SPEECH: The Naval War College Foundation Symposium
Good morning. It is an honor to speak to you today at this important symposium. I am a great admirer of the Naval War College and have several friends who received an important part of their training at this institution. Thank you all for your work for our country. Americans are safer because of your service. I would also like to thank the foundation for its essential contribution to the college.
This concept of integrated deterrence in a multipolar world is an interesting one and I look forward to learning more about this today. But I certainly am no expert on the military aspects of preparation for war or other similar elements of deterrence. Rather I want to ask you to think about this concept in a broader way. Should not the economic posture of the country be part of this integrated deterrence? Is not our ability to manufacture the products that are essential to this deterrence a part of this integration? Is not the general ability to manufacture across our economy in the long run also important to deterring aggression. Of course, our ability to maintain technological superiority in the defense sphere is essential but is that not, in part at least, dependent on our general primacy in technology and manufacturing? It is no surprise that the country with the best manufacturing capability and the most advanced technology is in a better position to prevail in a conflict and thus can more effectively deter one.
But first, let's go back to basics. I believe there is general agreement in this room that when we talk of deterrence it is most importantly the Chinese Communist Party who we need to deter and that it is a dangerous increasingly aggressive adversary of the United States. Indeed much of our defense posture is based on this understanding. It has built up its military to challenge us in ways that you all understand far better than me. It has the largest army in the world and the largest navy and it continues to grow them. There are not a lot of examples in history of a totalitarian regime building up its military and then not using it.
Further China seems to be increasingly aggressive. It tries to intimidate our navy ships in international waters and endangers our pilots in open-air space. It has militarized the South China Sea in ways not seen since the second world war. It has increasingly threatened Taiwan and has sent its navy ships around Japan. Just a few days ago its warships were part of a flotilla with Russian ships off the coast of Alaska. It undoubtedly signed off on the Russia invasion of Ukraine and is likely supporting it now. Its diplomats or so-called “wolf warriors” act against US interests around the world. It sent a spy balloon across our country violating our sovereignty. It builds military outposts far from home in Africa and even in Cuba.
We have recently been reminded of China’s belligerency when a few days ago two US navy sailors were arrested for espionage. The US attorney in that case said “China is unrivaled in its audacity and the range of its malign efforts to subvert our laws”. The FBI opens a new Chinese espionage case every few hours and has thousands active right now. Almost all the fentanyl that kills tens of thousands of Americans every year comes through Mexico from Chinese precursors.
Finally, China’s own words increasingly show its hostility to American. It talks of “preparation for the struggle” and “changes not seen in 100 years”. While our secretary of state was visiting Beijing, its president was in another part of China giving a speech to his troops telling them to prepare for war.
You know all of this but I think it is important to remind ourselves of the nature of this relationship when thinking of solutions. I fear that those who propose half measures don’t understand the gravity of our situation. They don’t really believe that China is an existential threat.
Clearly strategies and hard power preparation for conflict are essential but I think we also need to change our economic relationship. For at least the last few decades China has been waging an economic war against us and they have been winning. Since the 1980s, Chinese government policies have intentionally aimed to steal American technology and displace American industrial capacity. Indeed their entire economic model centers on co-opting foreign technology to modernize their industrial base. They employ joint venture mandates, technology transfer requirements, massive targeted subsidies, widespread cyber theft and industrial spying. They also use the usual mercantilist policies of currency manipulation, maintaining a closed market and restrictive regulatory schemes. Through these nonmarket and unfair practices the Chinese Communist Party has built by far the world’s largest manufacturing economy.
Another result of this policy is the accumulation of massive trade surpluses. Our year-after-year trade deficits with China transfer trillions of dollars of American wealth to Chinese companies and ultimately the Chinese Communist Party. In 2001, China’s GDP stood at $1.3 trillion while ours was $10.6 trillion—12%. Twenty years later their number was $17.7 trillion and ours was $23 trillion—78%. They are rapidly catching up.
Over the same period, China’s annual trade surplus with the United States grew from $80 billion to about $340 billion. During a 20 year period, the United States imported over $6 trillion more in Chinese goods than it exported to them. And these are just the official numbers. The likely real number of our annual wealth transfer is much higher, particularly if you factor in the value of the stolen technology which has been estimated to be $300 billion per year, the amount of Chinese products transshipped through other countries and the effects over time of compounding on these wealth transfers.
So it is fair to say that American dollars created this great industrial base and this threatening military. Modern Chinese companies are dominant players across the global value chain. They are market leaders for strategic goods like nuclear power plants, commercial ships, lithium-ion batteries, critical minerals, steel, aluminum, and much more. Chinese control of these industries feeds into the growing modernization of the Chinese military, which now leads the world across many crucial military capabilities including air defense systems, cruise and ballistic missiles, and naval shipbuilding.
A wise man once said once said that failure is not fatal but failure to change might be. I submit that part of a broad deterrence must be changing this economic relationship. It makes no sense to prepare for a possible war with an adversary while at the same time paying for its army, its navy and its technology. We need a clear policy of strategic decoupling.
By this I do not mean that we should have no economic relationship. I just mean changing it so that it favors America and our allies. To me strategic decoupling means putting in place tariffs on Chinese goods to bring about balanced trade to stop the wealth transfer. If they buy $150 billion in goods from us, we should do the same from them. It also means dis-entangling our technology through export and import restrictions. We should develop new technology at home or with our allies. Finally, it means regulating inbound investment from China and outbound US investment to China to assure that both are in our national interest. Such a policy would need to be clearly articulated and phased in over a period of years.
This process really was begun in the Trump administration when we put tariffs on $370 billion of their imports, notably on their technology exports to us, and initiated far reaching export controls. This has reduced our dependence on them. It forced our companies to bring some manufacturing home or shift it to other friendly countries. The world did not end, as many predicted. Companies adjusted and the trade deficits in these important products went down. To its credit so far the Biden administration has followed these policies. It is now time to take the next steps toward strategic decoupling.
By the way, one side effect of this strategic decoupling would be increasing our economic relations with our allies and thus strengthen our alliances. Shifting the source of our imports from China and to Europe, Japan and India would have multiple geopolitical benefits. It would also have a stabilizing effect in our own hemisphere if we shifted the source of imports from China to Mexico.
Another way to think about this is that I propose a policy toward China that is very much like the policy that China has toward us and indeed the rest of the world. They organize their economy so as to continuously run huge unprecedented trade surpluses.
They only import products that they feel they need and only for as long as needed. They have a very clear policy that they believe will lead to technology independence as well as dominance. All substantial inbound investment is assessed by the government so that it is in China’s interest. If you are investing there, it is because the government has determined that it will net help them achieve their goals. The same is true of investment from China here and in our allies. It is all strategic and part of their plan.
The CEO of Raytheon our second largest defense contractor recently said that while his company closed its factories and pulled out of Russia in two weeks after the invasion of Ukraine, they could not do that with China. He said it was “too big, too important and too necessary to the US economy”. He said it was impractical to move supply chains out of China. Raytheon was quote “de-risking” which he described as finding secondary sources for critical components. I am sure that what he said is true but what does that tell you? It tells you that the US defense industry can’t operate independently of China. If we believe that they are an existential threat and a global adversary, shouldn’t we begin to change policy so that this is not the case in, say, five years? If you have a lethal vulnerability, shouldn’t you do something to eliminate it?
This notion of “de-risking” deserves a closer look. It is the answer from some in the current administration and from many in business to the obvious problem of dependence on China for critical supplies and material. Let’s not change the economic relationship, they say.
Let’s just have a Plan B, if we get into a war and China cuts us off. But this is unrealistic. First, these secondary sources of critical supplies will take time to scale up to meet the new demand if China acts. Second, the logistics of that transfer of business would be unfathomably hard in a time of war. And third, as technology develops around these critical inputs that development will take place where those inputs are currently produced, that is in China. How does a secondary source keep up?
Why not just make the change now, if these secondary sources exist? To truly de-risk these companies need to begin the process of changing immediately.
It is fair to ask, if those who resist so obvious a proposition truly understand the current danger? Is the real reason that these companies, even US defense companies, want to avoid shifting supply chains back home or to allies merely a question of cost? Is it really just that it is cheaper to rely on the very adversary that all of you are trying to figure out how to beat in a war? Is it just corporate profits and executive salaries? Isn’t that shortsighted and self-defeating?
Finally, even if this imaginary de-risking did somehow work, we would still be transferring our wealth to China and they would still be using it to build their own military and technology.
Another response that this administration and many in the business community have to those calling for real change is the so-called “small yard, high fence” strategy. They argue that if we keep the most advanced technologies away from China (not all our security technology, mind you, just the really important stuff) and if that is guarded by rigorous export controls and investment restrictions – the high fence – we can manage China’s military ambition and industrial rise.
This policy is also fundamentally misguided. The yard is far bigger than the White House realizes. Do we really know what technology today will be incorporated into military use in, say five years? The whole notion of cutting edge science is that one doesn’t know what is coming. Further all the dual-use products are outside of the fence. All those products we allow Americans companies to export to or build in China risk eventual diversion to support the Chinese defense industrial base.
Sometimes that diversion is direct. Chinese laws expressly forbid their companies from complying with American export control regulations and require all Chinese firms to promote their national security. So, if the Chinese military comes knocking, our Chinese customers will hand over their American dual-use goods putting our technologies to use by their military.
Other times the diversion is indirect. When companies like Intel form research centers in China to study artificial intelligence, semiconductors, and edge computing, they may think they are engaged with commercial and academic actors.
But in reality they are engaged in technology exchanges outside of our proverbial small yard. Down the road, the know-how they hand over to their Chinese counterparts advances the very science and technology base that powers the Chinese defense industry.
Further if US defense and technology companies are developing their products and supplies in China, do we actually believe that our fence is going to be high enough or impenetrable? In some cases could we be relying on the very technology that is compromised to protect the uber sensitive secrets? No, a phased-in clean break on technology would be far more secure.
Let me spend a minute on another fashionable concept in Washington these days. That is that we should avoid annoying China and quote “stabilize the relationship”. Stabilize is the modern term for détente. In French “to relax”. Whether stabilizing or détente make sense depends entirely on where you think the trajectory of the relationship is headed at that time. In other words, if the status quo that you are locking in favors you, than stabilizing may be beneficial. If it favors China, then probably not.
I suggest that the current trajectory clearly is in China’s favor. They are quickly gaining on us economically, they are quickly gaining on us technologically and, although I bow to your greater expertise, they seem to be quickly gaining on us militarily. Why would we want to lock in this trajectory? Isn’t that a little like giving up? I believe that this is not the time for relaxing but rather the time for bold change.
Remember that in the first Cold War Ronald Reagan ran for election against détente in 1980. He knew that the then status quo favored the Soviets. After he rebuilt our military and got our economy roaring, then he began talks in his second term. The results of his strategy are now in the history books.
I would like to raise one more issue for your consideration. If we are really talking about deterring a war by showing we will win it, we must consider the state of our overall industrial capacity-- which I submit is not good. Statesmen, strategists, and scholars have long noted the important role that industrial capacity plays in supporting and augmenting a nation’s military power. As Alexander Hamilton put it - the “independence and security of a Country appear to be materially connected with the prosperity of [its] manufactures.”
The past few decades of American global supremacy allowed us to forget this important point. After all, this capacity mattered little in America’s most recent wars, which we fought against adversaries with military and industrial power that paled in comparison to our own. A war with China would be different. It would pit the United States against another great power, in the kind of conflict our nation has not waged since the Second World War.
Most great power wars, by the way, begin with notions of ‘quick’ victories. The Kaiser’s generals had their Schlieffen Plan. Nazi Germany had its Blitzkriegs. Putin had his strategy. The promise is always made – “the troops will be home by Christmas.”
Yet, history tells us the harsh reality: wars between adversaries with similar military capabilities are long wars of attrition. To win them, a nation needs to possess a stronger domestic industrial base. An industrial base that it can rely on to better re-supply its armed forces and provide for the needs of its civilian population.
“Powerful enemies,” Franklin Roosevelt once noted, not only must be “outfought” but also must be quote “outproduced” so “overwhelmingly that there can be no question of our ability to provide a crushing superiority of equipment in any theater of … war.”
Outproducing an adversary requires more than just our defense industry. Every country goes into war with a defense industrial capacity that is limited by the fiscal constraints peacetime places on military procurement. As a result, from day one of a major war, the defense industry alone is unable to meet wartime production demands.
To fill that production gap, a nation must convert its defense-adjacent commercial industrial capacity. Commercial factories must be turned into defense plants. Factory workforces must be retrained to produce military platforms and equipment. The tanks that General Patton rode to victory in World War Two, for example, were made in converted auto plants. This process takes time, but the nation with the more robust defense-adjacent commercial industry will do it quicker.
So, aside from military preparations, an effective deterrence posture also requires us to make industrial preparations for war. In practice, making these industrial preparations today requires us to focus on two objectives. First, we need to ensure that we have the industrial capacity to fight and win a long war with China. And second, we must make sure our technology and wealth are not building up China's own industrial base. On both marks, sadly, our current policies are failing.
For decades, Washington leaders pursued a one-sided free trade agenda that liberalized most American barriers to imports. As we took down our trade barriers, many nations across the world – including China – continued with economic policy as usual. They kept subsidizing advanced industries, protecting domestic manufacturers, and manipulating free market forces to their strategic advantage.
As a result, American manufacturers – unprotected at home and preyed upon abroad – decided to offshore their production capacity. So, America’s share of global manufacturing fell from 25 percent in 1997 to 17 percent in 2019. China’s by the way is almost 30%. Real growth in our manufacturing sector slowed from 4.9 percent in the 1990s to 1.4 percent in recent years. And, our trade deficit in manufactured goods tripled, driven by declining American production of critical civilian and defense-related goods like auto parts, pharmaceuticals, machinery, metals, electrical equipment, semiconductors, and precision tools. Today the official trade deficit in goods is over $1.2 trillion a year. And for some technical reasons I won’t get in to that is likely a gross understatement.
Importantly, this deficit is not isolated to old lower-tech manufactured goods. It also includes the most advanced products. While the United States once was a net global exporter of advanced technology products, today we run an annual $244 billion deficit in these goods.
This general industrial malaise has carried over to our defense and defense-adjacent industrial base. As you know more than anyone, America’s once great shipbuilding sector now struggles to build more than two U.S. Navy destroyers a year. China, meanwhile, is on track to build at least five.
The picture is no prettier in other parts of the defense industry. Over the past year, as the United States began supplying munitions to Ukraine, American ordnance contractors building precision-guided weapons have begun struggling to meet delivery timelines for our military. We are not even fighting in the war, and yet already our defense industry is reaching its breaking point.
It is not hard to imagine, then, what would happen if our defense industry went into a real war with China. Wargames performed by the Center for Strategic and International Studies indicate that the United States would run out of key munitions within one week of a conflict with China.
We need to be clear eyed. Our defense industry alone cannot re-supply our armed forces during a major war. And we lack a sufficient defense-adjacent industrial base which could be converted quickly to defense production. Further, we would struggle to manage supply chain shortages for a variety of critical civilian goods.
In short our industry is not prepared for war. And this very fact erodes the credibility of any threat to prosecute a long, drawn-out conflict with China and seriously undermines our deterrence posture.
Even though we increasingly recognize this reality, the policy solutions we are deploying to restore our industrial capacity are at best half-measures. To be sure, the current administration has taken positive steps to rebuild. They’ve shepherded through the CHIPS Act to reshore semiconductor manufacturing, they’ve supported advanced battery production, and they’ve continued the last administration’s financial support for reshoring critical mineral production. But, in the final analysis, there are major problems with our current approach.
First, our industrial policy posture is reactive not proactive. We faced pandemic-era chip shortages, so we passed the CHIPS Act. The Chinese threatened to halt rare earth exports, so we invoked the Defense Production Act.
We seem only to address our industrial weaknesses after outside events or our adversaries expose them. We need a better proactive strategy to identify the gaps in our industrial capacity before a problem emerges.
Second, we are focusing on far too narrow a set of industries. Securing the most sensitive, national-security related, advanced technology supply chains is essential. But, we cannot ignore the importance of building broader supply chain resiliency and robust defense-adjacent capacity in legacy industries. We do not just need semiconductor fabs making leading edge chips or rare earth mines.
We need a strong network of commercial shipyards, airplane engine manufacturers, steel mills and more. Much of our military equipment relies on older industries that we must also reshore.
Third, and perhaps most tragically, we are moving far too slowly, and we are allowing secondary political goals to stymie sound defense industrial policy. We like to think that we can snap our fingers and rebuild an industry, but this is simply not the case. Modern industry is far more complex than those of generations past.
That is why even though we invoked the Defense Production Act for rare earth elements four years ago, we still barely produce any rare earth magnets. It is why a year and a half after passing the CHIPS Act, we still have not dispersed any of its funding. We are slow walking crucial projects with red tape and long permitting processes. All while many senior military leaders fear a war over Taiwan will come before the end of the decade.
What will fix this last problem? First, the Department of Defense together with the National Security Council should recognize that the general manufacturing capability of our country is essential to any effective integrated deterrence strategy. They should be far more proactive on the side of domestic manufacturing. Second, I believe we need the kinds of policy that have brought prosperity in the past, like a sensible business tax regime, reducing the cost of regulation, appropriate subsidies, a fair trade policy and worker training.
But we also need strategic de-coupling from China. Balancing our trade relationship with China will return manufacturing to America and make our manufacturing sector more resilient in a prolonged war and thus a better deterrent.
So I end where I began. China is a dangerous adversary. It is intent on global domination and we are in their way. Our job, really your job, is to do what you can to avoid this turning into a hot war and to assure we win if it does. That has to include a dramatic change in our economic relationship. A convincing integrated deterrence of Chinese aggression must stop the flow of our wealth to them and include a phased-in requirement for balanced trade, better protection of our technology and the stopping of incoming and outgoing investments that hurt our country.
In July of 1940 when Britain was facing a possible invastion from Germany Prime Minister Churchill wrote a desperate cable to President Roosevelt begging for the transfer of surplus US destroyers. He ended the cable by saying quote “Mr President, with respect I must tell you that in the long history of the world, this is a thing to do now.” Well changing our economic relationship with China may be another such thing.