Author: Thomas Drohan
Estimated Time to Read: 21 minutes
Executive Summary: Our previous article on supply chain competition and warfare explained how political, economic, and security issues unleash and restrain strategies of competitive advantage. China is waging all-effects warfare. Meanwhile, democratic states and the US compete with a self-imposed disadvantage: inferior operating strategy at the strategic level of significance. How can we compete and when necessary, wage superior complex warfare in kind?
The United States is in a fleeting privileged position to decide what level of autarky it needs yet also compete in an interdependent global economy. Most states do not have the luxury of selecting self-sufficiency and growing the economy in a competitive global system. Of the 200 or so, about 40 are developed while the rest are emerging. As more people see the world economy splitting into Western-led and China-led spheres, leaders face three broad decision points crucial to supply chain competition and warfare: (1) diversification and leverage; (2) energy and transportation; and (3) leadership and capital.
Diversification and Leverage
Supply chains are power relationships among suppliers and buyers in which size matters. Large purchasers—companies or governments—can diversify suppliers to increase leverage. In a competitive market, bargaining leverage can build resilience. Large suppliers with authority over entire national industries change this dynamic. Owned or controlled by the Party, China supplies rivals with critical resources and products to gain leverage. Beijing’s supply chain warfare is widely mistaken in the United States as unfair competition if armed force is not involved.
China’s large-scale diversification of ports and trade routes are about controlling supply chains rather than adding value for local development. The Party’s approach is to fund, own, or control infrastructure as in a wartime economy. Democracies tend to finance diversification of transportation providers and protect them from armed attack.
As China’s income levels rise, however, democracies expect skilled labor and performance standards to add more value to be competitive. Unfortunately, that peacetime logic does not apply to the current regime in Beijing, which seeks to eliminate competition via “unfair” pricing, exclusive access, and non-transparent deals.
The Trump administration‘s response to China’s trade war with the US, born of frustration with unfair competition and systematic theft, has increased incentives for diversification by raising costs of doing business with China. Thirty-one firms including Apple, Google, IBM, Microsoft, and Cisco have formed an alliance aimed specifically at eliminating dependence on “a single vendor with a closed proprietary system” — China’s Huawei. Small businesses with less cash account for 40% of US GDP, but have less options. Diversification is likely to be gradual as governments deficit-spend their way through the pandemic.
In the United States, even with low interest rates and incentives to onshore more infrastructure, there is resistance to diversification. Pandemic shutdowns scatter specialized labor. With over 50,000 small businesses supporting the Department of Defense (DoD, Chinese vendors such as Huawei, ZTE are standing by to buy. In addition, small businesses seek cash flow to survive, wherever that cash comes from, and lack visibility into complex supply chains. The National Defense Industrial Association and the Professional Services Council want a year extension to a US federal government ban on five Chinese companies for both of these reasons.
As US government programs spend $6 trillion and counting, much of that debt is financed by China’s purchase of US government securities ($1 trillion). Few US businesses can sell factories in China at a loss.
Energy and Transportation
Every supply chain is run on energy sources. US dependence on foreign energy is decreasing, but the price of shale oil is still higher than Middle East oil. If US policy and business leaders want to use domestic oil for internal consumption rather than pay less for foreign oil, transportation costs will increase. An alternative to that is exporting US oil, which means allowing market forces to determine the distribution of energy … again. The consequences include relying on authoritarians’ oil.
As Northeast Asia’s dependence on China increases and parts of Europe become moored to Russian oil and natural gas, US oil can compete in these markets. Advantages include resource exploitation with environmental protection, the ability to track-onload-transport-offload, and reliability in meeting customer expectations. Investments in transportation are critical to securing the flow of energy unobstructed by Chinese supply chain warfare.
China’s territorial expansion and militarization of supply chains is three-pronged: (1) through the Taiwan Strait and East China Sea toward Taiwan, South Korea and Japan exclusive economic zones; (2) through disputed territory in the South China Sea, toward the Malacca Strait and Indian Ocean; and (3) westward overland into India-claimed territory. With rising energy demand, China’s interests in securing energy flow and defending its expanding claims of sovereignty are on the rise.
For states that distrust China’s intent, shortening supply chains closer to end customers makes sense to avoid the risks created by China’s territorial unilateralism above. The trend began before the COVID-19 pandemic as corporations sought resilience. Small businesses, however, must go where skilled labor costs are low compared to transportation costs.
A globalized US economy that is engaged in international institutions is critical to generating alternatives to dependence on China. Even shorter supply chains require developing relationships and procedures to protect them from global attacks.
Leadership and Capital
Leadership is also a competition. China’s leaders make decisions to promote self-sufficiency and increase competitors’ dependence on their protected industries. There are 18 emerging economies that have experienced growth rates that achieve upper middle income status over a 20
– to 50-year period. That is where a global recovery of manufacturing and trade will be contested. Proactive investment looks at the timing of growth cycles. To act upon market opportunities such as low currencies and price-to-earnings ratios, globalization must be protected. The existential threat to doing this is the globalization of protectionism. Every country has protected sectors, but China’s protectionism is authoritarian, globalized, territorial, and suffused with disinformation. We see the oppressive influence most prominently in emerging markets.
China’s approach to the emerging markets is to buy debt, then purchase capital assets. Distress-buying serves China’s state-subsidized domestic overcapacity, which protects its markets while seeking others. With 60 million Chinese employed by state-owned, collective-owned, and private enterprises, Beijing needs high rate economic growth to stave off political unrest.
This approach contrasts to that of the International Monetary Fund (IMF) and World Bank (WB): restructuring debt payments in return for domestic policy reforms. Particularly for emerging economies vulnerable to authoritarian corruption, China’s elitist model becomes an acceptable alternative to implementing conditional reforms. .
This pattern is likely to replay in the aftermath of the current pandemic. We know China’s supply chains are well integrated into the global economy and backed by a growing military presence. Less certain is China’s territorial and credit-fueled economic expansion, whose municipality deficits are hidden. China’s protectionism aggression presents a challenge for democratic alliances to exert leadership in capital formation.
The Need for Combined Effects
US business and government strategists face tradeoffs and dilemmas. Diversification of supply reduces leverage over suppliers, unless an organization is large enough to influence terms. In energy and transportation, there is a dilemma of seeking either autarky or interdependence. The former risks an isolated, uncompetitive economy, while the latter reduces national control. Leadership requires capital for credible guarantees, but massive capital does not require responsible leadership.
The world is a mix of protected globalization and globalized protectionism. Decisions made by the governments of the largest two economies can heavily influence the balance. The strength of the US dollar as the international currency of choice guides financial flows through US markets. To the extent that US tariffs against unfair traders such as China protect fair trade, they protect rule-based globalization.
In contrast, China’s practices are characterized by opaque information sharing, dark supply chains, predatory lending practices, and economic threats to coerce political compliance. A coordinated disinformation campaign claims openness while tariffs, subsidies and currency manipulation normalize unfair trade. Passive acceptance of these practices is globalizing protectionism. To compete, US political, professional, and business leaders need to generate superior combinations of effects.
Strategic Integrative Options
Supply chains are becoming integrated in complex ways even as states take measures to safeguard them. Permanent decoupling from China is unlikely as some states seek alternative supply chains closer to home. What can be done?
The following four recommendations enhance supply chain competitive advantage if their effects are combined:
- Lead economic transformation of the Americas
- Integrate diplomatic-economic engagement and information-led military effects
- Adjust costs & benefits of protectionism and globalization
- Shape rules of international competition
Each recommendation includes two integrative options: [Option A] Integrated Competition to counter all-effects warfare from China; and [Option B] Horizontal Escalation into all-effects warfare to subsume that of authoritarians such as China.
I. Lead economic transformation of the Americas
[Option A] Promote hemispheric integration of specialized supply chains for competitive advantage, expanded employment, and overall growth with common health and safety standards.
The Americas have potential with respect to industrial capacity and governance to create the kind of transcontinental scale and efficiencies that Eurasia presents China. The challenges in Latin America are acute, as noted by R. Evan Ellis: underfunded health care; high debt; low liquidity; major defaults; and mass protests. Canada is the largest consumer of US goods, more than China, Japan and the UK combined. Mexico is our second largest consumer, with 40% of US imports from Mexico made in the USA. The North American Free Trade Agreement, replaced by the US-Mexico-Canada Agreement, transformed Mexico from protectionism to freer trade while Canada and US trade tripled.
More trade and investment in higher paying jobs, however, does not create competitive advantage. Superior combinations of effects are needed to gain market share over competitors. Such as inducement & persuasion and deterrence & defense: inducing demand while persuading brand loyalty; and deterring market entry while defending quality. Each effect targets customers and competitors, respectively. Without effects-oriented strategies, economic growth benefits China’s all-effects warfare. Option A may simply hand over relative gains over to authoritarians. Hence the need for Option B.
[Option B] Envelop China’s predatory economics, political pressure, and military presence in the Americas.
China is the largest trading partner of the United States but direct investment has declined for both sides since 2017. In 2018 China committed to strengthen enforcement of intellectual property and improve access in agriculture and financial services. Instead, cyber theft, discriminatory licensing, and strategic acquisition of US assets continued. China is also Canada’s second largest trading partner, but there is still no Canada-China free trade agreement. China’s investment in Canada is mostly state-owned rather than private, and has plummeted as Canadian concerns over strategic takeovers have risen. In Latin America, China’s trade and investments have soared. Easy loans and failed projects feed corruption, result in mergers and acquisitions of local corporations, coerce contracts, and pressure governments to adopt pro-China policies. In addition, equipment and weapons sales generate military exchanges and regional hosting of operational missions. All while the sale of domestic surveillance equipment funnel data to Beijing.
Both Option A and Option B are likely to be needed and present a three-part challenge: (1) education and employment; (2) defense and diplomacy; and (3) effective market dominance.
1. Education and Employment
Education and employment can be a sustaining advantage if driven by academic, professional, and vocational learning. Academic exchanges and scholarships, think tanks, and democracy centers can deconstruct Confucian Institutes’ propaganda, reveal disinformation, and expose environmental destruction. The Department of Defense Perry Center for Hemispheric Defense Studies and the US Southern Command Conference Center of the Americas provide opportunities for developing strategies solve with whole-of-government solutions. Expanded access to a greater variety of quality higher education can promote productivity and innovation.
Returns on investment are not just income; it is also about influence. An individual’s income ROI from a Latin American university, professional institute, or tech training center (22) is highest in engineering, law and science. This incentive is also an opportunity for US-funded student assistance to cultivate democratic values with technical skills. Investment in long-term develop projects is also an opportunity to compete with China’s equity influence being sold as benign.
In North America, Mexico’s export-dependent economy requires inclusive growth to fund national infrastructure, educational access, and law enforcement. Strengthening the US-Canada Innovation Partnership can leverage development of software, information technology, transportation infrastructure, and the services industry.
Networks of technology alliances with innovative startups, corporations, and higher education have no geographic limits. Technology is inherently educational and disruptive, with competitive advantages flowing to learnable labor markets in growing economies.
2. Defense and Diplomacy
Defense cooperation in Latin America is driven by US Southern Command’s three lines of effort: (1) strengthen partnerships for security, governance, and economic opportunity; (2) counter narcotics, transnational crime, and illicit trafficking; and (3) build an educated, trained, and healthy team prepared for steady state and crisis operations. To envelop China’s pol-mil-economic warfare, these efforts should include military education, exercises, and operations that consider all appropriate effects. As illustrated in Part 1 of this two-article series, all-effects warfare includes four spectra of cooperative and confrontational effects: (1) dissuade-persuade; (2) secure-induce; (3) deter-compel; (4) defend-coerce. These effects may also be described in terms of diplomatic, informational, military, economic and social instruments of power.
US-Canada defense relations should also be expanded and unified, building on the Tri-Command Vision among the Canada Joint Operations Command, North American Aerospace Defense Command, and US Northern Command. The vision’s five goals are largely reactive: (1) detect, deter, defend against, and defeat threats; (2) unity of effort; (3) collaboration and cooperation; (4) intelligence and information sharing/fusion; and (5) support to civil authorities. Coordinated information operations can develop actionable intelligence for more proactive effects.
Deep collaboration among these activities would fall under the direction of each US Ambassador or Chief of Mission who leads the US Country Team. This would also deepen civil-military ties among American leaders. That foundation would set conditions for defense and security to guide like-minded partners.
Here are eleven expansions of desired effects with which US leaders and strategists can speak a common all-effects language for integrated planning. The effects integrate the narrower Defense Strategy with the broader National Security Strategy:
3. Effective Market Dominance
Dominating the market with superior effects requires finances plus leveraging DIMES advantages. Chinese investment is greater than USAID and the Inter-American Development Bank combined. US foreign aid, only 1 percent of the US federal budget, is underfunded despite its holistic effectiveness. Foreign military sales (FMS) and direct commercial sales, however, dominate that from China and support diplomatic, economic, and military effects in two basic ways: (1) defense products and services are designed to out-perform competitors, and (2) export licenses and proprietary agreements are monitored to advance long-term objectives. Therefore, even if the US is unwilling to match China dollar-for-renminbi, FMS technology cultivates US political, economic, and social advantages.
II. Integrate diplomatic-economic engagement and information-led military effects
[Option A] Stronger commitment to US alliances in Asia, North American Treaty Organization (NATO), Association of Southeast Asian Nations (ASEAN), and the European Union (EU) is needed to compete with China’s supply chain (Belt & Road Initiative) inroads. US military capabilities need to create diplomatic effects, enhance a strategic narrative, and build infrastructure.
Consider the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The agreement expanded after US protectionism killed its predecessor, the TPP. Unless the United States participates in this agreement or offers a competitive replacement, US diplomatic, economic, and military activities will not be positioned for epic Eurasian integration.
For instance, the effectiveness of a US military presence in support of ASEAN assertiveness against China’s illegal territorial claims is undermined by uncompetitive economic engagement. Even the Philippines, a US ally which won a decision by an international tribunal rejecting Chinese claims on Filipino territory, continues to participate in infrastructure projects with Chinese companies enabling such illegal territorial expansion.
DIMES integration is crucial because security relationships in the Indo-Pacific are exceptionally dependent on supply chains for military deterrence and defense. Information-led technology, vital to maintaining military advantage, requires logistics to deliver effects. The integrated distributed combat force is the latest technology promising unprecedented operational integration for high-end fights. This is insufficient. Strategic integration wins all-effects wars.
With shorter supply chains providing interior logistics, China’s influence benefits from any US disengagement. The United States must expand trade and financial ties, or China will extend its predatory lead as the largest trading partner of US allies—Australia, New Zealand, Japan, the Philippines, and Thailand.
[Option B] Expand military cooperation to create new DIMES effects. Extending the integrated distributed combat force to the “alliance” could yield powerful effects on (a) the coalition and (b) China:
- Diplomatic: (a) compel alignment for or against China; (b) encourage Taiwan independence; induce North Korea support; encourage India expansion
- Informational: (a) persuade unity and dissuade division; (b) compel nationalism; encourage separatism
- Military: (a) deter and defend against incursions; (b) deter and defend against incursions; coerce coalition defections
- Economic: (a) secure technology transfer, credit, and trade; (b) induce trade and credit losses; coerce contracts
- Social: (a) persuade support and defend against protests; (b) compel and coerce Party compliance
III. Adjust costs & benefits of protectionism and globalization
[Option A] Incentivize selective protectionism for national security technology, infrastructure, food, and health.
A National Security Council that speaks a common all-effects language and organizes a permanent staff to identify when to protect which supply chains. Considerations include risks, vulnerabilities, and the full range of effects from compellence to coercion.
Government-induced incentives can re-scale supply chains, as in the pharmaceutical industry after Chinese officials threatened to cutoff medical supplies. This triggered rules-based, regulated protectionism. The costs of over-reliance can be specified, funding determined, then budgeted and supported by taxes and/or debt. As benefits are generalized throughout society, paying the costs will be contentious. Beneficiaries’ incentives are to free ride as others subsidize costs. An expanded permanent national security staff can recommend cost-benefit solutions that balance protectionism with globalization.
In contrast, China’s approach has been described as “distributive globalism” (107). The benefits of protectionism and globalization are not transparent but are concentrated. Costs are not specified but are distributed. So, the benefits of a project, such as a hydroelectric dam, flow to elites making the agreement. Significant costs of the dam, such as downstream disruption of agriculture, are borne by others, not China. This moral hazard of foisting the consequences of non-transparent agreements on to others promotes secret deals, corrupt processes, and authoritarian control.
By incentivizing selective protectionism via government inducements, democracies can compete with China’s distributive globalism by leveraging secure technological advantages. Democracies must enforce rules that regulate secretive agreements. Otherwise, China steals technology and strikes illegal agreements to capture market share defended by protected supply chains.
Selective protectionism of technology does not work for long. Effective, integrated strategies are needed to sustain advantage. By knowing what is critical to a competitor’s system and less so to one’s own, strategists can identify changes to create near-, mid-, and long-term advantages. To prevail in this realist struggle, participants need to at least speak a strategic language that recognizes broad competition and warfare.
[Option B] Adjust protectionism and globalization to create advantages in multiple contexts.
We know that protectionism costs more than globalization from a financial profit-seeking point of view. However, the political-economic costs of too much dependence include: (a) consequences of being coerced and compelled into less market share or policy positions; and (b) less shareholder value and the imposition of authoritarian values.
Some costs are more important than others, so leaders must set priorities. The debate over regime type and economic growth is a long-standing one. Whether China’s model of socialism with Chinese characteristics—fascist capitalism—can outperform liberal capitalism is influenced by strategy. If we assume that economic growth drives political and military influence, we need a strategy that generates value-added products and services better than the competition. This implies using less resources for greater effects.
Given the complex warfare waged by China, we need a strategy that protects relationships we want to be independent (e.g., nuclear weapons production), and globalizes relationships we want to be interdependent (e.g., proprietary trade and finance).
A new way to assess the impact of protectionism and globalization on national security systems is the ratio of required resources to combined effects. This method is different from the current practice that considers the ratio of resources to capabilities. An example of the latter is “enhancing expeditionary logistics with emerging technology,” the purpose of which is to have systems that are lethal, agile, and survivable. To go further, technology should develop missions with the logistics to create superior strategic effects.
For instance, ensuring that an amphibious assault force is lethal, agile, and survivable relies on integrated air and sea power to provide a decisive combat advantage. Compare the strategic effect of seizing beachheads and moving inland to other means. Assume the desired strategic effect is to coerce the removal of a Chinese force occupying disputed maritime territory. The cost of resources to maintain secure supply chains for an amphibious assault is much higher than that required to conduct precision air strikes. Both options require the destruction of Chinese forces. Both risk vertical (e.g., violence) and horizontal (e.g., economic) escalation. The type of protectionism it takes to secure amphibious versus airpower capabilities needs to be part of our strategic calculations. Instead, current US government practice is to maintain critical technologies lists to control exports. This is an ad hoc, unintegrated, non-strategy of protectionism and globalization.
Therefore, supply chains need to be adjusted to provide capabilities that create both military and broader security effects (Table 1). The ratio of resources to desired effects in situationally different contexts should inform engaged leaders how protectionist and how globalist supply chains should be.
Doing that requires public-private partnerships to increase supply chain transparency, identify vulnerabilities, collaborate on technology strategy, and implement competitiveness. From a corporate perspective, protected supply chains means government regulations that inhibit international competitiveness. From an all-effects perspective, business-to-business (B2B) cooperation with protected supply chain segments facilitates China’s all-effects warfare.
IV. Shape rules of international competition
We can wish for an effective blend of protectionism and globalization, but the choices are constrained by prevailing rules of international competition, for those who follow them. Domestic restraints can become international constraints, as in our “should deterrence fail” approach to warfare. This strategy gap requires strong US engagement in international institutions to shape and collaboratively enforce transparent rules.
[Option A] Commit to international institutions as influence space for cooperation and confrontation. Compared to national governments’ exclusive sovereignty, multilateral institutions derive their influence from membership. Each member may have one vote in the United Nations General Assembly, for instance, but each has unequal power in many other aspects. Supply chains tend to be nationalistic, subject to protectionism. Each country pursues a mix of protectionism and interdependence. The prevailing mix matters because international influence follows economic growth, advanced technology, and military power.
In that context, states attempt to set standards for international finance and trade (see study on 5G). As authoritarian states seize physical territory, they cannot be trusted to restrain themselves from seizing market share with mercantilist practices. Absent US and other democracies’ engagement and enforcement, any rules of cooperation and confrontation are likely to be determined by authoritarians. As China replaces rules with ruling, economic warfare becomes globalized.
For instance, China refuses reciprocal third party audits of its stocks despite a 2013 agreement and while US investors lose billions to Chinese fraud. In 2019, a surprise attempt by Hong Kong Exchange and Clearing to buy out LSE was blocked by the latter’s management board. Given China’s record of broken WTO commitments, it’s reasonable to regard such practices as financial warfare.
Shaping the rules of institutions can only go so far without the leadership of the world’s largest economy. A change in strategy is needed. A feasible approach is to reform international institutions to protect globalization with rules that negotiate protectionism.
[Option B] Collaboratively reform international institutions with rules of protected globalization.
Reforming international institutions requires continuity in managing a coherent set of national security effects. The following three recommendations form a synergy of effort:
- The US National Security Strategy should prioritize prosperity (NSS goal #2) as goal #1. A growing economy is required as the competitive foundation for the other three goals (protect the homeland, peace via integrated power, advance influence).
- To achieve goal #1, the US should propose establishing new international rules for negotiating protectionism. The current context of authoritarians waging complex warfare calls for a full US commitment to reforming the World Trade Organization (WTO), as difficult as that long-standing process has been.
- To promote rules-based competition that accommodates change, the US should cooperate with and confront China and Russia in collaboration with allies and partners. With the previous recommendation, this effort can form a persuasive strategic narrative.
Four recommendations have now been presented to create supply chain competitive advantage: (1) lead economic transformation of the Americas; (2) increase diplomatic-economic engagement and information-led military effects; (3) adjust costs and benefits of protectionism and globalism; and (4) shape rules-based competition.
Each recommendation contains two basic options: (A) supply chain competition, and (B) supply chain warfare. If implemented together, any combination of the four options creates political commitment and economic inducements for an overall combined effect: (1) broad integration of American supply chains, and (2) globalization with transparent protectionism.
American supply chain integration can compete with, moderate, and prudently participate in China’s economic expansion. US engagement in multilateral institutions can lead transparent negotiations that admit protections for member states.
Because supply chains tend to be nationalistic or nationalized, US values and interests support an open rules-based trading system backed by negotiations for free and fair trade. Negotiating is also a spectrum of competition to achieve desired effects.
So far, the US is not waging Option B, crippling our ability to prevail in the relevant battlespace.
The main reason for this is a narrow approach to warfare that cedes non-military arenas of confrontational competition to opponents. As a result, areas of military superiority are made irrelevant, subsumed by broader strategies of all-effects warfare. Moreover, China’s competitive advantage fuels military modernization already superior in shipbuilding, land-based conventional and cruise missiles, and integrated air defense (ii).
Beijing’s attacks orchestrate disinformation campaigns, undercut outside investors, construct/seize then militarize disputed territory, brutalize human rights, and create supply chains that restrict foreign competition. Taken holistically, there is an authoritarian synergy: nationalistic narrative; corrupt finance; territorial expansion; domestic control; and protected supply chains.
To defeat authoritarian threats in this strategic arena, democracies need to be armed for DIMES-wide 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. POC firstname.lastname@example.org
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.
Social Media Caption: By recognizing supply chains as arenas of competition & warfare, we develop two superior US strategic options toward China: (1) integrated competition to counter all-effects warfare; (2) horizontal escalation to subsume all-effects warfare.