The Biden administration has announced the first findings from its review of international supply chains. The review stemmed from an Executive Order issued on February 24, 2021, out of concern that the U.S. economy had become too dependent on problematic, even adversarial, foreign sources for imports of goods in strategic sectors. Four critical product lines have been initially targeted: semiconductor manufacturing and advanced packaging; large capacity batteries, like those for electric vehicles; critical minerals and materials, such as rare earths (which Chinese strategists have sought to monopolize); and pharmaceuticals, the sector that first alerted both leaders and the public to supply risks during the Covid-19 pandemic. And like the pandemic itself, the focus has been on the need to “de-couple” from China for national security reasons. The outsourcing of manufacturing to China has made the American economy vulnerable to disruptions (or their threat as leverage). More importantly, the transfer of industry across the Pacific included the transfer of capital, technology and know-how which has helped the Communist regime in its pursuit of peer status in renewed great power competition.

Business interests that have invested in these international supply chains are unhappy with this government inquiry that originated during the Trump administration. The U.S. Chamber of Commerce responded to the February executive order in a typical fashion. It feigned agreement with the objective, stating that “The American public should never suffer from shortages of essential goods due to supply chain issues.” However, it quickly rejected the notion that trade should be impacted. “We can mitigate risks to our supply chains by working with key international partners to diversify our supply chains and stockpiling select products – and we trust that the administration will engage closely with the private sector to ensure that any policy recommendations reject punitive approaches, new trade barriers, and one-size-fits-all solutions.”  The word “resiliency” was substituted for “security” in the statement, just as in recent decades the word “global” was substituted for “international” to avoid any concern over how the movement of assets around the world might affect national communities. Lobbyists hope that words can change the perception of reality, but they cannot change reality itself, which is what policymakers must deal with in a contentious world.

Of course, the question of whether the world is contentious has always been at the heart of the debate over trade policy. The classical “free trade” argument was perfected during the relatively peaceful period that followed the wars of the French Revolution and Napoleon Bonaparte, a period of strife that ran for over a quarter-century and constituted a world war. It would not be out of line to extend this contentious period back to the Seven Years War (1756-1763) as the conflicts centered on a Second Hundred Years War between coalitions headed by Great Britain and France. It is not surprising that it was within these contending powers that the main intellectual movement aroused to propose an alternative to state-centered international politics based on private enterprise and supposedly “peaceful” commercial competition. A new system that would benefit consumers by promoting efficiency and specialization “free” from constraints stemming from security concerns.

Writing in 1821, John Stuart Mill claimed, “There is, in the present advanced state of the civilized world, in any country having a good government and a con­siderable population, so little chance of civil war or foreign invasion, that, in contriving the means of national felicity, but little allowance can be rationally required of it.” Any problems remaining, Mill would refer to an international court of arbitration (like today’s World Trade Organization). Across the channel, French economist Frederic Bastiat argued that “Free trade means harmony of interests and peace between nations” and went on to state that “we place this indirect and social effect a thousand times above the direct or purely economic effect.” Richard Cobden who led the fight against the Corn Laws that protected British agriculture, advised in 1842 that “It would be well to engraft our free trade agitation upon the peace movement. They are one and the same cause.” The theory did not just rest on the need for a world in which national security did not matter, but that such a world could be created by “free trade.” As Cobden famously proclaimed, commerce was “the grand panacea” and that under its influence “the motive for large and mighty empires, for gigantic armies and great fleets would die away.”

The post-Cold War period seemed like the post-Napoleonic period to many, and explains the vigorous return of classical arguments which, like all arguments in politics, advanced because they were useful to powerful interest groups. That period has now clearly passed if it ever actually existed. Certainly, the once-popular notion that trade would tame Beijing so that it would join the liberal global order, rather than try to change or dominate it, has collapsed. But that such notions were persuasive for a time is why the Biden administration can accurately blame “public policy choices” for “fragile supply chains across a range of sectors and products. Unfair trade practices by competitor nations and private sector and public policy prioritization of low-cost labor, just-in-time production, consolidation, and private sector focus on short-term returns over long-term investment have hollowed out the U.S. industrial base, siphoned innovation from the United States, and stifled wage and productivity growth.”

Though simplistic, classical theory is still pushed by some libertarian ideologues, the more substantial debate has shifted again as it did in the late nineteenth century when it was clear that international rivalry was still how the world worked. The new argument was that trade allowed nations to diversify their supply chains among numerous sources to lessen the chance of disruption from any single event, whether a natural disaster or a political conflict. The Economist (the British journal founded in 1843 to “fight for free trade”) featured an article in March making this exact argument to claim that “global supply chains are a source of strength.” Having become dependent on imported food thanks to the success of Cobden’s campaign, British leaders embraced the idea of diversified imports rather than a return to protected domestic supplies. Yet, they still had to reject Cobden’s notion of abandoning a “great fleet” as no matter how spread out their foreign sources might be, they still had to bring their cargo of food over the water, a vulnerability that German U-boats preyed upon in both world wars. And today, that argument still depends on the naval superiority of the U.S. Navy and its allied fleets.

After World War I, even the free-trading British embraced the Imperial Preference idea that it had resisted before the “war to end all wars.” It redirected a substantial share of trade back within the empire. Both the Trump and Biden administrations have expressed the hope that supply chains would re-shore to the United States (or North America) to maximize security as well as provide lucrative jobs. However, a shift of business from China to other foreign lands where gains from trade will not be used to build menacing weapons is considered an improvement. Japan, India, and Australia are considering a “supply chain pact” to reduce exposure to China, while at home the Japanese government is offering financial help to firms to put their supply chains on a more secure basis. This is managed trade, not free trade.

A country with the sheer size of the United States, with a highly developed technological infrastructure and deep research capabilities, can choose to specialize in the strategic sectors it needs and even attract foreign investment in domestic production of goods that originate elsewhere.

This leaves those special interests who have unwisely offshored into vulnerable supply relationships one final argument. It is too hard to undo what has been done. The Chamber of Commerce even finds “listing China, Cuba, Iran, North Korea, Russia, and the Maduro regime as foreign adversaries provides false comfort to businesses” because “it does not take into account the realities and complexities of modern manufacturing processes and supply chains.” Beijing agrees. Citing American business opposition to President Joe Biden’s trade policies, state media outlet Global Times argued in July,

Fundamentally speaking, the US obsession with protectionism measures underscores the hollowing out of US manufacturing. The services sector dominates the US economy, which no longer has the base to develop large-scale manufacturing. Protectionism is not going to change that. The US needs to recognize the necessity to reverse its aggressive tariff policy on the Asian supply chains.

Another Global Times article written at about the same time tries to appeal to classical theory, claiming “Encouraging high-end manufacturing to return to the US or move out China is obviously contrary to market laws.” Yet, the same article admits “The structure of the current global industrial chain - mainly based on traditional manufacturing - took through 5 to 10 years to put in place.” With tensions rising, it could be restructured even faster.

Too many major corporations have become mere assemblers of parts sourced far and wide, with many tiers of sub-contractors that are unknown to the parent firm. This maze already has spawned specialists in supply chain risk management based on commercial concerns. The need now is to expand those inquiries and policies to cover national security concerns as well. The Chamber ends up pleading “that supply chain security requires the U.S. government to inform the private sector of emerging threats and vulnerabilities.” This is what the Biden administration is trying to do.

Supply chains constructed during a brief period of supposed international calm, when business leaders were told that the day of classical economic theory had finally arrived, will now have to change to match the reality of renewed great power competition. As Joseph Schumpeter observed at the start of the first Cold War, “We have seen that the industrialist and merchant, as far as they are entrepreneurs, also fill a function of leadership. But economic leadership of this type does not readily expand, like the medieval lord’s military leadership, into the leadership of nations. On the contrary, the ledger and the cost calculation absorb and confine.” But this does not mean stagnation. Capitalism is the best system to handle the dynamism of the real world to provide what is needed, including security. Indeed, Schumpeter believed that capitalists would have to strengthen rather than undermine the “steel frame” of their national community to retain their legitimacy. And he was right. No fanciful academic theories or wishful thinking about a different world gives them a pass during great power competition.  

William R. Hawkins is a former economics professor who served on the professional staff of the U.S. House Foreign Affairs Committee. He has written widely on international economics and national security issues for both professional and popular publications.

Image: Reuters.