Journal of Political Risk, Vol. 7, No. 3, March 2019
By William R. Hawkins
President Donald Trump’s trade reform campaign is not meant only to redress the massive deficit with the People’s Republic of China ($419 billion in goods last year, a net figure of how much American money is supporting jobs and production in China rather than at home). His policies have been rooted in national security concerns with a focus on the dangerous transfer of capital and technology that has empowered Beijing’s military buildup and aggressive behavior along the Pacific Rim and beyond. There is concern that the momentum of his efforts is slowing. He delayed elevating tariffs on Chinese goods from 10% to 25% on March 1st to give negotiations more time to reach a deal. But the PRC regime will never curb its pursuit of the wealth and capabilities it needs to replace the U.S. as the world’s preeminent power. It is a long-term economic contest between rivals for the highest of stakes imaginable.
President Trump and close advisors such as Peter Navarro, Director of the National Trade Council in the White House know this, but need to operate from a strong base. Congress cannot, however, add much to the campaign at present. It is so crippled by factions and sophistries as to have taken itself out of the game. But Congress has left a legacy from earlier, less anarchic times: the Defense Production Act. This core legislation, based on preserving the “Arsenal of Democracy” which won World War II, gives the President broad authority to revive, expand and maintain our domestic industrial base. The DPA was first enacted in 1950, but it is still alive and well, being reauthorized twice by President George W. Bush, amended in 2009 on a bipartisan basis, supported by a 2012 Executive Order issued by President Obama and reauthorized again in 2014.
The DPA does not restrict itself to the defense industry narrowly defined. It states in its opening findings that “the security of the United States is dependent on the ability of the domestic industrial base….” And includes all industrial “resources…. necessary for national defense and the general economic well-being of the United States”. Throughout the DPA the term “national security strategy” is used, which is broader than military strategy or business practice. Indeed, in Section 702, Definitions, the impact of “critical infrastructure” includes, but is not limited to, “national economic security and national public health or safety.” Earlier, under Findings, the DPA “provides the president with an array of authorities to shape national defense preparedness and to take appropriate steps to maintain and enhance the domestic industrial base.”
Explicit national security exemptions in trade agreements along with customary international law allow national governments to shield strategic industries from negative impacts resulting from actions by foreign rivals in commerce and investing. For example, Article XXI of GATT 1994 (which governs the World Trade Organization) states that the GATT will not prevent a WTO member “from taking any action which it considers necessary for the protection of its essential security interests … taken in time of war or other emergency in international relations.” The GATT does not define critical terms such as “considers necessary,” “essential security interests,” and “emergency in international relations.” These are all conditions that properly remain with sovereign states to determine in their own interests.
Even Adam Smith, a “free trade” advocate, recognized the national security exception. In regard to London’s famous Navigation Acts, Smith wrote that the “defense of Great Britain depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavors to give the sailors and shipping of Great Britain the monopoly of the trade of their own country.” Smith also approved of paying bounties on the fisheries because they increased the supply of sailors and shipping. He likewise approved of paying bounties for the production of naval stores in the American colonies and prohibiting the export of naval stores from the colonies to anywhere outside the British Empire. Such regulations made the empire less dependent on the importation of strategic goods from foreign sources. The aim was to induce private merchants to conduct business in ways that supported the higher needs of national security.
British historian Corelli Barnett, in his book The Collapse of British Power, criticizes Smith because “he could not foresee that national defense would come to depend not just on seaman and naval stores, but on total industrial and economic capabilities.” This complaint is more applicable to the more extreme liberals who came after Smith inasmuch as Smith wrote in The Wealth of Nations: “It may be advantageous to lay some burden upon foreign imports for the encouragement of domestic industry, when some particular industry is necessary for the defense of the country….It is of importance that the kingdom depend as little as possible upon its neighbors for the manufactures necessary for its defense.”
The dynamics of the Industrial Revolution, which was just getting started in Smith’s day, quickly expanded the horizons of security planning. More than inventions and factories were involved. A system evolved that depended on the integration of a wide range of economic activity. And a mass market was needed to support mass production. An advantage would occur to any system that could be unified under a single national authority. The continent-spanning U.S. with a population over 330 million people, is a perfect example of a society with such an advantage. It has never had to rely on external trade to any great extent, and certainly not for strategic industries.
While we have not left traditional industry behind, the economy has experienced more and more “revolutions” taking us into the Information Age and promising even more future advances. The Chinese realize this. As the Office of the U.S. Trade Representative has reported, “In May 2015, China’s State Council released Made in China 2025, a 10-year plan spearheaded by the Ministry of Industry and Information Technology (MIIT) and targeting 10 strategic industries, including advanced information technology, automated machine tools and robotics, aviation and spaceflight equipment, maritime engineering equipment and high-tech vessels, advanced rail transit equipment, new energy vehicles (NEVs), power equipment, farm machinery, new materials, biopharmaceuticals and advanced medical device products.” Our DPA can (and must) respond in kind.
Today though, too many major “manufacturers” (both traditional and high-tech) merely assemble products from parts made elsewhere. Just concentrating on restricting (through quotas or tariffs) finished products or bringing them “home” will not be enough if they are only shells filled with foreign parts—especially if those supply chains go back to China (as far too many do).
This has become an increasingly dangerous trend as defense contractors have turned more and more towards using dual use and “off the shelf” products in weapons and support equipment. Commercial industry is the center of innovation. The Pentagon needs the best but is also under pressure from tight budgets to bargain hunt, even in high-tech sectors such as electronics. The DPA deals explicitly with such a danger. Section 107, Strengthening Domestic Capability (b)(1) Maintenance of Reliable Sources of Supply states, “The president shall take appropriate actions to assure that critical components, critical technology items, essential materials, and industrial resources are available from reliable sources….” China is not a reliable source, nor are most other foreign sites which are beyond the reach of American law and regulation. That is the whole point of the DPA.
The argument that many high-tech components are no longer available from domestic firms is not an excuse to do nothing, but a call for action. Entire commercial sectors will need to return to American territory so they will be subject to U.S. law and regulation, including the priorities established under the DPA. Bringing production and jobs back home will drive up costs, at least in the short run, but buy us peace-of-mind.
The DPA does provide under Title III a variety of means by which the government can provide financial support to domestic firms to make it economically viable to produce needed critical components. As the DPA states, “the President may provide appropriate incentives to develop, maintain, modernize, restore, and expand the productive capacities of domestic sources of critical components, critical technology items, material, and industrial resources essential for the execution of the national security strategy of the United States.” A number of projects are already being funded with Title III, but a substantially larger effort will have to be made to achieve the objective of strategic economic independence. In February 2018, the DPA Title III Office (under the Deputy Assistant Secretary of Defense for Industrial Policy), working with the U.S. Army Contracting Command, issued a Broad Agency Announcement inviting companies to submit ideas for future projects essential to national defense.
On a larger scale, the provision of protection (tariffs, quotas) to strategic industries from “cheap” foreign rivals is needed so that domestically based firms remain economically viable. Just as we would resist enemy attacks to blow up our factories and research centers, we should protect them from destruction by other hostile actions. Competition takes many forms, but the aim is always the same; to shift wealth and power from here to somewhere else and upset the world balance of power.
As one of the Findings in the DPA states, “Much of the industrial capacity that is relied upon by United States government for military production and other defense purposes is deeply and directly influenced by….the ability of industries in the United States, in general, to produce internationally competitive products and operate profitably while maintaining adequate research and development to preserve competitiveness with respect to military and civilian production.” In this competition, the survival of entire industrial sectors is at stake. The U.S. does not just need a “level playing field”, it needs a “home field advantage.”
President Trump has the authority under current law to accomplish this critical mission. He just needs to use it more than he has so far.
William R. Hawkins is a consultant specializing in international economic and national security issues. An economist by profession, he has served on the Republican staff of the U.S. House Foreign Affairs Committee. JPR Status: opinion.