The Buzz

China: The Pentagon’s Great Industrial Challenge

Entering the White House on January 20, 2017, the next President will confront a daunting challenge: ensuring continued US preeminence in military capacity. That edge, which America has enjoyed for a quarter century, is being systematically blunted by competitors. The roots of American advantage lie in an interlinked set of social, political, economic and technological factors. In particular, the United States has exploited the self-reinforcing benefits of being both economically dominant and technologically advanced. Now, however, globalization is driving countertrends in the diffusion of knowledge and wealth. The eroding American techno-economic lead is a chronic risk to US power that will require enormous national effort to overcome.

In articulating their Third Offset Strategy, US defense and security officials are signaling an awareness of this problem. They should understand that the nation’s techno-economic position is underpinned by the remarkable dynamism of its private business sector. US corporations are the world’s most valuable by far, because they are the most profitable, the most productive and innovative, and highly globalized. Almost two-thirds of the world’s most valuable firms are American. They rule over many strategic industries. This position has been achieved with the considerable support of other US institutions: the American workforce foremost, but also the government, universities, research organizations, capital markets, and the military. Recognizing the continuing importance of nurturing this symbiotic ecosystem, the Pentagon has long funded organizations like DARPA, and now is reaching out to the private sector in new initiatives such as DIUx.

There is a general consensus that key technologies addressing both civil and military needs increasingly are merging. A good example is machine autonomy enabled by artificial intelligence, which is a clear dual-use application. “Civil-military integration” is not new, of course, but what is different now is the sheer sophistication and resources of the private sector relative to the government. American firms are independently capable of extraordinary feats of initiative: sparking the shale fracking revolution, for instance, and launching rockets into space. This is welcome testimony to the nation’s model of capitalism. But it should give pause to policymakers, because there are reasons to believe that the motivations of the private and public sectors are diverging. What’s good for big business may not necessarily be good for America.

Reaping globalization’s harvest

Modern globalization, pioneered by Washington’s own institutions, has both raised millions out of poverty and spurred a worrying leap in inequality between rich and poor, skilled and unskilled, and some economic sectors and others. The US as a whole may have prospered for a generation on this unprecedented expansion of international commercial integration, but the plight of the American worker is plenty visible in 2016’s election campaign. Globalization has also seen an epochal shift in the relative balance of power between countries, and between governments and companies.

The archetypical US economic success story today is the multinational corporation, culturally American but spreading far across the planet. The allegiance of such firms is not to Washington but to their shareholders. Half of their profits come from overseas. They deploy sophisticated strategies to minimize their tax burdens stateside. They may exploit regulatory arbitrage too. They build their factories and laboratories overseas — to tap local talent, get closer to markets, exploit financial inducements, and meet countries’ “localization” requirements which are rising by the day. These multinationals often outsource wherever they can. Their supply chains are complex, disintegrated and fragmented, and growing less American. In short, they have intelligently embraced a model of worldwide commerce enabled by a relatively benign era of liberal American economic hegemony.

That era may be ending. The geopolitical environment is becoming more conflictual as new powers, enriched by trade, assert their own interests. The financial crisis that started rumbling in the United States a decade ago still reverberates. Much of the world faces lower growth or outright stagnation, inequality, deflation and low interest rates. The domestic discourse in many of the world’s democracies has grown febrile. Against a darkening security backdrop and rising nationalism and protectionism, America paradoxically is wealthier but less secure, ever indispensable and interconnected yet also more vulnerable.

Along came China