Reviving Economic Statecraft for National Security

Whether coping with pandemics, the effects of climate change, or the rise of a peer competitor, defense of the realm has become a more complex, multifaceted task than the pursuit of armed preparedness. National security is no longer conceived solely or primarily as a military affair relevant to the world of geopolitics. The confluence of strategic and economic concerns now looms large in policy decisions. The context framing this enlargement is the China challenge. Beijing’s recent emergence as a peer competitor that pursues geopolitical-eco­nomic superiority has motivated U.S. efforts to reclaim its high-tech leadership. A spate of bold new initiatives promulgated through the chips and Science Act now target technologies considered central to U.S. strategic advantage—most notably, semiconductors. As these com­mercially relevant initiatives move center-stage, some see the United States rejecting an anti-statist mindset and embracing industrial policy in a new departure from established practice.

But if we take account of their context, motivation, and intention we find a strong precedent for the recent round of measures. Galvanized by geostrategic imperatives, the new techno-industrial initiatives build upon the well-established practice of economic statecraft that prevailed throughout the Cold War. While once the quasi-exclusive domain of the defense and defense-related agencies of the so-called national security state (NSS), responsibilities now fall mainly to the Department of Com­merce.

My earlier book America Inc.? addressed the rarely considered question of why, after World War II, it was the United States, rather than some other country or countries, that emerged as the world’s high-technology superpower. Being vital parties to this new status represented a marked shift for U.S. corporations, which hitherto (with some historical exceptions) were best known for their ability to improve upon innovations developed elsewhere.¹

Extensive research found that over the course of the Cold War, the United States had put in place a unique innovation engine driven by the existential threat perception of a hostile rival, bent on remaking the world in its own image. Quick on the heels of Sputnik, the drive for innovation and the quest for qualitatively superior technology became the linchpin of a U.S. national security state determined to outflank the USSR and fend off surprise. Throughout that pursuit, Washington re­mained cool toward industrial policy while it excelled at economic statecraft.²

Yet as Soviet hostilities receded and new asymmetric threats pro­liferated, the United States began to relax its laser-like focus on high-tech supremacy. In the absence of a peer competitor, the security-led innovation engine began to sputter. Its slow attrition over the course of the 2000s led NSS insiders and observers to issue numerous warnings that America’s technology advantage was fast eroding.³

At the same time, an equally insidious erosion was occurring as great waves of manufacturing production—mature as well as advanced—migrated offshore, chiefly to China. Despite the massive consequences of this migration—loss of production know-how, decline of a skilled workforce, shrinking of supply chains and of the larger ecosystem—little corrective action was taken. America’s loss became China’s gain. But in U.S. national security assessments, there was little cause for alarm. China had become a manufacturing powerhouse, but its technological capabilities remained well below U.S. levels, thus posing little strategic threat. For political leaders, China was perceived as a rising economic and regional power which, with the right mix of incentives and deterrents, would see the benefits of playing by the rules.

The “China First” Challenge

It took the launch of President Xi Jinping’s “China first” policy in 2015 to turn that understanding on its head and present China as a credible economic and military adversary. Officially known as the Made in China (MIC) 2025 strategy, MIC set out a plan for achieving leadership in ten critical emerging technologies. Its stated goal was not simply to indigenize technology, but to replace foreign suppliers, raising the do­mestic content of core components and materials (to 70 percent by 2025), and ultimately to occupy the most advanced parts of global production chains. Backed by an industrial policy with financing and subsidies in the hundreds of billions of dollars, MIC 2025 effectively heralded Beijing’s intention to supplant the United States as the new global military and economic superpower. The international backlash to the plan was sufficiently intense to move Beijing to expunge all refer­ences to MIC 2025 from Chinese Communist Party (CCP) documents and official speeches, while leaving MIC policies largely in place.⁴

Although rarely mentioned prior to 2015, let alone a topic of concern,⁵ it was clear that the world had entered a new era of great power rivalry. It wasn’t China’s rise that took the U.S. government by surprise. It was the clear assertion of China’s geostrategic motivations. If there was any lingering ambiguity behind Beijing’s intent, the broader context of China’s drive for military-civil fusion (MCF) removed all doubt. As the State Department describes it, MCF is an “aggressive, national strategy” of the CCP to develop the world’s most technologically advanced military and achieve military dominance.⁶ MCF is based on the premise that security and economic strength are intertwined, and mastery of advanced technologies—from microelectronics and artificial intelligence to quantum computing and biotechnology—is the common thread enabling military and economic preeminence in future decades. Launched in the same period as MIC, its core feature is the elimination of all barriers between China’s civilian research and com­mercial sectors, and between its military and defense-industrial sectors.

Apart from lacking in transparency, there is nothing particularly sinister in China’s MCF strategy. As an attentive student of U.S. prowess, Beijing has in fact modeled its initiatives on a close study of America’s defense industry and innovation ecosystem. As Elsa Kania, analyst of China’s defense innovation, observes, military-civil fusion is, in some ways, China’s attempt to learn from and replicate certain strengths of the U.S. model, “but reflected through a glass darkly and implemented as a state-driven strategy.”⁷

But it goes much further. To implement this strategy, the CCP is using all means—both fair and foul—to acquire for itself the world’s cutting-edge technologies.⁸ Concern about China’s MCF program stems in part from the effort to leverage MIC 2025 technological advancements for military development. But in addition to drawing on its own R&D resources, China seeks to supplant U.S. leadership in semiconductors through outright theft, forced technology transfers, and a deep pocket of funds for foreign acquisitions. The PLA Daily even uses the expression “Picking flowers in foreign lands to make honey in China” to explain a less examined aspect of MCF: how the PLA leverages overseas expertise, research, and training to develop better military technology—often without the host institution’s awareness.⁹ So whether shopping for tech start-ups in foreign countries, or importing the latest in high-tech equipment, or funding its PhDs to do research abroad, the CCP is pick­ing flowers abroad to make honey at home.

In combination with MIC 2025, military-civil fusion could hardly fail to resurrect the spectre of great power rivalry that had died with the the Soviet Union. China’s audacious objectives thus proved effective in shifting Washington’s threat perception and slowly but surely recharging its techno-security mission. This recharge of the techno-industrial system comes on the back of lengthy neglect and has experienced a slow takeoff. The protracted start toward remedial action (relative to the dire need) partly reflects the deep divisions within the U.S. polity, now more riven than during the Soviet era. This makes achieving bipartisan consensus on legislation a difficult and time-consuming task. (Thus, it would take two years—and a special “national security” briefing of Republican politicians—to pass the chips Act.)

Another significant difference from the previous era is that the challenge from China is more intense: China is more technologically savvy and more intent on surpassing the United States than the Soviets were, so the technology gaps are smaller, and the determination is fiercer.

National Security Reconceived

A third important difference in the current story of great power rivalry is the new, much more expansive understanding of national security which crystallized in the same period following the release of China’s MIC 2025 plan. In a departure from Cold War practice, the U.S. national security mission is no longer conceived primarily as a military affair. Defense of the realm is perceived as a more complex, multifaceted task than the pursuit of armed preparedness alone. Although the su­periority of the U.S. military still rests largely on its technological preeminence, security extends beyond technology designed for the physical battlefield to areas such as cybersecurity and intelligence gathering. AI, in particular, has deepened the threat posed by cyber attacks and disinformation campaigns, enabling autocratic regimes to infiltrate society, steal data, and interfere in democracy.¹⁰

Similar security concerns now apply to protection of personal data, critical infrastructure, and, not least, supply chains which, thanks to digitization, can also be weaponized by potential adversaries. In a recent report, the Department of Defense confirmed that adversarial infiltration into defense supply chains is “substantial.”¹¹

More generally, military capabilities since the 2000s have become much more closely linked to the state of commercial technology in the advanced and tech-intensive industries, rendering the viability of such industries imperative for national security.¹² Testifying before Congress on strategic technology competition as the “unseen conflict,” In-Q-Tel’s CEO, Chris Darby, observes that whether in communications networks, computing infrastructure, power grids, or healthcare and finan­cial sys­tems, the “new great game is about dominance in these areas.”¹³

The resulting confluence of strategic and economic concerns has resulted in expanding the concept of national security in policymaking circles. As if reflecting this shift, a new phase in U.S.-China tech rivalry began to take shape with little fanfare in the lead up to the chips Act. In 2019, the Trump administration took steps to limit access of Chinese companies to U.S. know-how. The Bureau of Industry and Security (BIS) added to its Entity List five Chinese companies with ties to the CCP’s supercomputing program, blacklisting them from doing business with U.S. companies. BIS took similar steps with SMIC and its subsidiaries for their close ties with China’s defense industry. Similarly, the Department of Commerce halved the number of licenses allowing U.S. companies to deploy Chinese nationals on sensitive technology and engineering projects.¹⁴ Intel, Google, and Qualcomm severed business links with Huawei in response to a provision of the 2019 National De­fense Authorization Act that bars any company (and executive agency or government contractor) from receiving government financial support in using Huawei equipment. Meanwhile, attentive to the changing political environment, U.S. chipmaker AMD declined to extend licenses to its Chinese joint venture partner. Other measures of “economic statecraft,” both preemptive and proactive, soon followed.

So, well before Covid-related supply chain shortages began to bite (especially in 2021–22), some of the groundwork was being laid for a more serious response to China’s geostrategic ambitions and U.S. tech­no‑industrial erosion. By mid-2020, the United States had embarked on a course to regrow the all-important production of semiconductors, with a bill before Congress that would eventually become the chips Act.

Significance of Semiconductor Tech

Why start with semiconductors (also known as integrated circuits or silicon chips)? At least three reasons leap to the eye. First is the foundational importance of semiconductors in the military and commer­cial world. The general purpose, dual-use character of chip technology makes it ubiquitous, finding its way into every corner of the economy. As the lodestar of U.S. technology leadership, its significance has been neatly expressed as “the new oil.”¹⁵ Chips power almost everything that the modern economy has to offer—from the tiniest cell phone to the largest cruise liner, from autonomous cars to advanced military systems. As the building blocks of advanced technology, semiconductors have also sped new vaccine development, by enabling rapid genome sequencing.¹⁶

Second, the dual-use character of the technology positions semiconductors at the heart of (the high-tech agenda in) national security strategy. As the CEO of In-Q-Tel observes, just as the success of any mission depends on semiconductor performance to power modern weapons and communication networks, so advanced manufacturing and the world of commerce are utterly reliant on the technology.

Finally, and not least, semiconductors are central to a range of emerging technologies—especially artificial intelligence and quantum computing—which are on the verge of transforming the world as we know it, and above all the character of interstate conflict.¹⁷ It is China’s advances in this technology that has the United States especially concerned. It follows that if China is to surpass the United States in the most advanced technologies, it must master semiconductors, which is why China has declared self-sufficiency in their production a national priority. As the report of an independent commission on AI recently concluded, “If a potential adversary bests the United States in semiconductors over the long term or suddenly cuts off U.S. access to cutting-edge chips entirely, it could gain the upper hand in every domain of warfare.”¹⁸

Because of the primacy of semiconductors in the military-commer­cial world and its special importance to Beijing’s strategic ambitions, the Biden administration has undertaken bold moves to regain—and retain—control of this technology. American firms have formidable capabilities in chip design, but more than two decades of government neglect of the industry relative to China’s (and other countries’) policy activism has allowed U.S. prowess in other areas of manufacturing to atrophy. One consequence of this inaction is a production deficit that creates a massive dependence on foreign sources of manufacturing. Another is a dearth of talent as younger people opt for what they see as more viable, dynamic industries.

This makes the battle for high-tech leadership also a “battle for brains.” Sorely needed was a major piece of legislation that would reduce reliance on foreign suppliers, grow domestic semiconductor production, and foster workforce development. The need to reshore chip production and address supply-chain vulnerabilities had become especially urgent. As the chair of the National Security Commission on Artificial Intelligence put it in 2021, “given that the vast majority of cutting-edge chips are produced at a single plant separated by just 110 miles of water from our principal strategic competitor, we must re-evaluate the meaning of supply chain resilience and security.”¹⁹ The chips Act is the start for rectifying this policy neglect.²⁰

It took Congress two years of debate to sign the chips and Science Act into law on August 9, 2022, and it was only after a closed-door national security briefing that Republican opponents blocking the bill were persuaded to sign on to the legislation.²¹ The first part of the Act focuses squarely on semiconductors. Chips (Creating Helpful Incentives to Produce Semiconductors) is designed to boost U.S. chip production, innovation, and national security. It aims to catalyze investments in domestic semiconductor manufacturing capacity, stimu­late innovation, spur commercialization of leading-edge technologies, and develop a technical workforce. It allocates $52.7 billion for semi­conductor manufacturing, R&D, and workforce development. Most of this expenditure ($39 billion) is to subsidize the construction of new microchip manufacturing facilities in the United States. The measure includes a 25 percent tax credit for investments in domestic fabrication facilities and equipment. To implement the chips program, Commerce has created the chips Program Office (CPO) housed within the Na­tional Institute for Science and Technology. As well as administering the allocation of manufacturing incentives and a $75 billion loan guarantee program, the CPO is tasked with monitoring compliance with performance rules, so-called guardrails. Unlike Part B, funding for Part A of the statute is both authorized and appropriated.

The larger package, Part B—the “and Science” part of the Act—addresses investment in R&D for critical and emerging technologies. It comprises numerous and diverse provisions which include setting up a new NSF Directorate for Technology Innovation and Partnerships to accelerate commercialization of new technologies in key sectors, creation of regional high-tech hubs, and development of a larger science, technology, engineering, and math (STEM) workforce. Implementation will fall to the newly established chips R&D Office, a nonprofit, public‑private collaborative effort between the Department of Defense, Department of Energy, and the NSF. The chips R&D Office will lead an $11 billion portfolio to deliver four programs designed to advance leadership in developing semiconductor technologies. Its centerpiece, the National Science and Technology Center, is a collaborative arrange­ment between Commerce and Defense conceived as a public-private consortium involving government, industry, academe, and several other stakeholders to advance innovation, set standards, and secure global leadership in semiconductor design and manufacturing. Overall, chips directs $280 billion in spending over the next decade, reserving a whopping $200 billion for scientific R&D, commercialization, and workforce development.

Although Commerce will have overall charge of the policy, it will not be a solo act. There is no shortage of initiatives or issues where interagency collaboration and public-private partnering will be needed to optimize policy implementation. Wherever interlinked security con­cerns call for interagency collaboration, for example, the CPO (whose chief strategy officer is a former Pentagon official) will work with the Department of Defense, the Office of the Director of National Intelligence, the NSF, and other relevant agencies to define and meet their respective security requirements.

It must be said, however, that trying to piece together “a multifarious 400-page piece of industrial policy legislation” like the chips and Science Act, and establishing who and what gets funded, is a bit like trying to solve Rubik’s Cube. As one analysis concluded, “determining the exact amounts and programmatic nature of the resources available in the chips and Science Act remains challenging in some cases and impossible in others.”²² This difficulty stems partly from the multiplicity of programs, objectives, and actors involved, and partly from the differences that arise between programs “authorized” and program funds “appropriated.” Regardless of the authority to spend, Congress must still pass a budget each year to set aside the funding authorized by this chips R&D law.

Industrial Policy?

We come now to the nature of the beast. As chips (and other new initiatives like the Inflation Reduction Act) move center-stage, some see policy leaders finally overcoming an anti-statist mindset and embracing industrial policy, in a new and welcome departure from es­tablished practice. As one broadly representative response to the chips Act put it, “It was a remarkable endorsement of industrial policy—government support for selected industries—that U.S. lawmakers had largely shunned for decades.”²³

Has the United States taken a revolutionary turn, as some suggest? If so, this would amount to an enormous change of attitude for the United States, where the very idea of “industrial policy” has long invited heated controversy and rejection. Few would dispute the observation that, of the advanced economies, “the United States has historically been the most averse to using industrial policies in any kind of consistent fash­ion.”²⁴ During the 1980s, the U.S. government’s apparent inaction in the context of Japan’s relentless rise sparked a heated debate over the nation’s need for an industrial policy that lasted almost a decade. Closer to our own time, China’s impressive export growth and technological transformation have helped to revive the idea of industrial policy and encourage its advocacy. Indeed, for some, the administration’s recent policy actions for semiconductors and green technologies would appear already to represent an endorsement of it. Unlike Japan in the 1970s and ’80s, the United States perceives China as a very different kind of rival—less as a high-flying economic competitor than as a potential threat to the global order and the role of U.S. leadership within it.

Some might be tempted to claim that the national security rationale is merely a fig leaf hiding the true motive, namely, to stymie economic competition from China. But to be convincing, the fig-leaf claim would need to address some puzzling inconsistencies, such as the administration’s stated fear that China’s access to advanced chips could benefit the Chinese military with developments in guided missiles and surveillance systems.²⁵ Another is the opposition of leading chipmakers themselves—Nvidia, Intel, and Qualcomm—who “lobbied the U.S. government for months” against imposing restrictions on China, arguing that it would only “harm American business,” while strengthening China’s ability to compete with the United States.²⁶ Most revealing perhaps is the very marginal role of manufacturing production itself in the chips program. As has been widely noted, for an industrial policy this program is very light on industry.²⁷

Nevertheless, since the concept is now in favor across the globe, the question is whether “industrial policy” is the most productive way to describe the U.S. response. Does that label help to illuminate the rationale or purpose that informs Washington’s recent policy actions, or the underlying context that has given rise to them? Does it make sense to portray in the commonplace language of “industrial policy” a rela­tively exceptional policy intervention like the chips Act?

These questions deserve reflection since the answers are far from obvious. Ironically, they take us into well-ploughed territory that has lain fallow for some time, but is now in the process of being revived. I refer to the masterful use of domestically oriented “economic statecraft” that the United States perfected during the Cold War as it sought to outflank the Soviets by building a commanding lead in high technology.

Why Economic Statecraft?

Economic statecraft in the standard usage refers to the use of foreign policy tools to change (reward or punish) the behavior of a foreign power.²⁸ In this conventional sense, the purpose of economic statecraft is to achieve foreign policy objectives through economic policies that are exclusively focused on the international arena. From this perspective, in exercising statecraft, states seek to influence foreign governments by deploying tools that provide rewards or sanctions. Trade, aid, finance, and investment are the typical tools mobilized to this effect, examples of which we have seen applied against Russian aggression toward Ukraine, and in China’s weaponization of trade in response to perceived insults by Australia. Accordingly, such tools are invariably oriented outward and aimed at influencing the behavior of foreign powers. This foreign policy focus is not mistaken, but it is limited insofar as it excludes significant ways in which geopolitical—and geoeconomic—pressures activate quite different tools of economic statecraft with a different, internal purpose in mind. In this case, the focus is on incentivizing and reorienting the behavior of actors in the domestic domain, not least in the high-technology arena.²⁹

There is, in short, another aspect of economic statecraft relevant to the story being told here, and it is practiced chiefly in the domestic arena to mitigate vulnerability to foreign influence, intrusion, or invasion. In this context, statecraft focuses on achieving and sustaining technological prowess and holding onto it as far as possible in order to fend off or surpass a strategic rival. It is the kind of statecraft that the United States perfected as it set about responding to the profound shock of Soviet Russia’s successful first launch of Sputnik in 1957. As my research shows in America Inc?, the national security state that emerged from that response functioned as an innovation engine that worked in partnership with private actors to deliver all the major technologies that power the modern economy and underwrite military superiority.

Indeed, if we consider the context, rationale, and objectives of the recent chips initiative, it seems that, on each count, the perceived need to deal with an external strategic threat is paramount. Government’s highest priority, its overriding objective, is to secure domestic access to advanced semiconductors for its defense and critical commercial needs. Improving productivity or profits would be a welcome side effect, but it is not a focus or key objective of the policy. As one of the two Senate proponents of the chips law explained, “[chips] is not an economic proposition. . . . It’s obviously important from an economic standpoint, but national security is the main reason why Sen. Warner and I undertook the legislation.”³⁰

As if to emphasize this aspect of the law, Commerce Secretary Gina Raimondo explained that, for the first award, the selection of a defense contractor, BAE, rather than a commercial semiconductor facility, was meant to emphasize the administration’s focus on national security: “As national security becomes as much about the chips inside of our weapons systems as the weapons systems themselves, this first chips announcement shows how central semiconductors are to our national defense.”³¹

A cynical rendering might view the national security rationale as code for a “hidden” industrial policy.³² But if we insist on framing the chips measures simply as industrial policy, we must then sideline the drivers, context, motives, and priorities as if of little consequence. Unlike industrial policy, however, in statecraft it is the specific threats or pressures originating from the international arena that act as the galvanizing force. These may be techno-economic challengers or mili­tary adversaries, or both. In U.S. statecraft, these external drivers are central to the policy uptake.³³

In the U.S. setting, the security rationale follows logically from a context of heightened concern over the use of advanced and emerging technologies for grey-zone and military conflict. Consider that China’s longstanding pattern of state-organized economic espionage, serial cyber theft, IP theft, and predatory trade practices go hand in hand with “its militarising of the South China Sea; its ‘anti-access, area denial’ maritime strategy aimed at the US Navy; and its massive One Belt One Road initiative . . . all linked together in China’s national strategy,” including its military-civil fusion and comprehensive techno-industrial policy. A brief thought experiment is instructive: let’s remove the China factor from the scene and ask ourselves, to what extent would the chips legislation (or the new export controls) have seen the light of day? It is hard to ignore this context in calling forth a decisive response from Washington.

If we conceive Washington’s techno-focused response to China’s geostrategic challenge as an exercise of economic statecraft, we can identify two arms. Its proactive arm comingles military-strategic and commercial objectives that seek to promote advanced manufacturing and innovation. As the creative aspect of statecraft, it relies chiefly on subsidies and tax credits to stimulate new domestic ventures as well as reshoring of investment and friend-shoring of foreign manufacturing. These are the kinds of tools we would typically associate with a policy for industrial development, but their relatively narrow focus and strate­gic impetus assign them a different mission.

Since China’s MCF strategy increases the likelihood that high-technology know-how will be used against the United States, serious preemptive steps have also been instituted to close the stable door before all the prize horses have bolted. Accordingly, in a remarkable precautionary move, the chips legislation includes numerous “guardrails” or disciplinary mechanisms to prevent noncompliance and to ensure that subsidy recipients deliver on their commitments. The guardrails entail enforcing correct uses of government funds, overseeing national-security-sensitive intellectual property transactions, and monitoring outward investments, all of which are the remit of the CPO, which is empowered to claw back funds if considered misused.³⁴

Alongside these novel mechanisms designed to augment the effective­ness of chips funding, the United States, on October 7, 2022, issued a sweeping set of export controls aimed at limiting Beijing’s military modernization efforts by blocking access to advanced AI chips made with U.S. inputs.³⁵ Not only was U.S. manufacturing equipment and design software now off the table, so too was access to U.S. companies and citizens, who were suddenly prohibited from working with Chinese entities to advance chip design, research, or fabrication. This was “a bigger bombshell than stopping us from buying equipment,” remarked a Chinese official at a state-owned company.³⁶

Another preemptive or preventive measure in the U.S. toolbox draws on the Foreign Direct Product Rule (FDPR). In its updated form, FDPR subjects foreign-produced semiconductors to U.S. jurisdiction if the item was produced using U.S.-origin plant and equipment, software, or technology. The result is a form of “weaponized interdependence”³⁷ that enables the United States to exploit its dominance in semiconductor design networks to determine who has access to critical technical infor­mation and knowledge. Cross-network weaponization enables the U.S. government to prevent a third party from accessing the most advanced semiconductors, thus effectively acting as a chokepoint.³⁸

More generally, the new export controls seek to limit or prohibit the outflow of critical U.S. know-how, whether embedded in hardware, design, software, U.S. technology companies, or personnel. The reason­ing is spelled out in a September 16, 2022, speech by National Security Advisor Jake Sullivan as he signaled a dramatic shift in the U.S. approach to the rise of China’s advanced semiconductor sector. Simply maintaining a steady lead in the technology, by staying a couple of generations ahead, said Sullivan, was no longer adequate for today’s strategic envi­ronment. Instead, “We must maintain as large a lead as possible,” by actively limiting Beijing’s capabilities. Technology export controls are more than just a “preventative” or protective tool, insists Sullivan. These restrictions are intended as a form of economic deterrence, “a new strategic asset in the U.S. and allied toolkit to impose costs on adversaries, and even over time degrade their battlefield capabilities.”³⁹ For its part, China sees the various export controls as “suppressing China’s chip industry through economic coercion” and has denounced them as “ridiculous and shocking.”⁴⁰

Policy Implications

From a practical policy perspective, why does it matter if we call the new U.S. approach industrial policy or economic statecraft? At some level, we should think of the two modalities as complementary, not competing. Economic statecraft presupposes a state that can respond effectively to a serious external challenge; techno-industrial policy may be a core element of that response. The current confusion over terminology in the United States, however, may reflect a deeper lack of clarity with respect to ends and means.

Effective economic statecraft will depend on the integration of national security and economic policy to ensure that all relevant actions are moving in the same direction. These two masters can be better served via a formally instituted interagency unit that spans security and economic expertise with input from industry and academe. As one of its missions, such a security-industry unit would master an analytical capacity: (a) to monitor, evaluate, and anticipate supply chain issues, including critical technology sectors like those affected by Covid supply shortages; and (b) most importantly, to avoid future scenarios like that which the regular national security assessments failed to comprehend, and thereby attached little importance to: the decades-long hemorrhaging of production, local supply chains, and depletion of workforce talent. A unit with such capabilities does not currently exist.

Moreover, whether for statecraft or industrial policy, subsidies without performance conditions are like working on a wing and a prayer. “Guardrails” are essential, but meet only one side of the equation. They address compliance: “If we give you this, don’t do that.” But to require a performance standard is to raise the bar and expect something in exchange for subsidies granted—notably, that certain performance conditions be met in exchange for the subsidies. As Alice Amsden’s work has amply demonstrated, this “reciprocity” was the golden rule that made industrial policy a resounding success in the rise of the “East Asian Three” (South Korea, Taiwan, Japan). Although the chips initiative does not quite meet the industrial policy test, it also lacks mechanisms for effective economic statecraft. As I’ve argued elsewhere, to be effective, economic statecraft depends on public-private sector relations where public objectives are achieved through disciplinary mechanisms. Prospective fab companies should still be required to meet certain performance conditions in exchange for financial incentives. These could include agreed milestones with timelines, or technological indicators such as reduced circuit widths.

Broader improvements in manufacturing production—the main event for a serious industrial policy—is currently something of a poor cousin in the chips program, at best a sideshow to the big-ticket event of fab construction and R&D. While there is provision for “funding for domestic manufacturing,” the allocation is aimed narrowly at the construction, expansion, or modernization of semiconductor facilities. The evidence is loud and clear that the United States won’t regain its lead in emerging technologies unless—like China—it treats manufacturing as a fundamental part of technological advancement. If America wishes to get serious about industrial policy, therefore, it should place production innovation at the forefront of industrial policy instruments, drawing on the private sector for input and buy-in. This would also make U.S. statecraft more robust.

Other Battles Ahead

Workforce deficiencies. With more than six hundred statements of interest from semiconductor companies as of February 2024, all reportedly proffering sound investment proposals, there is no lack of response to the chips program. But to increase its prospects of success, some glaring deficiencies will need to be remedied. The first is to double down on training a technology workforce.⁴¹ Workforce challenges remain a serious source of concern and, according to a recent report, a major reason why the nation’s advanced industries have been struggling. Can one hope to eliminate U.S. dependence on foreign chips when the industry is in the midst of a STEM talent shortage, faces a likely shortfall of 300,000 engineers and some 90,000 skilled technicians by 2030, and lacks personnel in “every major talent group required to operate a fabrication plant”?⁴² Although the “battle for brains” is anticipated in the extensive workforce initiatives of the chips and Science Act, the funding and infrastructure required are inadequate.

Marginal attention to legacy chips. We know that the thrust of U.S. preemptive measures (chokepoint strategy, investment blocking) is to thwart China’s access to leading-edge chips. China needs these to produce the advanced-node semiconductors that would give it a military edge.⁴³ But what about China’s production of legacy or mature chips? In spite of Washington’s bold new proactive initiatives to produce semiconductors, and not least the preemptive export and investment rules to impede China’s ability to buy, make, or steal advanced chip technology, this is no time for the United States to relax. To do so would be to ignore China’s legacy dominance at its peril. While the United States is busy forging clever stratagems to choke off China’s access to advanced chips (with circuit breadth of five nanometers or smaller), China is busy ramping up investment in mature chip production, where most of its semiconductor manufacturing capacity is con­centrated (twenty-four nanometers or above). Since legacy chips “underpin everything from dishwashers to military weapons systems,” China’s strengths in producing these mature chips could seriously threaten U.S. economic and national security.⁴⁴ It is not difficult to imagine a scenario in which, while China is locked out of cutting-edge semiconductors, it could do likewise to the United States (and rest of world) by locking out access to the legacy chips, first by dominating the supply of mature semiconductors just as it did with solar, then forcing out foreign chip competitors through dumping, finally rendering the United States dependent on China for mature chips. Placing some emphasis on the manufacturing of mature semiconductors would seem both an obvious and essential insurance policy.

Manufacturing deficit. For a very long time, many commentators have warned that the United States needs to get serious about industrial innovation policy.⁴⁵ They also concur that without an emphasis on production—its cornerstone—there is no such policy. As David Adler and MIT’s William Bonvillian observe, advanced manufacturing and scale-up financing are certainly part of the new programs, but they are a minor focus relative to the level of effort needed. Production needs to be addressed directly. “No nation can maintain a world-power position while walking away from manufacturing.”

Another Sputnik Moment?

In the United States, we find a distinctive form of statecraft: Driven by geostrategic imperatives, the new techno-industrial initiatives build upon the well-established practice of economic statecraft that was finely honed during the Cold War. Rather than designed to influence the behavior of a foreign power (standard usage) or to boost economic competitiveness (the sole or primary objective of an industrial policy), these measures are designed to regenerate domestic capacity in a technology critical to U.S. strategic advantage. Taking into account the distinctive context of the new initiatives as well as their rationale and objectives opens a window onto security-oriented “economic statecraft.” Its first major implementation since the Cold War has come in the form of the chips and Science Act.

But critical differences remain. Cold War statecraft ranged widely across advanced technologies with dual-use potential and included pro­grams for manufacturing and scale up. But the new program is running light or nonexistent on manufacturing outside of semiconductor fabs, a long-running area of weakness that is incompatible with world power ambitions.

Can the United States correct its long-neglected deficiencies in advanced manufacturing, replenish the industrial ecosystem’s supply chains that have been depleted after decades of offshoring, deliver a trained workforce, and coax the onshoring of U.S. and allied production? This may or may not be a Sputnik moment, but the task is grand, and the stakes are high.

This article originally appeared in American Affairs Volume VIII, Number 2 (Summer 2024): 3–21.

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