The New York Analysis of Policy and Government continues its review of America’s endangered defense industrial base, and a major Department of Defense Report reviewing the crisis.
Looming larger than any other factor in the decline of the U.S. industrial base is China.
While multiple countries pursue policies to bolster their economies at the expense of America’s manufacturing sector, none has targeted the U.S. industrial base as successfully as China. China is engaged in economic competition with the U.S. over key sectors of the global economy, and China’s strategies of economic aggression and its complementary military modernization efforts are codified in its doctrine of civil-military fusion. By actively promoting the fusion of its military and civilian industrial and science and technology sectors, Beijing strives to reinforce the People’s Republic of China’s capabilities to build the country into an economic, technological, and military power while ensuring that overall control of these elements of national power remain firmly in the hands of the Communist Party of China. Since joining the World Trade Organization in 2001, China’s real gross domestic product has grown more than 300%, from $2.4 trillion in 2001 to $10.2 trillion 2017.72 During that period, U.S. real gross domestic product grew less than 40%, from $12.8 trillion in 2001 to $17.3 trillion in 2017 ).
China’s economic growth has, in turn, helped finance its rapid military modernization. In 2001, China’s annual military budget was less than $20 billion.73 By 2017, it exceeded $150 billion,74 second only to the U.S.
The Report emphasizes that “China’s non-market distortions to the economic playing field must end or the U.S. will risk losing the technology overmatch and industrial capabilities that have enabled and empowered our military dominance – even as China seeks to raise its military capabilities to U.S. levels.”
One of the Chinese Communist Party’s primary industrial initiatives, Made in China 2025, targets artificial intelligence, quantum computing, robotics, autonomous and new energy vehicles, high performance medical devices, high-tech ship components, and other emerging industries critical to national defense. In order to obtain the capabilities needed to support these advanced technologies, China relies on both legal and illicit means, including foreign direct and venture investments, open source collection, human collectors, espionage, cyber operations, and the evasion of U.S. export control restrictions to acquire intellectual property and critical technologies.
For example, China imposes conditional access to its domestic market to lure intellectual property, investment, and onshoring of manufacturing, using high tariffs and a complex web of non-tariff barriers, including restrictive customs barriers, burdensome licensing requirements, discriminatory regulatory standards, and local content requirements in government procurement to boost domestic manufacturing and production. China also uses forced technology transfer78 as a condition of access to the Chinese market.
In an attempt to dominate critical global markets and manufacturing industries, China leverages policy tools such as low interest loans; subsidized utility rates; lax environmental, health, and safety standards; and dumping to boost its industry. China also uses counterfeiting and piracy, illegal export subsidies, and overcapacity to depress world prices and push rivals out of the global market. It has implemented these tactics to capture much of the world’s solar and steel industries and intends to extend its dominance to other industries such as automobiles and robotics.
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A key finding of the report is that China represents a significant and growing risk to the supply of materials and technologies deemed strategic and critical to U.S. national security; a challenge shared by key allies such as Germany and Australia. In addition to China dominating many material sectors at the upstream source of supply (e.g., mining), it is increasingly dominating downstream value-added materials processing and associated manufacturing supply chains, both in China and increasingly in other countries. Areas of concern to America’s manufacturing and defense industrial base include a growing number of widely used and specialized metals, alloys and other materials, including rare earths and permanent magnets.
China is also the sole source or a primary supplier for a number of critical energetic materials used in munitions and missiles. In many cases, there is no other source or drop-in replacement material and even in cases where that option exists, the time and cost to test and qualify the new material can be prohibitive – especially for larger systems (hundreds of millions of dollars each). From commodity materials to rare earths, Chinese investment in developing countries in exchange for an encumbrance on their natural resources and access to their markets, particularly in Africa and Latin America, adds an additional level of consideration for the scope of this threat to American economic and national security.
China’s capture of foreign technologies and intellectual property,109 particularly the systematic theft of U.S. weapons systems and the illicit and forced transfer of dual-use technology, has eroded the military balance between the U.S. and China. Such transfers aid China’s efforts to gain a qualitative technological advantage over the U.S. across key domains, including naval, air, space, and cyber.
China’s aggressive industrial policies have already eliminated some capabilities with critical defense functions, including solar cells for military use, flat-panel aircraft displays, and the processing of rare earth elements. China’s actions seriously threaten other capabilities, including machine tools; the production and processing of advanced materials like biomaterials, ceramics, and composites; and the production of printed circuit boards and semiconductors
As part of China’s One Belt, One Road doctrine to project Chinese soft and hard power, China has sought the acquisition of critical U.S. infrastructure, including railroads, ports, and telecommunications.
China’s economic strategies, combined with the adverse impacts of other nations’ industrial policies, pose significant threats to the U.S. industrial base and thereby pose a growing risk to U.S. national security.
The Report concludes Monday
Illustration: China Map (U.S. State Department)