The War in Ukraine Has Exposed a Critical American Vulnerability

In 1939, when America was emerging from the throes of the Great Depression, our Army ranked 19th-largest in the world, standing behind Portugal and only slightly ahead of Bulgaria. It could muster just 174,000 soldiers, scattered between three and a half divisions. Six years later, the U.S. Army had mobilized more than 8 million men spread across 92 divisions. This unprecedented expansion occurred under the leadership of Chief of Staff of the Army General George C. Marshall. On September 1, 1945, in a report submitted to the secretary of war, Marshall warned that in the coming peace, “a rich nation which lays down its arms as we have done after every war in our history, will court disaster.” Although a demobilization soon occurred, the Korean War remobilized the U.S. military five years later, placing it on a footing that largely endured through the Cold War.

Like the end of the Second World War, the end of the Cold War brought about a peace dividend. Although the military incrementally contracted, demobilization proved limited as the nation seemed to heed Marshall’s warning, with one important exception. As the United States entered the post–Cold War era, the systems of innovation and production that had sustained the military through a whole-of-nation approach to national defense began to atrophy.

The ’90s brought the era of globalization, the tech boom, and management philosophies that embraced cheap offshore production, creating a profitable but brittle global supply chain, one that no longer had national security front of mind. Though the U.S. maintained a robust, mobilized military, it had demobilized its manufacturing base. In the past two years, pandemic-related shortages have brought awareness to the weaknesses in our supply chain, while Russia’s invasion of Ukraine has shown the dangers of being economically tethered to an authoritarian state.

So far in Ukraine, a globalized supply chain has proved a shield that the free world has raised against Russian aggression. Vladimir Putin underestimated both his economic vulnerability and the ability of NATO to come together and exploit that vulnerability. But Russia’s troubles should put not only the tin-pot autocrats of the world on notice but also the great democracies—like the United States—that are similarly vulnerable to economic warfare. Were China to invade Taiwan, the question wouldn’t be what sanctions the world’s liberal democracies should place on China but who would be doing the sanctioning. The Chinese possess enormous economic leverage over the West, and could just as easily sanction us.

In Congress, a growing bipartisan consensus acknowledges that our supply chain is a problem, and nowhere more so than in semiconductor production. Last year, 104 companies worldwide raised $3.3 billion to manufacture semiconductors. Fifteen of those companies were American. Seventy were Chinese, and they accounted for 80 percent of the funding. The Biden administration is currently trying to secure funding for the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act, a bill passed under the Trump administration that has since gone unfunded. CHIPS would allow U.S. companies to apply to the Commerce Department for grants of up to $3 billion to create semiconductor-fabrication plants, or fabs. China has already declared self-sufficiency in semiconductor production a national priority. Strategic technologies such as artificial intelligence and quantum computing—to say nothing of already fielded military technologies—rely on advanced semiconductors. Today, major U.S. companies such as Amazon, Apple, and Google rely on Taiwan to manufacture 90 percent of their semiconductors. Russia, which is currently facing a semiconductor shortage due to sanctions, has resorted to sourcing computer chips from home appliances like refrigerators for its tanks. The country has also resorted to pulling vintage T-62 tanks out of mothballs, because these older models require no semiconductors.

“What’s happening in Russia could happen to us,” Gilman Louie told me. He is the CEO of America’s Frontier Fund (AFF), a nonprofit strategic-investment fund. Louie and his colleagues—a group of entrepreneurs, investors, scientists, and defense professionals that includes the former IBM CEO Samuel Palmisano and the former national-security adviser H. R. McMaster—believe that shoring up America’s supply chain is the single greatest challenge to our national defense, and that it requires a generational transformation of the incentive structure around American manufacturing. Since the tech boom of the ’90s, American companies have enjoyed significant profitability by leveraging a system in which innovation can occur at home while manufacturing occurs abroad. In East Asia, where operating a fab costs 30 to 50 percent less than in the United States, this has been not only an economic boon but an intellectual one. China, in particular, has long benefited from its access to technologies developed in the United States.

“Yes, the Chinese government has made a commitment to deep tech,” Louie told me. “But tech entrepreneurs and investors are starting to flee authoritarian states. This is our moment.” Louie believes that early government investment in defense-related sectors such as chip-manufacturing facilities and longer-term innovations like quantum computing and artificial intelligence will send a powerful message to private-sector investors, creating a catalytic effect. “If we unleash the potential of our capital markets, we come out ahead. But we’re moving too slow. We need leadership to make this a priority. If you think back to Kennedy, when he said we were going to the moon, he put a timeline on it: seven years. That’s what we need, to set a national manufacturing goal and go for it.”

The CHIPS for America Act doesn’t set such a goal. Although it’s an important start, it’s only a single piece of legislation for a specific sector and hardly enough on its own to address our broader supply-chain vulnerability. In the Second World War, Franklin D. Roosevelt turned America into an “arsenal of democracy” and mobilized industry in service of national defense. The perception has often been that he did this through nationalizing American industry. Although nationalization was certainly an important component of America’s wartime industrial mobilization, a realignment of incentives for businesses also proved crucial to the effort. This included tax relief for some industries as well as the waiving of certain antitrust measures. Although the heavy government involvement in the defense sector that began during World War II later led to warnings of a “military-industrial complex,” in recent years we’ve swapped the dangers of an industrial complex for those of the short-term profit motive; this has led to long-term vulnerabilities for our country.

For decades, American capital has funded Chinese growth. If Washington has awakened to the threat represented by overexposure to Chinese markets, Wall Street has been slower to follow, if it’s following at all. Chinese funds catering to American institutional investors—such as large university endowments and pension funds—have attracted trillions of dollars of investment in China, but that investment hasn’t traveled the other way. In 2020, U.S. corporations invested nearly $14 billion in Chinese manufacturing of computers and electronic products alone, while the equivalent Chinese investment in the U.S. was only $141 million. Although a rise in geopolitical tensions makes investment in China more fraught, it hasn’t stopped American capital from flooding Chinese markets.

It also hasn’t prevented Chinese companies with ties to its military from pursuing large ownership stakes in U.S. tech companies, stakes they exploit as part of a national policy of “military-civil fusion,” in which the private sector is mandated to share technology with Beijing. Battlefield simulations have become a key part of military training, and Tencent Games, which has ties to the People’s Liberation Army, owns a 40 percent equity share of American Epic Games. As the U.S. and China face off across the Taiwan Strait, groups such as AFF would like to see such relationships subjected to greater regulatory and public scrutiny in the United States, with investment in China coming to resemble investment in the tobacco industry or pornography, areas where reputable funds rarely place their money despite potential profits.

According to Michèle Flournoy, a former undersecretary of defense in the Obama administration and current AFF board member, this shift may already be under way. “The war in Ukraine showed a rapid and universal response from the private sector, which divested from Russia because it didn’t want to be exposed to a reputation risk,” she told me. But would reputational fears alone prove enough of an incentive to change the posture of American business toward China? “This is a long-term challenge,” Flournoy added. “This is not something that government alone can solve. I would not trade our innovation ecosystem for the Chinese system, but our system has to be mobilized and pointed in the right direction.”

The United States has the capacity to mobilize. The question is whether we can substitute a culture of short-term profits and politics for a long-term national defense. We’ve been here before. In the face of an emerging Soviet threat, General Marshall faced a similar challenge. “We may elect again to depend on others and the whim and error of potential enemies,” he wrote in his report to the secretary of war, “but if we do we will be carrying the treasure and freedom of this great Nation in a paper bag.”

https://www.theatlantic.com/ideas/archive/2022/06/us-supply-chain-semiconductor-production-economic-warfare/661267/

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