We're a frontier nation, we make things. It's really how we think about ourselves. And so getting this right and not losing this capability and not having it atrophy is an existential issue for us as a nation … prosperity and security are intertwined, and the wellspring of both I believe is the industrial commons.
Jeffrey Wilcox, Vice President, Digital Transformation
Lockheed Martin Corporation Keynote Speech at Study Workshop, 28 January 2019
1. Introduction
Barely six years ago, Peter Katzenstein posed the question: why didn't the United States view China as a peer adversary, a threat to be reckoned with in the same way it had perceived the Soviet Union during the Cold War era? The question still made sense in late 2013, when China's push for global dominance was emergent rather than explicit and visible, and its technological prowess and geopolitical ambitions remained unclear. Katzenstein's question was directly motivated by the argument made in my draft for a book, subsequently published in 2014. There I argue that great power conflict is key to understanding how the United States became the world's high-tech hegemon after 1945. Conflict between the United States and Soviet Russia was paramount in driving the creation and expansion of the ‘innovation and enterprise engine’ embedded in America's national security state (NSS). In Soviet aggression, Washington perceived an existential threat from a well-matched adversary, and this sense of vulnerability catalyzed a national push for technological dominance.
Sustained geopolitical rivalry motivated Pentagon planners to pursue high-tech supremacy as a national security imperative. That strategy imbued a cluster of national security agencies with a mission to pursue trail-blazing innovations and a tolerance for costly long-term investments. It is those efforts, the result of concerted national security policymaking, which have spawned numerous radical general-purpose technologies that not only underpin US military primacy, but also power the modern economy (think computing and software, semiconductors, communications satellites, the internet, GPS, and autonomous vehicles). And who can say that Silicon Valley would have flourished and grown to adulthood without decades of nurturing NSS investments and early demand for its innovations (O'Mara, Reference O'Mara2005)?
Geopolitical conflict between two well-matched adversaries was important also for the domestic political consensus it encouraged, as well as the laser-like focus it lent to the NSS innovation engine in pursuit of technological superiority (so-called ‘overmatch’ in current terminology). However, both the bipartisan support for and the strategic focus of the NSS innovation enterprise were eventually fractured by the removal of that external challenge. The effect of these changes, together with the emergence of new asymmetric threats from the late 1990s onwards, served to disrupt the NSS innovation focus, diluting its larger strategic priorities in favour of more short-term goals. As the Department of Defense (DOD) recently admitted in reflecting on this trajectory, ‘Today, we are emerging from a period of strategic atrophy, aware that our competitive military advantage has been eroding’ (United States Department of Defense, 2018).
Indeed, as the United States entered the twenty-first century, it appeared to a number of analysts that the heyday of major government-sponsored innovation breakthroughs – the general-purpose technologies that delivered US military and commercial superiority – was numbered, if not entirely over (Ruttan, Reference Ruttan2006, for a critique see Weiss, Reference Weiss2014, chapter 7).
This brings us back to our opening question: why wasn't China then seen in the same light, as a threat to keep the US on its technological toes? (A related question we return to below is whether technological wizardry in itself is sufficient to sustain military and commercial leadership.) Japan after all, even as an ally, presented a pressing challenge to US technology leadership through the late 1970s and 1980s. By impinging on the US strategic imperative to dominate the technology space, Japan's rise helped keep the innovation engine running to produce new breakthrough initiatives, even as the Cold War thawed. By contrast, at the time I was writing in 2013, China's technological (as opposed to its manufacturing) capabilities were not seen as sufficiently advanced to challenge US techno-superiority. In particular, the crown jewels of US innovation – its microelectronics (semiconductor) technology – still remained largely in US (and to some extent in European and Japanese) hands. Indeed, until very recently many commentators saw China less as a potentially threatening superpower than as a strong regional and rising economic power that was containable with diplomacy and economic cooperation (see, for example, the 2015 National Security Strategy).
This picture of apparent US equanimity towards China has now shifted decisively as Beijing more openly flexes its military and economic muscles. Increasingly, numerous reports draw attention to Beijing's panoply of aggressive and illegal strategies to obtain high-technology by way of ‘forced’ transferFootnote 1 and cyber espionage, to its menacing military maneuvers throughout the Southeast Asian region, and to its globally expansionist projects that create ties of economic dependence and resource access through its belt-and-road strategy. Above all, it is the Chinese Communist Party's 2015 launch of its Made in China 2025 plan, in combination with its 13th Five Year Plan of 2016–2020, and its Mega Project Priorities that have brought home to Washington the scope and seamlessness of Beijing's geopolitical and geoeconomic ambitions.Footnote 2 The United States is now paying attention.Footnote 3 Reflecting this year on the 2014 Pentagon initiative known as the ‘Third Offset’Footnote 4 (emphasizing innovation at the frontier and more agile procurement practices to secure military advantage), former Deputy Defense secretary Robert Work lamented the document's failure to specify the Chinese threat and thereby inject a more heightened sense of urgency. In his words: ‘I would have said, “The Chinese are coming, the Chinese are coming, the Chinese are coming”’ (in Brennan, Reference Brennan2019). Now that the United States recognizes that the Chinese are indeed coming, the competitive dynamics between the two are likely to intensify as Chinese companies increasingly dominate global production networks.
2. Re-emergence of Great Power Competition
Though dormant for a time, the notion of great-power competition came into its own with Washington's release of its National Security Strategy in 2017, shortly followed by publication of the Pentagon's National Defense Strategy (NDS). The NDS document emphasizes ‘the re-emergence of long-term strategic competition’ as the ‘central challenge to US prosperity and security’ and the principal priority for the DOD, requiring both ‘increased and sustained investment’ (United States Department of Defense, 2018, 1–2).
While intelligence reports single out both China and Russia as the nation's strategic competitors, it is clearly China that is seen as the ‘number one threat’ on a global scale (Defense One Staff, 2019). In a recent Congressional testimony, DOD officials gave prominence to the China threat, declaring that ‘China, in particular, has made it a national goal to acquire foreign technologies to advance its economy and to modernize its military’. They noted that China is ‘comprehensively targeting advanced US technologies and the people, the information, businesses and research institutions that underpin them’; it is also implementing industrial policies at such a scale as to ‘pose a multifaceted threat’ that is putting at risk ‘the entire national security innovation base’ (in Ferdinando, Reference Ferdinando2018).Footnote 5 In this assessment of China's reach into America's economy and society, we see a more expansive concept of national security that speaks to a heightened sense of US vulnerability.
With great power potential in both military and commercial arenas, it seems clear that – unlike Russia – China can bake its cake and eat it too. While Russia has built strong S&T capabilities that make it a well-matched military adversary for the United States (not least in cyber technology), it still falls far short on the economic side. By contrast, China's fusion of central political command with a market-style economy has created capabilities that unleash the potential to prevail in both military and economic arenas. Tellingly, for the first time in 150 years, the US now faces the challenge of competing ‘with an economic rival that could be larger than its own economy’ (Brown and Singh, Reference Brown and Singh2018).
The implication of this difference is clear. In light of China's challenge to its technological pre-eminence, the United States can no longer afford to be complacent about its techno-industrial slide. US military power is still intact, but this relies on the ability to reinforce its technological and economic prowess to sustain that advantage. For commentators both inside and outside the NSS, there is now urgency to this endeavour. After reviewing what the Chinese military have already accomplished in the last two decades and what they are planning to do over the next decade, former deputy secretary of Defense, Robert Work, declared that ‘any objective assessment … must conclude that the US joint force is perilously close to being the victim of a very patient, exquisitely targeted and robustly resourced … offset strategy’ (Work and Grant, Reference Work and Grant2019).
A key question is whether – and how – the United States can secure its technological and commercial superiority in the face of China's own prowess and determined leadership. Many known and unknown factors are at play in ensuring that outcome, not least of which is the impact of polarized domestic politics and a shambolic national leadership. There is also a good deal of lost time to recoup. For as we see next, what goes up can also come down.
3. Fall and Rise of US Techno-Strategy
3.1 Fall: From an Era of High-Level Innovation to a Relative Stalling of the Innovation Engine
In the past, the American people and its leadership had the advantage of what has come to be known as its ‘Sputnik’ moment. Russia's demonstration of its superior satellite technology in 1957 sent shock waves that reverberated throughout the country. This world-first achievement was met in the US with a mix of fear and awe and its impact was momentous – broad, deep, and lasting. It was a galvanizing force like no other in the post-war period. Set against America's own failed effort to launch a satellite (fast-tracked by the Navy), the success of its geopolitical rival had a devastating impact on morale and led to a period of ‘genuine consternation, followed by a veritable orgy of national self-examination and self-criticism’ (Watson in Stuart, Reference Stuart2008, 321).Footnote 6 As a result, Sputnik sparked an innovation panic that triggered the so-called space age and a new era of institution (and nation) building. To boost innovation efforts, the federal government founded two new research and technology-oriented agencies (the Defense Advanced Research Projects Agency (DARPA) and the National Aeronautics and Space Administration (NASA), expanded the National Institutes of Health (NIH), centralized DOD science and technology policy by creating the position of Deputy Director of Research and Engineering, and created a hybrid institution to seed a modern venture capital industry: the Small Business Investment Corporation (SBIC). SBIC spearheaded a network of government-backed venture funds by prompting the federal government to fill a gap in the investment infrastructure for high-risk innovation (Weiss, Reference Weiss2014). As historian Walter McDougall (Reference McDougall1982, 1011) writes, ‘Sputnik triggered an abrupt discontinuity’, transforming governments into ‘self-conscious promoters, not just of technological change but of perpetual technological revolution’. In sum, the catalytic effect of Sputnik was to propel the fledgling NSS into a sustained race for technological supremacy, and in a way that transcended partisan rivalries.Footnote 7
By contrast, China's new high-tech capabilities have triggered no such whole-of- government reaction. As analysts at the Center for a New American Security observe, ‘The United States may very well be in a new space race, but … has not yet experienced a true ‘Sputnik moment” from the perspective of the broader public and policymakers’ (Horowitz et al., Reference Horowitz, Kania, Allen and Scharre2018) No single event has framed the threat from China in such a dramatic way as did the Soviet success in launching the world's first satellite. Instead, China's rise as a high-tech power has taken shape much more gradually and somewhat less visibly, bringing to mind the proverbial frog unaware of the rising temperature of the water. It is as if Deng Xiaoping's foreign policy guidelines transmogrified into a Party slogan: ‘Keep a low profile and bide our time, while actively getting something accomplished’ (Taoguang Yanghui, Yousuo Zuowei).
While China was biding its time, US energies were being consumed by war and conflict in the Middle East. Technology projects increasingly aimed at addressing the short-term needs of contingency operations in overseas campaigns. Other changes too impacted on the NSS technology enterprise. Most generally and perhaps most importantly was the demise of its powerful geopolitical rival and the emergence of new asymmetric threats. The end of the Cold War removed the perception of an existential threat, only to be replaced by multiple threats from lesser adversaries. This had the two-fold effect of displacing the strategic focus on advancing the US technological frontier and reducing the external pressure that made science and technology innovation a national security priority for both sides of politics.
In addition, from the 1990s through the 2000s, structural changes in domestic markets became less conducive to the catalytic role of the defense sector. A large government market and sizable research and development (R&D) budget, relative to those of the private sector, once gave the national security mission agencies considerable influence over the direction of technology, leading to a host of revolutionary general-purpose innovations for both defense and commerce.Footnote 8 But as the new century wore on, public–private shifts in R&D spending and the rapid explosion of commercial innovation in the private sector began to erode the technology edge essential to US military strategy. Many Silicon Valley firms that were nurtured on NSS contracts began turning away from government to exploit more profitable commercial markets, and innovations in the private sector (especially in software) rapidly outpaced capabilities in the traditional defense sector.
Military leaders and technology analysts feared that the NSS innovation engine had begun to sputter, and with it, the source of so many transformative innovations that powered US military and commercial leadership throughout the Cold War and beyond (Ruttan, Reference Ruttan2006).Footnote 9 Whatever the precise combination of factors, by no means least important was the disappearance of a major geopolitical rival. All this was about to change in the mid-2010s as China stepped into that role. As security scholars have noted, until approximately 2015, ‘US policy was based on the view that it could remain considerably ahead of China, both militarily and economically; that US businesses and society more generally could benefit from trade with China; and that economic interdependence would eventually lead China to liberalize politically and economically, thereby dampening China's incentives to challenge US primacy’. This view was articulated in Obama's National Security Strategy released in February 2015. Almost every aspect of this view came under challenge during the final period of the Obama administration and increasingly during the Trump administration (Foot and King, Reference Foot and King2019).
3.2 Rise: Resurgence of the US Innovation Engine
After two decades of responding to terrorism and counterinsurgency, the NSS has come to perceive in its new peer adversary a clear geopolitical threat and strategic target on which to focus its technological endeavours. If there had been any doubt beforehand, China's 2015 announcement of its Made In China (MIC) 2025 Plan – backed by an industrial policy with massive financing, and subsidies in the hundreds of billions of dollars – helped crystallize the view in Washington that Beijing was determined to displace the US as the world's technological and military superpower. Particularly influential in reshaping US thinking was the DOD's so-called ‘DIUx Report’ which revealed that for the first time the US had lost ground to China in a key emerging technology such as artificial intelligence (AI) (Laskai and Sacks, Reference Laskai and Sacks2018). Moreover, US–China economic and strategic competition is intensifying at the same time as a range of emerging technologies – not least AI and quantum computing – are poised to transform the character of strategic interstate conflict, potentially disrupting the military status quo (Kania, Reference Kania2018a, 2). But if China is to surpass the US on the quantum and AI fronts, it must master microelectronics. This is why one area China has targeted for global leadership is the design and production of semiconductors – a strategy reliant on large-scale spending (estimated at $150 billion) to boost R&D, design and manufacturing, in addition to subsidizing foreign acquisitions and investment over a 10-year period (Brown and Singh, Reference Brown and Singh2018, 11).
Since technology for the US can never be simply a commercial matter, the China project has had the effect of completely re-energizing the drive for technological superiority within the NSS. Indeed, China's whole-of-nation strategy of military–civil fusion (see Kania Reference Kania2018b) – which aims to create and leverage synergies between defense and commercial developments in dual-use sectors – has lit a fire under the entire US political and national security establishment. The most immediately visible (and tangible) response has been an outpouring of official reports, legislation, and initiatives for recapturing US leadership in a host of sectors that have generated bipartisan support. Examples include the ‘United States 5G Leadership Act of 2019’; the US ‘Global Leadership in Advanced Manufacturing Act’ (2019); the Executive Order on Maintaining American Leadership in Artificial Intelligence (2019); ‘Winning the Future: A Blueprint for Sustained US Leadership in Semiconductor Technology (2019)’; the American Super Computing Leadership Act of 2017; and the American Innovation Act (2017) that authorizes large expansions in funding for sustained national investment in basic science research at key federal agencies.
Following through on these specific statements of policy, it would appear that a clear shift is now underway with the launch of new programs that cover everything from High Performance and Quantum Computing to Artificial Intelligence, Microelectronics, and Advanced Manufacturing. (As an aside, the question remains as to whether the funding will be adequate.) Microelectronics is especially important because silicon chips are a key enabler of superior hardware and software. As an earlier report observed: ‘[I]f there is any single industry whose technological progress and competitiveness are critical to the economic growth and national security of the United States, it is electronics.’Footnote 10 Currently semiconductors underpin the Pentagon's top technology focus on artificial intelligence, machine learning, robotics, autonomous and unmanned systems, advanced manufacturing, quantum computing, cyber, space, and biotechnology.
In this game-changing technology for both commerce and national security, China still lags. Reflecting earlier on why China had not sparked the techno rivalry seen with Soviet Russia, and then Japan, I ventured that Chinese firms were still perceived to be far from the frontier and especially ‘far from mastering the design of semiconductor technology, which the Pentagon views as the litmus test of technology leadership’ (Weiss, Reference Weiss2014, 232). In January 2017, an influential analysis from the President's Council of Advisors on Science and Technology (PCAST) reported that ‘after more than a decade of failed attempts … Chinese manufacturing of advanced-logic chips is significantly behind the state of the art in the United States, Taiwan, and elsewhere’ (President's Council of Advisors on Science and Technology (PCAST), 2017, 7). Even efforts to reverse engineer advanced chip technology would take a number of years, by which time, the technology would have moved on. This consideration perhaps goes some way to explaining the degree of complacency (or hubris?) that persisted in the face of numerous NSS warnings about the worsening state of US domestic capabilities in advanced microelectronics, material shortages, counterfeit issues arising from reliance on foreign suppliers, and diminishing manufacturing sources. In spite of all the calls for action, little remedial action was undertaken (Defense Science Board (DSB) 1987, 2005; United States Government Accountability Office (GAO), 2015; PCAST, 2017). With the benefit of hindsight, what seems clear is that an external impetus for remedial action in this critical arena has been lacking – until now. Whether even that impetus will prove sufficient to compensate for the incoherent, maladapted leadership of the Trump administration is far from clear.
These obstacles aside, Beijing's big drive to achieve global leadership in the design and production of semiconductors – key to advancing its geostrategic ambitions – has helped to jump-start new US programs. These new programs are intended to address long-standing concerns stemming from the offshoring of its supply base and the slowdown of innovation in chip design. The need to build or, rather, rebuild an onshore capability is a prominent theme in both initiatives. These remedial efforts stem from a recognition that the broader community is potentially impacted not just through direct actions of external adversaries, but also through the vectors of foreign supply chains in which Chinese companies dominate. On this issue, Cohen and Rogers and Evenett (this issue) speak to the broader commercial and policy concerns around Chinese supply-chain dominance. Although still strong in design and manufacturing of integrated circuits, US companies are increasingly investing in design and fabrication services offshore. The problem with offshoring, a recent report concluded, is that it threatens DOD's access to a trusted and assured supply and gives adversaries the ability to ‘[manipulate] supply chain control to their advantage and our detriment’. Of particular concern is the decline in the amount of hardware being built in the United States. Pentagon officials note that while Taiwan, an ally, produces up to 80% of the microelectronics used in the United States, the small island sits ‘uncomfortably close to a nation that has in many ways declared itself to be an adversary to the United States’ (Griffin in McLeary, Reference McLeary2018). A related concern is that if Taiwan's microelectronic manufacturing succumbed to a cyberattack, it would undermine the ability of both the Pentagon and private sector to replace existing systems.
To address these current threats to its leadership in microelectronics and prepare for future needs, DOD has launched two major new programs. The first is the Microelectronics Innovation for National Security and Economic Competitiveness (MINSEC) strategy launched in 2018. With a budget of $1.55 billion over five years, MINSEC's task is to sponsor advanced microelectronics for both government and commercial national security applications – not just to maintain US leadership, but also to create a secure domestic microelectronics ecosystem, and develop a competitive industrial base of onshore suppliers (Muldavin, Reference Muldavin2017).
The rationale for MINSEC articulates the more expansive view of national security that informs current policy in this new era of digital transformation. Although defense-driven, the program is designed with a ‘broader national security community’ in mind.Footnote 11 This community includes commercial industry, financial institutions, and critical infrastructure, and shares with defense an exposure to the risks of overseas fabrication. Accordingly, MINSEC addresses several problems of national concern: options for trusted domestic manufacture of custom DOD electronics are diminishing; most commercial off-the-shelf electronics are made overseas, hence at ‘significant risk’ from tampering; the shift in electronics fabrication also creates potential for overseas control and this in turn undermines electronics based growth delivered by a commercially competitive industry. Thus, a core aim is to restore and build up a US-based microelectronics ecosystem, one that can manufacture custom DOD electronics and expand government access to trusted chip supplies.
The other important response to the challenge from Beijing is DARPA's Electronics Resurgence Initiative (ERI) launched a year earlier than MINSEC. ERI's cluster of programs aims to counter ‘two common enemies – the decline of Moore's Law and the rise of China’ (Merritt, Reference Merritt2018). Its investments, estimated at $1.5 billion over five years, focus on developing next generation technology with matching funds from industry. To that end, DARPA is collaborating with a broad range of defense, academic, and commercial semiconductor partners, all based in the United States. A core objective is to vault beyond the soaring costs and complexity of building new electronic devices by revolutionizing both chip design and manufacturing. DARPA's initiative intends to support domestic manufacturing options, which could provide both application-specific and general integrated circuits and thus cater to diverse needs and users in both the defense and commercial sectors.Footnote 12 However, the ERI initiative involves hard technologies that need scaling up and manufacturing, and DARPA has traditionally relied heavily on entrepreneurial start-ups for this process. But the sidelining of hardware start-ups by US venture capital and the severe decline of the manufacturing base (discussed below) now poses a significant challenge for DARPA at the implementation stage (Bonvillian, Reference Bonvillian2018, 912).
The need for these move-ahead efforts suggests that US–China technological competition is no longer steeply tilted in America's favour. Indeed, one analyst of China's defense policy goes further, suggesting that compared with its undisputed first-mover military advantages in high technology, ‘the terrain of US–China technological competition’ in the emerging technologies of artificial intelligence and quantum computing technologies ‘is far more level’; and in this context ‘the Chinese leadership appears to recognize a critical opportunity’ to surpass the United States (Kania, Reference Kania2018a, 5).
In order to do that however, China must master the nuts-and-bolts enablers of chip technology. As to whether the US semiconductor industry can withstand the challenge that China poses, according to Laura Tyson, that will ultimately depend ‘not on America's success in curbing China's progress, but rather on its ability to sustain and support innovation by US companies’ (Tyson, Reference Tyson2018).Footnote 13 Compared with China's efforts however ($120 billion over five years), US funding for these two initiatives (slightly exceeding $3 billion over the same period), may need to be at least an order of magnitude greater to achieve that outcome.
3.3 Rebuilding the Industrial Commons: Advanced Manufacturing
A recent (if widely overlooked) question is whether ‘innovation’ – investment in next-generation technology – is sufficient to sustain leadership. If so, what obstacles might prevent or slow innovation? And how is the NSS responding? Is the quest for more breakthroughs enough? Or is there need for greater proficiency in advanced manufacturing in the US? Breakthroughs may be anticipated through the continuing efforts of DARPA and other risk-taking agencies within the NSS. But increased proficiency in producing advanced technologies would at the very least require a substantial shift in US business models, which are still based on ‘design at home, produce abroad’ (Bonvillian, Reference Bonvillian2018).
The problem already discussed is that over the course of several decades, the massive migration of advanced manufacturing offshore has left the US continent with a seriously depleted industrial ecosystem. In the first decade of this century, America's manufacturing workforce declined from 17 million to just over 11 million; manufacturing's share of gross domestic product (GDP) halved over the period 1950 to 2010, and the trade balance in advanced technology products turned negative for the first time in 2002, as deficits rose from $16.5 bn to just over $128 bn in 2018. Almost three decades ago, defense officials reported that ‘the loss of technological leadership in key manufacturing technologies [was occurring] at an increasing rate’, and predicted that this would have ‘extremely adverse potential for [US] long-term security interests’ (Under Secretary of Defense (Acquisition), 1988, 47). That prediction has now come home to roost. Entire industries have since moved abroad, and with them many of the capabilities that once powered high-technology innovation and manufacturing. The local supply chains necessary for converting ideas from the lab into highly advanced and commercially viable products are now much diminished. The issue has for many years been well surveyed and widely documented (Berger, Reference Berger2013; Bonvillian and Singer, Reference Bonvillian and Singer2018).
The notion that ‘serving potato chips is the same as making micro-chips’ (paraphrased by Smil, Reference Smil2013) has persisted in broad segments of the policy community, explaining perhaps the relaxed attitude towards the massive divestment and relocation of manufacturing abroad (enabled by a favourable tax code, see Thomhave, Reference Thomhave2019; Clausing and Hassett, Reference Clausing and Hassett2005). Despite numerous warnings against its neglect, advanced manufacturing did not become a policy priority until Obama was in the Whitehouse. A brutal decade of offshoring – bookended by the Great Recession of 2008–2009 and rising mass unemployment – drew the Obama administration's attention to underlying structural problems stemming from the major decline in manufacturing and its depleted ecosystem. In response to these (domestic) challenges, the Whitehouse established the manufacturing institutes program, which took shape between 2011 and 2014. Its focus on production technologies was designed to fill a major gap in America's research-and-development-led innovation system. The neglect of production-led innovation was underscored in the 1980s as Japanese companies Wrested market share from their American counterparts (Bonvillian, Reference Bonvillian2017b). China's economic rise followed a similar production-centred pattern, propelling it onto the global economic stage.
It is worth emphasizing that to the extent that the Obama administration was concerned about China's rise and sought to respond to it, the focus was chiefly economic. Obama's main containment strategy centred on the Trans-Pacific Partnership (TPP), which would allow the US to set the rules of the regional economic game. Although Obama's manufacturing institutes coincided with China's growing economic influence, they were intended primarily to address domestic rather than geostrategic concerns. But as China announced its geostrategic ‘great power’ ambitions (in the policy documents mentioned above), the Pentagon's long-standing concerns about the migration of high-tech industry found a more receptive (bipartisan) audience in Congress.
The upshot of China's increasing geopolitical assertiveness was to prompt a ‘major shift’ in US technology policy in which support for onshore manufacturing is now a key focus (Bonvillian, Reference Bonvillian2017a, 23). The National Security Strategy acknowledges that the manufacturing sector is ‘the backbone of US military technical advantage’ as well as being a major contributor to the US economy.Footnote 14 It emphasizes the importance of a vibrant manufacturing sector to comprehensive national power, and warns of the dangers inherent in the weakening of America's manufacturing base.
We have already seen an intimation of this policy shift in the MINSEC program described above. Department of Energy (DOE) officials have also added their voice to the onshore manufacturing movement. The DOE's Office of Energy Efficiency and Renewable Energy for example, now requires applicants for funding to submit a US Manufacturing Plan, which (loopholes aside) must include specific and measurable commitments to support onshore production (United States Government Accountability Office (GAO), 2017, 41–49).Footnote 15 This policy shift rests on the growing recognition that innovation is not confined to what happens in the lab but is rather a whole-of-cycle outcome encompassing invention, design, testing, production, and supply of new products and services (see Breznitz and Murphree, Reference Breznitz, Murphree, Breznitz and Zysman2013). Following through on this understanding means promoting the ‘production’ front end, where prototyping, scale up, and manufacturing processes are critical.
Technology experts find that when production and its supply chains are removed offshore, an entire local ecosystem for advanced manufacturing and the prospects for future innovation are forfeited. The lesson from such studies seems to be: offload production and eventually innovation starts to dry up. An exemplary case of this disconnect and its harmful effects is detailed in Fuchs and Kirchain's work on optoelectronics, a dual-use technology that is critical for defense, as well as having numerous commercial applications. Their research finds that if the production is not local, firms cannot continue to push the technological frontier; when they shift the location offshore this changes the incentives for innovation, making it no longer profitable to pursue certain products. Moreover, public companies responsive to short- term shareholder interest, increasingly face incentives to produce old technologies overseas and abandon the development of new technologies in the United States (Fuchs and Kirchain, Reference Fuchs and Kirchain2010). Making a similar point from a different perspective, Suzanne Berger observes that the Chinese have risen to become the world's top exporters of information technology equipment because they promote co-location synergies, ‘not because of low-cost labor’. Firms master scale up and mass manufacturing ‘because of their ability to move complex advanced product designs into production and commercialization’ (Berger, Reference Berger2013). By contrast, it matters little how many start-up firms are being spun out of US research labs and universities if they cannot reach the manufacturers to test their designs in the iterative process of prototyping and scale up. Influential (and outdated) arguments that the domestic economy can continue to prosper indefinitely by specializing in services ‘ignores both the co-location synergies with manufacturing and the fact that other economies are now aggressively integrating forward into high-tech services’.46
For at least a decade, many have been warning of the consequences of this ‘disconnect’, not least for US national security (Fuchs, Reference Fuchs2014; Pisano and Shih, Reference Pisano and Shih2011; Bonvillian, Reference Bonvillian2018). The National Security Strategy now takes a similar position, articulating an expanded notion of national security in proclaiming that ‘[s]upport for a vibrant domestic manufacturing sector, a solid defense industrial base, and resilient supply chains is a national priority’, and that priority actions must include the promotion of ‘policies and incentives that return key national security industries to American shores’ (National Security Strategy, 2017, 30).
An early step in that direction emerged as the economic ramifications of the 2008 financial crisis unfolded. Predating the challenge from China, the impact of the crisis served to underline the importance of an advanced US manufacturing industry for the nation's security and livelihood. That view found a receptive audience in the Obama administration, which proposed the creation of a network of Advanced Manufacturing Innovation Institutes (known as Manufacturing USA, Sargent, Reference Sargent2012). Concerned about the alarming depletion of advanced manufacturing capabilities, the Obama administration in 2014 launched a $1.5 billion initiative to establish Advanced Manufacturing Innovation Institutes across the country. Government funding was guaranteed for a minimum of five years with the potential of renewal for a total of ten years.
The pilot initiative and first wave of institutes was spearheaded by the DOD, which is currently responsible for eight of the 14 entities, the DOE for five, and Department of Commerce for one. DOD-led institutes combine $600 million in federal investment with $1.2 billion in matching funds from industry and non-federal sources. Collaborative research and pre-competitive development bring together academic and private sector researchers and entrepreneurs with the intention of creating – and in some cases regenerating – an ‘industrial commons’ or ecosystem of supply chains.
Manufacturing USA's long-range objective is to create a US-based ecosystem of dual- use supply chains in emerging technology sectors that will lead to the local manufacture of advanced industry products. DOD sees the institutes as ‘game- changing catalysts’ and engages as both a co-investor with industry and as a customer that can tap into capabilities in these sectors for defense projects (National Academies of Sciences, Engineering and Medicine, 2019, chapter 4). For their part, private sector partners have a stake in the project through their cost-shared participation and early access to the commercially viable products that may result.Footnote 16 Barely five years in the making, the institutes are still evolving; nevertheless, their partnership structure is a well-established vehicle for implementing NSS policy. In the DOD case, that policy is designed to yield ‘dual public–private benefit, offering large commercial market potential while meeting key US defense industrial preparedness and operational needs’ (National Academies of Sciences, Engineering and Medicine, 2019, chapter 1). As in all cost-shared collaboration, industry has significant input into the technical side of a program that is tasked with accelerating the delivery of both defense relevant and commercially promising technologies (United States GAO, 2019). Although these public/private partnerships address both commercial and defense manufacturing needs, they do so within specific, defense-relevant technology areas; these dual-use areas include photonics, advanced fabrics, robotics, flexible hybrid (wearable) electronics, additive manufacturing, digital manufacturing and design, tissue biofabrication, and lightweight metal manufacturing. As such, the DOD Manufacturing USA institutes follow a familiar pattern of commercial involvement in support of national security objectives.
4. Expanding Partnerships and Commercial Involvement
The NSS has a long track record of relying on domestic partnerships with non-state actors in US research institutions and private enterprise, amply documented elsewhere.Footnote 17 At their most productive, such partnerships are synergistic. Neither top down nor bottom up, they draw on the strengths and requirements of each side of the commercial–national security divide. The revival of the US High-Performance Computing (HPC) industry, battered by Japanese competition through the 1980s, is an exemplary case. Its regeneration derived from DOE's 1995 Accelerated Strategic Computing Initiative (ASCI), a ten-year $5 billion project to manage the nuclear stockpile. The project's core objective was to provide an alternative to underground nuclear testing, following the signing of the Comprehensive Test Ban Treaty in 1996. ASCI was one of the largest (hugely successful) military–civilian technology development programs ever implemented. The DOE needed a viable HPC industry that could meet its national security mission; the industry in turn needed the DOE's investment and procurement power to re-establish its competitiveness. Input from both sides ensured a successful outcome. Though initiated and invested with national security goals in mind, this dual-use program has generated substantial commercial payoffs (Larzelere, Reference Larzelere2009). Similarly broad benefits are anticipated from the DOE's latest investments in exascale computing for DOE's National Nuclear Security Administration.Footnote 18 The same can be said of many other programs examined in earlier work.
Beyond the case of the high-performance computing industry, many companies in other sectors have found working for the federal government an attractive proposition – at least in the earlier postwar period. But as mentioned earlier, as the relative size of government R&D and procurement markets shrank and the profits and products for commercial and defense markets increasingly diverged from the 1980s onwards, innovative companies saw fewer incentives and became more reluctant to work with government. Private-sector reluctance has at times created headaches for defense strategists as many of the innovations needed to ensure military primacy now occurs outside the traditional defense industry sector. As highlighted in the Pentagon's 2019 budget document: ‘DOD's ability to access commercial technology for its custom, secure, trusted and assured needs is diminishing as SOTA [state-of-the-art] suppliers become fewer and more focused on serving the global commercial market’ (Office of the Secretary of Defense, 2019).
Seeing a need to offer new incentives, the NSS has for several decades taken to incorporating dual-use in the design of its technology programs. It has also added the carrot of venture-capital funds such as the CIA's InQTel (1999–) and the Army's AVCI (2002–), hybrid public–private investment vehicles that can walk and talk the language of Silicon Valley while prioritizing technological goals of the NSS.Footnote 19 Through these and other incentives (such as fast-track procurement) DOD seeks early access to the innovative capabilities of the commercial sector and an opportunity to influence the direction of its emerging technologies. As information technology is a critical enabler of today's defense systems, a competitive commercial sector is thus vital to the national security strategy.
But it is also a problem. Take the case of AI, a pivotal frontier technology for securing future military primacy. For one thing, industry has sucked up the lion's share of the limited expertise in this cutting-edge area of technology. ‘We are in an AI arms race, and it's happening in industry, in the Big Five [Alpha, Apple, Amazon, Facebook, Microsoft] … The computer science departments of our major universities are wiped out because the professors are all on sabbatical doing this work [for the Big Five]’ (Peniston, Reference Peniston2017). If one considers also that Beijing has plans to train 5,000 people in AI, while the Trump Administration currently has no such national education or industry strategy, then one must conclude that meeting the challenges ahead will pose significant difficulties for America.
5. Economic Statecraft vs Industrial Policy: Concluding Remarks
In this context, what gives China the edge is that it has a no-holds barred approach to industrial policy to improve its competitive position in the international arena. That approach makes full use of the government's panoply of policy tools and directional thrust from the centre. Here the US–China contrast could not be greater: Each country has radically different views about the appropriate relationship between government and the private sector. For America, the very idea of industrial policy is one that raises red flags, typically inviting antipathy and controversy. Although it is sometimes claimed that the US has long pursued an industrial policy, the very same claimants often lament that what passes for ‘industrial policy’ is a hodge podge of disconnected initiatives that beg a coordinating strategy. It is therefore tempting to conclude that whereas industrial policy is America's Achilles heel, for China industrial policy is more like the wings of Hermes.
There is however an important caveat and distinction to be made. The term ‘industrial policy’ is now widely used to label any kind of support delivered by the state to economic actors – from garden variety tax breaks and tariffs all the way to corporate bailouts and job-creating initiatives. Arguably, this indiscriminate application to a diffuse range of activities and objectives results in a conceptual flabbiness that undermines the term's analytical value.Footnote 20 Some analysts even go so far as to view the Pentagon as the source of an industrial policy that is pursued ‘beneath the radar’. Industrial policy is of course a useful analytical lens, ‘if it helps to explain why a country chooses [to pursue] particular policies and contributes to our understanding of why particular industries located in that country do well’ (Ketels, Reference Ketels2007). The main point to emphasize is that in the US context, where the economic impacts of NSS-led technology programs have been commercially significant, these are side-effects of policies chosen for strategic geopolitical objectives. Economic competitiveness has not been their primary concern. This does not exclude an interest in commercial competitiveness. On the contrary, as already emphasized, by virtue of its increasing reliance on technological advances from the private sector, NSS interest in a competitive industrial sector has necessarily tightened the economic–security nexus (Ketels, Reference Ketels2007).
Paying attention to quintessential state purpose is key to understanding the differences between industrial policy and statecraft. Industrial policy may or may not be a government's targeted response to international competitive pressures. By contrast, the exercise of statecraft is always a response to challenges arising from the international arena, whether such pressures are geopolitical or geoeconomic in nature. In the US case examined here, the drivers of statecraft are geopolitical, but the policy focus is domestic: achieving and sustaining technological superiority in the home base.Footnote 21 I call this economic statecraft, here contrasted with the more conventional usage of the term.Footnote 22 A statecraft analysis provides a corrective to two influential views. First is the standard view that America's postwar technological pre-eminence was the simple product of free-market entrepreneurship. In contrast to this claim – and in spite of its famed ‘anti-statism’ (Friedberg Reference Friedberg2000) – it was the exercise of statecraft that enabled the United States to emerge after the Second World War as the world's undisputed high-tech hegemon, spinning out virtually all the radical innovations that drive the modern industrial economy and underpin its prosperity. Second is the conventional minority view which posits that the US pursues an industrial policy as a ‘hidden developmental state’ (Block, Reference Block2008; Mazzucato, Reference Mazzucato2013; Wade, Reference Wade2014). Close analysis of key projects over several decades reveals a very different story. The NSS typically initiates programs for technology leadership to sustain its military advantage. It also values a commercially competitive industrial base that can help develop, test, scale up, and deliver security-relevant (and typically dual-use) technologies. But if an industrial sector has little or no relevance to the broader national security enterprise, it is unlikely to attract serious or sustained government support.Footnote 23 In other words, NSS agencies selectively support initiatives in the commercial space primarily because of the perceived strategic imperatives at stake, not to improve economic ‘competitiveness’ per se.Footnote 24
By paying attention to the principal drivers and ambitions that motivate the relevant policy agents, one is thereby led to emphasize an important comparative point: the US may have a poor inclination for, and track record in, industrial policy, but it possesses an outstanding predisposition and capacity for the exercise of (economic) statecraft. In its American incarnation, economic statecraft prioritizes technological superiority as a strategic imperative and enlists in that pursuit the relevant private sector partners and agencies tasked with national security missions.Footnote 25 As already mentioned, and discussed in depth elsewhere, the revolutionary innovations resulting from these endeavours have spawned globally competitive US industries. What makes America's domestically focused techno-industry programs a distinctive form of statecraft, however, is not their significant economic payoffs, it is that, in spite of the significant economic benefits of these programs, they have been geopolitically driven, strategically motivated, collaboratively implemented, and designed to outmaneuver a clearly identified set of foreign rivals. Unlike your garden variety industrial policy, economic ‘statecraft’ implies an acute awareness of the geopolitical challenges facing the nation and a set of strategic actions in the domestic techno-industrial arena designed to meet those pressures head on.Footnote 26
In this light, what passes for China's ‘industrial policy’ may need to be reframed since it seems far removed from a standard quest for improved economic competitiveness. In some respects, it leans towards the collaborative public–private model in the American version of statecraft. Indeed, an assumption in official circles that may need rethinking is the view that America's collaborative model ‘gives the US an edge over more authoritarian regimes that favor a “top–down, industrial approach” to research and development’. So states the White House Deputy Chief Technology Officer, Michael Kratsios. Convinced of the superior advantages of the US system for achieving global dominance in AI, Kratsios declares that he is ‘always going to bet on the American innovation ecosystem’ (Kratsios in Corrigan, Reference Corrigan2018).
It turns out that China is a diligent student of the US system and according to experts, its innovation ecosystem might not stray too far from America's, at least not as far as some believe. According to one specialist in Chinese technological development, ‘The American model of innovation is unique, but at the same time we are starting to see a number of these elements also emerging in China's approach to development’ (Kania, Reference Kania2019). In AI research for example, Chinese businesses are partnering with academia and creating joint laboratories to commercialize results. China also understands the significance of possessing globally competitive commercial industries for its national security and technological leadership. Recent efforts by one of its state-owned companies to steal US semiconductor technology underlined this commercial priority (discussed in Allen, Reference Allen2019, 14). More generally, military–commercial fusion in China does not mean that commerce is simply the servant of the military (though the potential is there through the legal requirement of its national champions to collaborate). Clearly, China is mindful of the need to avoid Soviet-style stagnation. In its AI Development Plan strategy document, for example, China's approach is articulated in the following way:
Follow the rules of the market … accelerate the commercialization of AI technology and results and create a competitive advantage. Grasp well the division of labor between government and the market. (Allen, Reference Allen2019, emphasis added)
If China can indeed grasp well that division, it can multiply the advantages of a massive domestic market, a large trade surplus, high-level policy ambition, and an autocratic leadership able to manipulate economic and financial levers. One must add to that China's dominance in global value chains and mastery of the manufacturing process give it the ability to prototype and scale at mass. This line up of China's advantages would not be complete without reference to the US disadvantages posed by the travesty of Donald Trump's leadership. For these reasons, as astute observers point out, underestimating China may prove costly. There is no guarantee that the current advantages of the US innovation system will endure or be sufficient on their own to meet the military–economic challenge that China poses. US leadership in the technologies of the future will depend in part on serious efforts to foster the domestic supply chains that can help reconnect production and innovation. This will prove very challenging since, unlike its authoritarian adversary, the US must weigh national security imperatives against private commercial interests. Given, the high cost of breaking up global supply chains, such measures are likely to be unpopular and have limited results. If NSS economic statecraft can redress some deficiencies in supply chains, it is most likely to apply to highly strategic technologies like microelectronics. The prospects for that effort to succeed are more likely to be realised by the incoming Biden administration than by its dysfunctional predecessor.
