The Long Hard Road to Decoupling from China

The era of globalization may finally be coming to an end. The Wuhan Virus and the attendant misery that the Chinese communist state has unleashed upon the world (very much including its own people) has laid bare a core structural flaw in the assumptions underpinning globalization. It turns out that the radical interweaving of markets—which was supposed to lead to the “complex interdependence” that IR theorists have been predicting for the better part of the century would lead to an increase in global stability as countries’ fates are proven to be dependent on each other’s fortunes—has instead created an inherently fragile and teetering structure that is exacerbating uncertainty in a time of crisis.

That this has turned out to be so should not be surprising. The logic that has driven globalized supply chains has all but eliminated redundancies across the world in the pursuit of efficiency. That efficiency has been found by locating links of the supply chain in places where labor costs have been low. In theory, anyway, this should not have been problematic: as one country grew its economy and ascended out of poverty, its low-wage sector would get outcompeted by other poor countries, by which it could be replaced in the supply chain. Similarly, by this logic, if robots become permanently competitive with low-skilled workers, so be it. A more efficient way of producing something is always favorable in this way of thinking.

Such thinking largely ignores geopolitics. By striving to “flatten” the world (in Thomas Friedman’s memorable phrase) into a single, borderless entity in pursuit of nothing but profit and prosperity, this worldview has created huge blind spots. For example, it was powerless to predict that China would build on its early advantage in sheer numbers of low-skilled workers to lock in a dominant and increasingly powerful position for itself in global supply chains. Economies of scale played their part, as did the complementarity of the various manufacturing sectors the country strategically developed, not to mention China’s bullying and corrupting practices. The end result was that the costs of shifting to poorer countries would be unappetizing to corporate supply chain managers. Worse still, such thinking could not account for the fact that behind the scores of successful companies lay a monolithic, totalitarian, nationalist entity with a vision for restoring China’s role in the world: the Chinese Communist Party (CCP).

When bereft of redundancies, networks devolve to hierarchies, which in turn create winners and losers. Hierarchies do not diminish the key importance of state power in international relations. On the contrary, they enable it. As China has grown to become the seemingly irreplaceable core of a globalized economy, the CCP has pursued predatory mercantilism in its commercial relations with the West, in the process tilting the hard power balance in its favor. In an economic system that allows for the flow of technology and capital across national borders, redundancies in the supply chain are essential to the preservation of state sovereignty and government capacity to act in a crisis. The Wuhan Virus pandemic is proving so devastating because the radical centralization of market networks has allowed for failure at a single point in our supply chain to leave the system with no capacity to off-load demand onto redundant networks. The Wuhan Virus pandemic is proving so devastating because the radical centralization of market networks has allowed for failure at a single point in our supply chain to leave the system with no capacity to off-load demand onto redundant networks. 

In short, globalization, as preached and practiced over the past four decades, has been shown for what it has always been: profiteering off of a vast pool of centrally controlled labor. While many vast fortunes have been made in the West as a result, and as American consumers binged on low-cost goods, the biggest winner has naturally been the Chinese Communist Party elite. And though even before the 2016 U.S. election there was a growing realization among Western captains of industry that something was not quite right with China’s role in the system, few were willing to ask big enough questions about the system as a whole.

The fundamental question is one of values: Is this kind of globalization compatible with liberty and democratic governance? My simple answer is no. By ignoring the role of nations in the international system—or, if not ignoring, indeed prophesying the nation’s demise—globalization’s boosters have implicitly, if perhaps unwittingly, lessened the accountability of elites and downgraded the voice of voters in these matters. No citizenry, if asked, would vote for the status quo—their working-class communities gutted, their security endangered, and their country made dependent on an adversarial foreign power.

We need to start re-shoring our manufacturing and investing in the regional diffusion of supply chains. The imperative of hard decoupling from China is as strong as it’s ever been. Getting there, however, will not be easy. “Re-shoring” is itself a tidy phrase for a complicated process that will take years to bear fruit. Change will require incentives, both positive and negative, including changes to our corporate tax code, subsidies, penalties, and perhaps even concerted efforts to shame American companies into different behavior. And beyond policy, leadership will be required. All this will have to be explained and communicated to the American people. We will simply have to absorb the costs of this, even if it means prices going up for various goods that we have become accustomed to consuming cheaply.

Especially in areas critical to national security and defense, the United States must preserve a degree of autarky that will allow us, should the extreme happen, the sovereign freedom to act.  Re-shoring our manufacturing will have the added benefit of eliminating the “technological bleed” that has accompanied globalization over the past 30 years. Although innovative design is vital to cutting-edge technologies, much of what has undergirded America’s technological superiority thus far is contained in processes, materials, alloys, and skillsets—what can be broadly described as our technological culture. As we look at the qualitative improvements in the People’s Liberation Army (PLA) and Navy (PLAN) weapons systems over the past three decades, it’s impossible to miss where these have come from. I am not advocating that we stop selling products to China outright, but we need to separate sales from the attendant technology transfers. For example, Boeing can sell their airliners to the People’s Republic of China (PRC), but should have never allowed for its aircraft to be manufactured there. Western intellectual property has been forcibly transferred or simply stolen by the PRC, and has in turn been used for military applications. Companies have been waking up to this reality. According to a recent survey of the Global CFO Council, last year one in five American companies doing business in the People’s Republic of China had their intellectual property stolen, with Western IP extorted by the Chinese for market access in a large number of cases.

Of course, the decision to bring our production back to the United States assumes that the PRC would stand by and watch as American corporations depart. If U.S. companies start pulling out of China, we will learn soon enough to what extent the CCP actually respects property rights. That said, should Beijing try to seize Western property—and given how many Western companies have unwisely entered into joint ventures with the Chinese state through the years, it may even do much of it legally—such behavior ought to further inflame Western sentiments. Machines and equipment can be re-purchased, but the era of “designed in California, made in China” will have taken a perhaps fatal body blow.

The re-shoring of U.S. manufacturing should prompt us to rehabilitate our rotting infrastructure.  Today is precisely the time for the U.S. government to invest in rebuilding our roads, our rail networks, and above all our energy grid. A 21^st-century energy policy that would reduce pollution and ensure we eventually move off petrochemicals lies in nuclear power. Today’s small modular nuclear reactors (SMRs) used by the U.S. military point to the future—the U.S. Navy has been operating and perfecting SMRs for 75 years. We are also uniquely positioned by virtue of our size and low population density overall to deal with nuclear waste storage more effectively than our competitors.

It is worth noting that China is already moving fast on its third-generation SMRs developed by the state-owned China National Nuclear Corporation; in 2019 it announced that the first application of its ACP100 reactor will be to replace coal-fired boilers to generate heat for a residential district in Hainan province. Likewise, in December 2019, Russia turned on its first floating nuclear power plant to generate electricity from a boat off the coast of Russia’s Far East; the reactor is set to replace coal, with enough capacity to power a city of 100,000. Moscow and Beijing seem determined to make nuclear power an integral part of their energy policy going forward.

Next, Congress needs to move to restrict access by Chinese students and researchers to our premier educational and research institutions and our engineering and science labs.  The idea that we continue to educate scientists and engineers who will then work for companies owned by the Chinese communist regime defies common sense. In 2019 the PRC sent some 370,000 students to U.S. universities, compared to 98,000 ten years earlier—close to a four-fold increase in just one decade. Worse yet, there has been a massive corrupting influence of Chinese direct funding of U.S. advanced research.  The CCP has been pushing money for research at U.S. universities and labs, directly or indirectly paying American scientists to do contract work for Chinese state companies. Last fall, a report by the Senate Permanent Subcommittee on Investigations showed that Beijing’s  so-called “talent plans” included contracts for American researchers requiring that they transfer intellectual property rights to their Chinese partners, avoid commenting on the PRC’s internal affairs, and keep such contracts confidential. Or witness the recent arrest of the chair of Harvard’s chemistry department on charges of concealing funding he received from China.

In effect, what was once considered espionage has become mainstream in our educational and research institutions. All this has to stop. It is borderline absurd that we would continue to train future weapons designers for the Chinese People’s Liberation Army and Navy, giving them a window into our best and most sophisticated research into defense-related technologies.

The imperative to end China’s theft of our intellectual property by way of our universities and research labs must be accompanied by a thorough reform of our system of higher education, which for the past three decades has managed to saddle American college graduates with unsustainable levels of debt, in many cases permanently handicapping their career prospects, while delivering often worthless and unmarketable degrees. We need a massive reinvestment in STEM curricula in our high schools and in science and engineering programs at our colleges and universities, so as to expand the available labor and management pools for our re-shored companies.  Again, it will take a concerted effort by Congress, the U.S. Department of Education, and especially parents and alumni donors to restore colleges to their proper place of teaching and learning, which at one time decades ago produced the best professional and managerial classes in the world.

Finally, a strategy for American renewal requires a foreign and security policy that puts a premium on alliances and partnerships with those countries that share our values and/or interests, even if at times only the latter applies. Our historical European allies and partners will remain among our closest allies, and a revitalized NATO is key. Still, we need straight talk with our allies and partners in Europe about shared interests, rather than wasting time by endlessly wringing our hands over the supposed demise of multilateralism. Furthermore, we should not hesitate to leverage our relationships with countries that can significantly improve our overall global position with respect to China and Russia.

In other words, we need to return the sovereign nation-state back to the center of the international system. And while we continue to seek international cooperation on a range of issues that concern us all, we should treat with requisite humility the expectations of what experiments in supranational governance can achieve. They can never replace self-constituting nations, and if forcibly imposed will routinely morph into rigid and ineffective top-down bureaucratized structures. Most of all, we need allies and partners across the globe who share our interest in preserving freedom in the world, and who understand that what the CCP is proffering as an alternative is a Beijing-controlled global supply chain, where state-owned markets and de facto serfs would replace free market societies and autonomous citizenry.

If there is any good to come from the devastating impact on our nation of this pandemic brought about by the Chinese communist regime through its malice and incompetence, it will be the likely demise of enthusiasm for globalization as we know it across the West. After three decades of intellectual gymnastics aimed at convincing Americans that the off-shoring of manufacturing and the attendant deindustrialization of the country are good for us, the time has come for a reckoning.After three decades of intellectual gymnastics aimed at convincing Americans that the off-shoring of manufacturing and the attendant deindustrialization of the country are good for us, the time has come for a reckoning.

Since the end of the Cold War, Western elites seem to have been in thrall to the idea that various “natural forces” in the economy and politics were propelling us forward to a digitally interconnected brave new world, one in which traditional considerations of national interest, national economic policy, national security, and national culture would soon be eclipsed by an emergent peaceful global reality. This virus crisis is a wake-up call, and while some argue we are waking up too late to effectively counter current trends, my money is on the ability of the American people to rally in a crisis and on the resilience of Western democratic institutions.

Today, while battling the Wuhan Virus consumes the attention of our government agencies and health care systems, we should not lose sight of the foundational strategic challenge confronting the West in the emerging post-globalization era: We are in a long twilight competition with the Chinese communist regime, a struggle we cannot escape, whether we like it or not. Now is the time to wake up, develop a new strategy for victory, and to move forward.