Supply Chain Competition and All-Effects Warfare: Fundamentals of Strategic Advantage (Part 1 of 2)

By Thomas A. Drohan
Approximate Reading Time: 19 minutes

Executive Summary: In the hands of authoritarian powers, supply chains are systematically weaponized into broad warfare that subsumes democracies’ traditionally narrow military approach. This series analyzes supply chain competition, warfare, and strategy in two parts. Part I discusses fundamentals that set strategic parameters for achieving an “all-effects” advantage: globalization and protectionism; strategies of national security; incentives and risks; and political and technological change. This broad perspective on competition and warfare is necessary to implement the cooperative and confrontational competition prescribed in the US National Security Strategy. Part II identifies decisions and makes recommendations to combine superior “all-effects” using diplomatic, informational, military, economic, and social instruments of power. This integrative perspective is necessary to synergize strategic advantages derived from the US National Defense Strategy and sixteen other national security-related strategies.

Introduction

Supply chains are vital to military success and socio-economic well-being. They also are mechanisms where authoritarians confront and wage warfare, while democracies cooperate and compete. Why is this important?

In an information era where an increasing number of actors have access to more means of achieving significant effects, a great power needs to have a grand strategy. Compare the following three scenarios: (1) United States is cut off of investments and trade with Russia and Iran; (2) China’s cutoff of rare earth minerals to Japan; and (3) Russia’s cutoff of oil and electricity to Ukraine. When are these exercises of economic leverage and when are they acts of war? Authoritarian and democratic security strategies give different answers. Authoritarian economic competition is part of all-effects diplomatic, informational, military, economic, and social (DIMES) warfare that employs non-lethal and lethal means across any domain. In all-effects warfare, there is no self-imposed “short of armed conflict” competition. 

Democracies take a narrower “should deterrence fail” approach to warfare. Lethal effects are for when non-military actions fail. Such idealism has political appeal, but there is a cost: DIMES (i.e., diplomatic, informational, military, economic, and social) instruments of power are not integrated into the National Security Strategy. For instance, US military doctrine definitionally restricts hybrid warfare and armed conflict to violent means. Adversaries, meanwhile, freely combine cooperative and confrontational effects using any available psychological and physical means.

As a result, US joint all-domain operations activities stay in their military lane while broadly strategic adversaries achieve more effects via hybrids such as narrative warfare and economic competition. At the same time, US diplomats focus on cooperative effects, (e.g., persuade, dissuade, secure, and induce) rather than confrontational effects, (e.g., compel, deter, defend, coerce) seeking “cooperation where our interests align.”

ALL-EFFECTS WARFARE

(Author-created Graphic)

The result is a target-rich US national security policy of self-imposed no-go zones that adversaries exploit with all-effects warfare.

Predictably, authoritarian threats wage all-effects warfare below democracies’ self-inflicted thresholds of “wartime” responses. While the Trump administration invoked the Defense Production Act in 2017 (hurricanes) and 2020 (pandemic), the idea of building (and blocking) commercial supply chains for national security smacks of waging war for prosperity. That shatters liberal economic principles. The predicament for democracies is: how to develop superior effects?

This two-part article answers that question by focusing on a vital ingredient of strategic competition and complex warfare: supply chains. Supply chains provide a complex yet tangible focus on fundamental advantages of superior national security strategies.

What is a Supply Chain?

A supply chain for a good or service consists of everything from development to marketing to procurement-to-fulfillment and customer service. This broad scope includes buyers and suppliers, infrastructure, and regulations, all of which are competitive and strategic. Supply chains provide the logistics of warfare that make strategies more than wishful thinking. During so-called peacetime, supply chains develop through cooperative and confrontational competition, the rules of which are contested. Rules matter because supply chains create and destroy economic relationships that are the foundation of political and military power.

To account for the conceptual breadth of supply chains and draw conclusions for strategy, we analyze supply chain competition, warfare, and strategy in two parts. This article analyzes fundamental advantages of globalization and protectionism, strategies of national security, and incentives and risks. The next article will identify decisions and recommend integrative options to achieve strategic advantage.

Globalization and Protectionism

Contentious arguments still rage over how globalized and how protectionist competition should be conducted. The benefits of globalization today flow from the post-World War II order erected by a relatively un-ravaged United States. Since then, every US National Security Strategy has equated freedom, “the most contagious idea in history,” (National Security Council Report, 1950) with two founding economic values:

  • Non-discriminatory free trade: the World Trade Organization (WTO) lists fundamental principles for multilateral trade based on agreed rules: (a) equal opportunity for most-favored nation status; (b) freer trade via negotiation; (c) predictable, transparent commitments; (d) fair competition; and (e) development with reforms to accept the preceding obligations.
  • Discriminatory actors, however: (a) grant favors to selected partners outside free trade agreements; (b) construct non-negotiable barriers to competition; (c) conceal policies, practices, prices, and promises; (d) export below cost; and (e) accept trade concessions without reforming.

Fixed parity among dollar-based currencies: the dollar-based, convertible-to-gold standard that emerged in 1945 (Bretton Woods) was replaced in 1973 by a more flexible arrangement (Jamaica Agreement) to permit limited government interventions yet prohibit predatory manipulations. Today’s mix of free-floating, managed-floating, and fixed-peg currencies includes the International Monetary Fund’s basket for special drawing rights on its international reserve, which is comprised of the US dollar, euro, Chinese renminbi, Japanese yen, and British pound sterling. Strong currencies attract foreign investment; weak currencies promote exports.

Protectionism arose from these concerns under a banner of national independence. The movement has gained momentum despite the confrontational protectionism that proliferated between the two world wars: tariffs, quotas, trade blocs, and trade wars. Distrust among rivals reinforces desires for self-sufficiency as comparative advantage shifts to different areas. In open competition, climbing up the value ladder requires market-oriented integration. In protected competition, value-added integration is influenced by fears of over-dependence in critical sectors such as agriculture, defense industry, and health.

Protecting self-sufficiency incurs costs. Consumers in developed economies may pay less for goods, but also depend upon outsourced labor, inventory, and production. Expanding self-sufficiency, even within an alliance, risks political costs. Such as getting replacement parts for the Joint Strike F-35 fighter due to the reduced credibility (induced by Russian S-400 air defense sales) of a NATO supplier (Turkey). Not so clear cases include many that mandate “made in the USA.” Which supplies, food, raw materials, and energy sources should we pay more to secure this way?

In a competitive global environment filled with state and non-state actors seeking profit margins, market share, and influence, businesses constantly adapt. They create partnerships, invest in technology, move production and services, and hire/fire labor. Mandated protectionism would have businesses maintain legacy partners, satisfice with good-enough technology, keep production and services at home, and retain existing labor.

Discriminatory competitors have a solution: reap the rewards of interdependent globalization and independent protectionism at the same time. Some competitors discriminate systematically. When does illegal competition become warfare?

When Competition Becomes a Strategy of National Security

When competition becomes a strategy of national security, mutually legitimate competition is replaced by threats unrestricted by violence-based strategies of warfare. The combined effects of such “unrestricted warfare” can be cooperative and confrontational, often at the same time: persuade —dissuade; induce—secure; compel—deter; coerce—defend. This broad strategy can envelop a narrower strategy. Why?

Mutual threats are not identical threats when values vary. So, combined effects impose dilemmas that are not necessarily recognized as threats as we see today. Our “should deterrence fail” military approach to warfare focuses on winning battles of armed conflict rather than wars of cooperation and confrontation. At the same time, the spread of warfare into an all-pervasive information environment is expanding and evolving what constitutes national security. The result is a squeezing out of what is regarded as non-security-related competition needed to accommodate change.

In this environment, a key issue for supply chain security is how to protect the benefits of globalization without globalizing protectionism. Any state will try to free ride on globalization’s benefits. However, authoritarians impose protectionism to prevent competition that threatens their monopoly on power. Democracies protect globalization and negotiate protectionism as exemptions from liberal rules. Rules with the consent of the governed are the basis of a democracy’s legitimacy.

This difference in governance matches the difference in what constitutes a matter of national security. If we understand security as “the absence of threats to acquired values and the absence of fear that such values will be attacked,” then regime type matters very much.

From a comparative perspective that is limited here by space, we will examine one complex threat to western democracies: China. China is a major focus in the US National Security Strategy for 3 key reasons:

  1. China is one of the two authoritarian Permanent Member States of the United Nations Security Council. Any permanent member can veto a resolution or decision of the 15-member Security Council.
  2. China engages in discriminatory trade against every WTO principle mentioned above: (a) granting, de-granting, and buying favors via weaponized investment; (b) setting import quotas and initiating high tariffs (22); (c) concealing and stealing information; (d) dumping/re-routing dumped exports; (e) benefiting from WTO and WB membership while rejecting diversification, property rights, and reforms.
  3. China spews official disinformation while calling for reforming international governance. China’s strategic use of information uses selective evidence, faulty cause-and-effect, and false dichotomies to persuade targeted audiences that China is a blameless and benign model of global cooperation.

Since joining the WTO as a developing country in 2001, China insists on retaining that special status to identify and align with similarly victimized followers. Yet, that status includes seven of the ten most wealthy countries by per capita gross domestic product and purchasing power parity: Brunei, Hong Kong, Kuwait, Macao, Qatar, Singapore, and the United Arab Emirates. Now the second largest economy, China’s national security modernization includes globalizing protectionist supply chains.

Globalizing Protectionism

China globalizes protectionism in two ways: (a) large-scale industrial policy to enforce modernization priorities, state-owned enterprises and banks to consolidate supply chain control in key sectors; and (b) government-guided investment funds to leverage private capital from development to fulfillment. This end-to-end approach produces supply chains that strengthen China’s domestic industries, extract foreign technology, and induce deficit-ridden and commodity economies into dependence. Beijing also creates new organizations that enable manipulative authoritarianism. How?

The New Development Bank (NDB) (i.e., Brazil, Russia, India, China, South Africa) and Asian Infrastructure Investment Bank (AIIB) operate according to opaque relationships and rules. The NDB rules include equal shareholding and voting with China as the largest contributor. China has the greatest number of top 100 banks with twice as many assets than the US:

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The AIIB operates by consensus, with a China veto. The China Development Bank (CDB), established in 1994, is the world’s largest lender for development projects. CDB loan financing serves the Belt and Road Initiative (BRI) strategy’s construction of supply chains across Eurasia. Meanwhile, half of China’s international lending is not reported to the International Monetary Fund or World Bank, adding to developing countries’ hidden debt.

China’s financial clout is also manipulating democracies into self-imposing authoritarian policies. Take, for instance, the profoundly effective result of protectionist education. Ivy League universities “protect” students from China’s National Security Law with a warning about competing ideas: “this course may cover material considered politically sensitive to China.”

In this context of globalized competition and protectionism, supply chains have become   integrated for various reasons in non-transparent ways. Liberal-style integration refers to competition among producers, storage facilities, and transportation networks not of the same firm: vertical integration. China’s illiberal integration is the opposite of this: horizontal integration of Party-controlled enterprises. As a result, international partners in China’s military and civilian supply chains unwittingly contribute to China’s all-effects warfare. How?

First, supply chain complexity frustrates achieving visibility due to multifarious interconnections among production orders, inventory levels, capacity and utilization, deliveries, revenues, and lead times. Second, China’s “military-civil fusion” strategy (18-23) protects domestic control of economic, military, and social governance.

As supply chains have become more globally integrated with respect to cross-border trade, investment flows, and labor markets, China’s protectionist practices undercut transparency and trust. They subsidize, direct, and pressure public and private enterprises to create dependencies that can be leveraged.

For example, in February 2020 China threatened to cut off medical supplies and pharmaceuticals to the United States during the pandemic that started in and emanated from China – perhaps deliberately – then exploited. In March, the state-run Xinhua news media warned of banning medical supply exports to the United States. In May 2019, the state-run People’s Daily outlet threatened to cut off rare earth minerals to the United States to leverage trade negotiations. Recall that China slashed exports of rare earth minerals to Japan in 2010 in the context of a territorial dispute over the Senkaku Islands (Diaoyutai, according to Beijing).

The use of trade dependencies to compel behavior reflects Beijing’s confrontational approach to supply chain integration. China uses such protectionism to attack threats to autonomy and preserve authoritarian rule. With few shots fired, Beijing’s security strategies have been broad enough to envelop and render US all-domain military operations ineffective. How has this happened? By constructing broad advantages where democracies are less willing to go. To understand this, the next section discusses incentives for and risks of achieving advantage.

Incentives and Risks

Political-economic incentives boil down to increasing one’s relative power and prosperity. For authoritarians, the purpose is to create a “stability of limited or non-opportunity” that leverages influence over elites. Supply chain competition is politicized for advantage. Information such as supply schedules, inventory management, and distribution networks are closely held. Contrast this to pluralistic political systems, where “stability” is a dynamic of providing more opportunity to a wider variety of actors. Risks are spread out and contestable. Democratic accountability generates more publicly available information.

In authoritarian regimes, increasing power and influence requires reducing that of one’s rivals. The rules about what risks are imposed on and assumed by whom, are neither publicly accountable nor negotiable. So, in areas that China regards as strategic, such as territorial disputes and industrial policy priorities, advantage is not a win-win proposition. The single-Party state seeks to create a broad industrial foundation for win-lose advantages in prioritized industrial sectors: (a) equipment manufacturing, shipbuilding, automobiles, iron and steel, non-ferrous metals, construction, petrochemicals, light industry, and textiles; and (b) new energy, new energy automobiles, energy conservation, environmental protection, info tech, bio-tech, value-added equipment manufacturing, and new materials. Connected via opaque and complex supply chains, these capabilities provide some resilience.

State-owned enterprises and subsidized private conglomerates politicize supply chain competition to serve regime interests. Disinformation campaigns propagate the politics as national identity. For foreign businesses, it is a struggle to get reliable information. The challenge is to discern the informal relationships driving decisions and constituting trust.

Technological incentives for advantage are a bit clearer. The digitization of information expands connections and enables economic efficiencies, such as reduced transportation costs. From containerization to real-time tracking and predictive delivery, e-commerce and intermodal transfers are making trans-continental supply chains profitable. Automation of routines, such as inventory management, and the sharing of information, such as departed-en-route-arrived data, enhance functional integration. This reduces costs and broadens supply chains.

The same technology that enables communication across distributed supply chains also creates vulnerabilities that used to require a military operation to disrupt. Businesses and governments face an explosion of diverse threats such as cyber and disinformation attack, outsider-becomes-insider, and the theft of financial and intellectual property. These threats pose an extreme threat to commodity supply chains that make use of extensive automation to keep costs down. Non-disclosure agreements and standards of practice, such as the US government’s cybersecurity maturation model, can reduce risks of depending on technology and information.

Competition Becomes Warfare

Authoritarian politics and new technologies escalate supply chain competition into warfare.

China’s access to foreign-sourced resources are enabled by technologies that reduce transportation costs and require information sharing. To deal with the growing complexity of supply chains, technologies such as artificial intelligence, block chains, 5G networking, and quantum computing offer solutions. All of these require decisions about how much control over valuable information should be allowed and by whom.

Authoritarian politics cannot be separated from the use of technology. The 2015 Agreement between President Obama and Chairman Xi and endorsed by the G-20 prohibited commercial spying. As information technology expands China’s massive domestic surveillance, that agreement favors China. Internal controls over citizens and foreign businesses are not considered state espionage in China. Evidence that Chinese hackers and researchers are attempting to steal coronavirus vaccine information are consistently denied by China’s Foreign Ministry.

Instead, China’s Blockchain Services network promises to change the world by managing information securely with transparent, trusted information. Yet, the Party’s centralized control, massive surveillance, and persistent disinformation is the exact opposite of a distributed ledger that is trusted and secure because it’s an open peer-to-peer network. Trusting China’s distributed technology is problematic, but a huge domestic market with mobile apps is enticing partners with monitored alternatives to US-centered international banking transactions. As Beijing induces partners to adopt monitored apps and bans technologies with uncensored search engines, its coercive power strengthens.

China also manipulates external relationships and institutions to turn competition into warfare. Beijing uses the Eurasian Economic Union (EAEU) created by Moscow to reshape its own supply chains via selective free trade zones. As a result, Russia is becoming a country of transit points servicing the China market. Chinese arms imports from Russia, which used to comprise one-half of Russia’s total, are increasingly lower tech as Beijing copies Russian technology for its own exports.

Technology, governments, and businesses have a way of creating alternatives. Citing national security concerns, the US Government permitted a subsidiary of Google to open a direct underwater cable connection that avoids Hong Kong. Cyber security laws in China prevent the free flow of data, requiring in-country storage to enforce what is private and what is not. Based on that and ongoing Chinese information operations, foreign businesses have good reason to expect continued state-sponsored theft of intellectual property.

Other tech trends affecting supply chain access to energy and information are advances in tracking goods and services, and the containers in which goods arrive and depart. More visibility can enable businesses to prevent some of the surprise stack ups in ports during the coronavirus pandemic. Transit routes are shifting through the Arctic such that China regards itself as a “near-Arctic” state. The ability to gain insight into more aspects of multiple supply chains will drive infrastructure to develop more sources of supply. This insight, however, may not erase the costs incurred when sourcing from production or labor locations that are not lowest cost for the right match of product and labor expertise.

The struggle to compete against authoritarian practices brings us to the question, how can global supply chains be protected against entrenched discriminatory competition that constitutes warfare?

Challenges of Protecting Globalization

Discriminatory practices are not unique to China, but they are exceptionally non-negotiable. In supply chain language, systematic discrimination occurs as follows. China’s single-Party elites run the development and marketing of individual freedoms to retain control over competitors’ procurement-to-fulfillment efforts. As for customer service, it is highly selective. The entrenched continuity of this supply chain warfare is reinforced by Xi Jinping’s entrenched political position and ideological prominence.

Xi was “elected” unanimously by the National People’s Congress, a formality eliminated by a Constitutional change in 2018 that allows Xi to serve for life. His selection as Communist Party of China (CPC) Chairman by the Party’s Central Committee in 2012 guaranteed the Presidency anyway. Xi also is Chairman of the Central Military Commission, other key commissions and leading small groups (LSG):

Xi’s continuity is based on protecting authoritarian rights and suppressing any political opposition. Economic growth is paramount. Xi presides over strategic protectionism and infrastructure-driven development on a transcontinental in scale.

China’s authoritarian protectionism is here to stay. The roots include nationalism, predatory trade and finance, lack of competition, disadvantaged workers, and more broadly, societal differences with respect to adapting to change. Imperial China’s “century of national humiliation” included all of that. As a result, globalization based on agreed non-discriminatory practices is precisely the kind of change that China seeks to prevent. We see this play out in the incentives for integrating supply chains.

Supply chains regarded as legitimate competition operate according to economic incentives: profit, market share, and added value. In China, however, these factors are manipulated to achieve national advantage: enhancing corporate pricing with subsidies; foreign-targeted taxes and beneficial land-use policies; compelling foreign firms to divulge private intelligence and technology; coercing board of directors members; and inducing key executives’ resignations with anti-corruption charges. Where judicial systems are not independent of the executive branch, rule of law becomes elite rule by law.

Beijing’s active pursuit of leadership positions in international institutions are about protecting China’s political and economic interests. Chinese officials in senior posts at the World Bank, Interpol, United Nations Educational, Scientific & Cultural Organization (UNESCO), and International Civil Aviation Organization serve China’s authoritarian control:

Multilateral arrangements designed to protect members against outside competitors are vulnerable to China’s aggressive protectionism when divided. With huge capital assets, Chinese businesses buy out the membership’s debt and then take ownership of assets.

Toward ASEAN, China divides state interests to prevent unified positions on territorial disputes, oil pricing, and any official Chinese position. Toward Australia, for instance, China threatens boycotts after Canberra’s call for an independent inquiry into the origins of the coronavirus pandemic. Chinese cyber operations also protect Beijing’s predatory globalization by targeting foreign technology, “anti-China” activities, commercial information, and defense intelligence.

Toward Superior Strategy

The origins and impact of globalized and protected supply chains are important because they produce issues that become non-negotiable matters of national security. Authoritarian states are built to weaponize supply chains for national advantage. Democratic states compete unarmed by their narrow approach to warfare.

In the United States, a prevailing idealistic view of warfare fixates on “military” ends, ways and means. Institutionalized in laws of armed conflict, the focus is on gaining and maintaining a combat advantage. Combatants are defined in terms of “taking a direct part in hostilities” using armed means with lethal effects.

This view is not the “principled realism” called for in the US National Security Strategy. Rather, it is  a strategy subsumed by DIMES-wide competitors waging all-effects warfare. This shortfall in the fundamentals of advantage can be remedied with a broad approach to competition and warfare. An integrated strategy that combines effects can counter and defeat China’s all-effects warfare.  

In Part II, we will identify major decision points and recommend strategic integrative options for supply chain competition and all-effects warfare.

Brig Gen (ret) Thomas Drohan is Director of the International Center for Security and Leadership, JMark Services Inc. (securityandleadership.com). He formerly headed the Department of Military & Strategic Studies at the United States Air Force (USAF) Academy. He holds a PhD from Princeton University, an MA from the University of Hawaii, and a BS from the USAF Academy. Brig Gen Drohan’s publications include A New Strategy for Complex Warfare: Combined Effects in East Asia, and articles in journals such as Joint Force Quarterly and Defense Studies. His career includes combat rescue, airlift and anti-terrorism in East Asia, the Middle East, and Afghanistan. He is a Council on Foreign Relations Japan fellow and Reischauer Center for East Asian Studies scholar.

Disclaimer: The views expressed are those of the author and do not necessarily reflect the official policy or position of the Department of the Air Force or the United States Government.

(Featured Image Sources: (left) https://pixabay.com/photos/logistics-truck-container-plane-3382013/; (middle) https://pixabay.com/images/search/strategy/?pagi=2; (right) https://www.ft.com/content/2bd0b16a-0f51-11e5-897e-00144feabdc0)

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