(Asia)(Forbes)Great Power Competition Demands Smart Industrial Policy

Admin
July 24, 2021

Recent decisions from the Federal Trade Commission concerning mergers affect two of President Biden’s stated policy goals, putting the success of both at risk: first, his expressed desire to keep the United States competitive with near-peer geopolitical rivals, especially China, and second, his pitch to decisively win the fight against cancer. There’s an opportunity to make big strides in both categories but it will require the FTC to maintain a steadier course than they have recently taken. Damaging precedence from the FTC will have far ranging unintended consequences.

 

It should come as little surprise that the centers of gravity in the global defense industry are shifting, but it was a wakeup call for many to see three Chinese companies ranked among the world’s 10 largest defense contractors by revenue in DefenseNews’ recent list. The situation looks even more stark when second and third tier suppliers are added in the mix. The simple reality is that U.S. and allied nation defense firms face a bold set of challengers and preeminence is not something that can be taken for granted.

The situation becomes even more challenging given robust Chinese state support for its defense industries that is far larger than anything seen in a comparable western nation. The main takeaway from this reality is simple: the Biden administration, Congress, and the broader defense community need to increasingly consider America’s defense industrial base in competitive terms, where first place standing is no longer a birthright. It is time to take common sense steps to boost America’s competitive advantage.

The first place to begin this process is resetting common-sense norms regarding foreign military sales. For decades many in the U.S. government vetoed sales of a variety of technologies to allies and partners in a quest to shape policy outcomes and limit potential adverse use of technologies. Remotely Piloted Aircraft (RPA) stand as a key example. The U.S. has long stood as a technical leader in this field, with numerous nations seeking to procure types like the MQ-9 Reaper. However, a significant number of these requests for sale were denied because some policy officials were concerned about how the purchasing nation might employ the system.

In a perfect world where the U.S. held a lock on technology, this approach could make sense. However, that does not reflect the world in which we live. With their application for U.S. technologies denied, countries simply turned to other nations with comparable systems—with China at the top of the list. So not only did the country in question net their end objective in spite of U.S. concerns, but it also empowered the growth of competitor defense industry while limiting the growth of our own. Talk about shooting yourself in the foot…

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Foreign military sales are incredibly important. They empower the depth of our industrial base, provide high quality jobs for Americans, while also injecting capital that can help generate the next generation of technology. They also make firms less reliant on the U.S. defense budget, which pulls the services out of the unfortunate position of simply buying equipment so a key industry stays in business. Did you ever wonder why the U.S. Army buys tanks every year even though they own thousands? We only have one plant left that can make them, so we either keep it in business or lose it. It is a smart move to allow others to help carry the load.

 

These transactions also support strong military-to-military relationships because allies operating like equipment can partner more effectively and routinely. This is a huge benefit when the U.S. needs additive capacity for a given campaign. We also garner insight regarding how a foreign nation is using the equipment. If things run counter to U.S. interests and values, we can always turn off spare parts flows and technical support. That certainly cannot be said when the equipment comes from China or another competitor.

Nor is the challenge restricted to traditional defense firms. If COVID-19 taught us anything, it emphasized that national security in the 21st century ranges far past traditional measures of strength, like how many planes, ships, satellites, and tanks a given country possesses. A far broader range of technologies—whether it be 5G telecommunication network security, healthcare supplies, technologies like artificial intelligence (AI), and infrastructure—are all key underpinnings of U.S. safety and security. That is why it is important to track Chinese programs specifically designed to surpass the U.S. on technological innovation.

Among their more ambitious endeavors is China’s Thousand Talents Plan, a worldwide effort to win over and recruit the world’s leading experts in scientific research, innovation, and entrepreneurship. While China doesn’t host a command-by-decree economy, the Chinese Communist Party (CCP) can mobilize enormous resources to achieve the technological goals they set for themselves. In its most recent Five Year Plan, the CCP proposed increasing R&D spending by at least 7 percent every year between 2021 and 2025. They have, according to China AI Expert Kai-fu Lee, “incubated a generation of the world’s most nimble, savvy and nose-to-the-grindstone, entrepreneurs.” China is clearly playing for keeps and it is likely their innovations will accelerate and enhance their internal security as well as reinforcing their desire for power projection.

U.S. leaders must take this sort of challenge into account as they regulate American firms. No longer can the focus simply be looking within the U.S. economy. We must assess the global competitive field. Here’s an example: last September, two American companies, Illumina ILMN +1.8% and GRAIL, filed with the FTC for merger approval. The two companies are not strangers, with Illumina originally spinning out GRAIL to isolate risk and allow the smaller company to accelerate a medical innovation in a key area of early cancer detection. Now, the companies want to recombine, it looks like the FTC is slowing the desired merger and may even block it. This sort of approach may have made sense in past decades when American preeminence was assured, but now it simply risks putting the U.S. further behind in a race where countries like China are playing for keeps. Why would we not want to have a strong player in the healthcare industry?

In April, while the companies prepared for their day in court and still hoped for a settlement and an amicable resolution, the European Commission (the executive branch of the European Union) announced that it too would jump in to pass judgment on the merger. A month later, the FTC stated in a press release, “Now that the European Commission is investigating, Illumina and GRAIL cannot implement the transaction without obtaining clearance from the European Commission,” handing off responsibility and legal standing, depriving the two companies of their day in court and diminishing the prospects of a timely resolution.

Despite that, progress has been made to protect our dominance and while the FTC dithers, Congress has stepped up and, in a rare act of bipartisanship, sent the U.S. Innovation and Competition Act to the White House for President Biden’s signature earlier in June. The law authorized $110 billion for basic and advanced technology research over five years. At the ceremony, Biden reiterated: “We are in a competition to win the 21st century, and the starting gun has gone off. As other countries continue to invest in their own research and development, we cannot risk falling behind. America must maintain its position as the most innovative and productive nation on Earth.”

We now live in an era where we need to think about the world in which we live, not the one in which we would like to live. We lost significant ground to China due to self-imposed restrictions that ran counter to our key interests. We failed to recognize we were in a race and someone else was gaining. With defense and innovation budgets growing tighter, competition from China growing stronger, and the need to maintain a healthy industrial production base more important than ever, that means empowering our strengths. The last thing we should be doing is self-imposing challenges. It is time to wake up and realize that we are in a race, and we can still win it—but it will take a different approach by the FTC. Allowing the FTC to break industry confidence in our regulatory process is precisely the wrong tack at a time when our adversaries are doing everything they can to race ahead.

As it stands, there is now demonstrated bipartisan support to protect innovation and comfortably outpace China. Signing the bipartisan U.S. Innovation and Competition Act into law was a great first step. As a second step, the FTC ought to recall its regulatory deferral to Brussels and reach a settled negotiation to ensure the option of vertical integration is there for our innovators to thrive