threat to the Domestic Supply Chain From Reliance on Critical Minerals From Foreign Adversaries and Supporting the Domestic Mining and Processing Industries (2020), A Sustainable Public Health Supply Chain (2021), Ensuring the Future Is Made in All of America by All of America’s Workers (2021), America’s Supply Chains (2021), Designation To Exercise Authority Over the National Defense Stockpile (2021), Implementation of the Infrastructure Investment and Jobs Act (2021) ↩

19. Department of Defense, Department of State, U.S. Trade Representative, Congress (taxes) ↩

20. Caolionn O’Connell, Unraveling the Gordian Knot: Considering Supply Chain Resiliency, Testimony before the House Energy and Commerce Committee, Subcommittee on Consumer Protection and Commerce on October 14, 2021. ↩

21. Juan Zarate, Treasury’s Wars (PublicAffairs, 2013), p. 416. ↩

22. Juan Zarate, Treasury’s Wars (PublicAffairs, 2013), p. 416. ↩

23. Caolionn O’Connell, Unraveling the Gordian Knot: Considering Supply Chain Resiliency, Testimony before the House Energy and Commerce Committee, Subcommittee on Consumer Protection and Commerce on October 14, 2021. ↩

24. https://www.technologyreview.com/2021/10/26/1038643/ai-reinforcement-learning-digital-twins-can-solve-supply-chain-shortages-and-save-christmas/ ↩

25. https://www.brookings.edu/blog/order-from-chaos/2020/08/07/more-pain-than-gain-how-the-us-china-trade-war-hurt-america/ ↩

26. https://carnegieendowment.org/2020/06/24/in-u.s.-china-trade-war-new-supply-chains-rattle-markets-pub-82145 ↩

27. Working with developing or nascent suppliers, the U.S. could provide a range of assistance: fair and sustainable lending for infrastructure, resource harvesting, development; knowledge, training, best practices, advisors; standards and other infrastructure (5G as an example); targeted subsidies or tax benefits to U.S. companies working with the target country ↩

28. https://www.atlanticcouncil.org/commentary/transcript/brian-deese-on-bidens-vision-for-a-twenty-first-century-american-industrial-strategy/ ↩

29. https://www.lawfareblog.com/securing-critical-minerals-supply-chain ↩

30. Biden-Harris Administration Executive Order on America’s Supply Chains response: 100-day Review Fact Sheet, June 2021 ↩

31. https://www.atlanticcouncil.org/commentary/transcript/brian-deese-on-bidens-vision-for-a-twenty-first-century-american-industrial-strategy/ ↩

32. Biden-Harris Administration Executive Order on America’s Supply Chains response: 100-day Review Fact Sheet, June 2021 ↩

33. Juan Zarate, Treasury’s Wars (PublicAffairs, 2013), p. 419. ↩