“Competition is profoundly dynamic in character. The nature of economic competition is not ‘equilibrium’ but a perpetual state of change. Improvement and innovation in an industry are never-ending processes, not a single, once-and-for-all event. Today’s advantages are soon superseded or nullified. At the core of explaining national advantage in an industry, must be the role of the home nation in stimulating competitive improvement and innovation.
…
Firms gain competitive advantage where their home base allows and supports the most rapid accumulation of specialized assets and skills, sometimes due solely to greater commitment. Firms gain competitive advantage in industries when their home base affords better ongoing information and insight into product and process needs. Firms gain competitive advantage when the goals of owners, managers, and employees support intense commitment and sustained investment. Ultimately, nations succeed in particular industries because their home environment is the most dynamic and the most challenging, and stimulates and prods firms to upgrade and widen their advantages over time.”

The Competitive Advantage of Nations
Chapter 2: The Competitive Advantage of Firms in Global Industries
Pages 70 and 71
By Michael E. Porter, 1990

“In modern war the great expence of fire-arms gives an evident advantage to the nation which can best afford that expence; and consequently, to an opulent and civilized over a poor and barbarous nation. In ancient times the opulent and civilized found it difficult to defend themselves against the poor and barbarous nations. In modern times the poor and barbarous find it difficult to defend themselves against the opulent and civilized. The invention of firearms, an invention which at first sight appears to be so pernicious, is certainly favourable both to the permanency and to the extension of civilization.”

The Wealth of Nations
Book V: Of the Revenue of the Sovereign or Commonwealth
Chapter 1: Of the Expences of the Sovereign or Commonwealth
Part 1: Of the Expence of Defence
By Adam Smith, 1776

“The experience of all nations in all times teaches us that nations, so long as they remain in a state of barbarism, derive enormous benefit from free and unrestricted trade, by which they can dispose of the products of the chase and those of their pastures, forests, and agriculture – in short, raw products of every kind; obtaining in exchange better clothing materials, machines, and utensils, as well as the precious metals – the great medium of exchange – and hence that at first they regard free trade with approval. But experience also shows that those very nations, the farther advances that they make for themselves in culture and in industry, regard such a system of trade with a less favourable eye, and that at last they come to regard it as injurious and as a hindrance to their further progress.”

The National System of Political Economy
First Book: The History
Chapter I: The Italians
By Friedrich List, 1841

“Had the English left everything to itself – ‘Laisse faire et laisse aller,’ as the popular economical school recommends – the merchants of the Steelyard would be still carrying on their trade in London, the Belgians would be still manufacturing cloth for the English, England would have still continued to be the sheepfarm of the Hansards, just as Portugal became the vineyard of England, and has remained so till our days, owing to the stratagem of a cunning diplomatist. Indeed, it is more than probable that without her commercial policy England would never have attained to such a large measure of municipal and individual freedom as she now possesses, for such freedom is the daughter of industry and of wealth.”

The National System of Political Economy
First Book: The History
Chapter II: The Hansards
By Friedrich List, 1841

The Great Game of Power continues onward driven by the rising global rivalry between the United States and China. As previously documented, China has adopted the position of Germany in the late 1800s. The Communist Party leadership, through the Five Year Plans over the past twenty years, focused on the imperative to build up its industrial power to close the gap with the West. And to then use this industrial might to undergird its military and strategic ambitions at the same time as it undermined the industrial strength of rival nations. The growing success of this policy can be seen in the ascent of China to the largest industrial base in the world and to the extended military reach it now possesses in the South China Sea and around the globe, with the erection of foreign military bases.

To reach this point, China adopted the economic policy advocated by Friedrich List, the great German economist of the 1800s, whose policies were implemented in Germany and drove that country’s industrialization and rise to power. His seminal work, The National System of Political Economy (Das Nationale System Der Politischen Oekonomie) written in 1841, analyzed and adopted the policies followed by the English from the 1400s through the 1800s as the means to fuel Germany’s rise to power in the 1800s. As List wrote in Chapter IV on England:

Had they sanctioned the free importation into England of Indian cotton and silk goods, the English cotton and silk manufactories must of necessity soon come to a stand. India had not only the advantage of cheaper labour and raw material, but also the experience, the skill, and the practice of centuries. The effect of these advantages could not fail to tell under a system of free competition.

But England was unwilling to found settlements in Asia in order to become subservient to Asia in manufacturing industry. She strove for commercial supremacy, and felt that of two countries maintaining free trade between one another, that one would be supreme which sold manufactured goods, while that one would be subservient which could only sell agricultural produce. In her North American colonies England had already acted on those principles in disallowing the manufacture in those colonies of even a single horseshoe nail, and, still more, that no horseshoe nails made there should be imported into England. How could it be expected of her that she would give up her own market for manufactures, the basis of her future greatness, to a people so numerous, so thrifty, so experienced and perfect in the old systems of manufacture as the Hindoos?

Accordingly, England prohibited the import of the goods dealt in by her own factories, the Indian cotton and silk fabrics. The prohibition was complete and peremptory. Not so much as a thread of them would England permit to be used. She would have none of these beautiful and cheap fabrics, but preferred to consume her own inferior and more costly stuffs. She was, however, quite willing to supply the Continental nations with the far finer fabrics of India at lower prices, and willingly yielded to them all the benefit of that cheapness; she herself would have none of it.

Was England a fool in so acting: Most assuredly, according to the theories of Adam Smith and J.B. Say, the Theory of Values. For, according to them, England should have bought what she required where she could buy them cheapest and best: it was an act of folly to manufacture for herself goods at a greater cost than she could buy them at elsewhere, and at the same time give away that advantage to the Continent.

The case is quite the contrary, according to our theory, which we term the Theory of the Powers of Production, and which the English Ministry, without having examined the foundation on which it rests, yet practically adopted when enforcing their maxim of importing produce and exporting fabrics.

The English Ministers cared not for the acquisition of low-priced and perishable articles of manufacture, but for that of a more costly but enduring manufacturing power.

They have attained their object in brilliant degree. At this day England produces seventy million pounds’ worth of cotton and silk goods, and supplies all Europe, the entire world, India itself included, with British manufactures. Her home production exceeds by fifty or a hundred times the value of her former trade in Indian manufactured goods.

What would it have profited her had she been buying for a century the cheap goods of Indian manufacture?

And what have they gained who purchased those goods so cheaply of her? The English have gained power, incalculable power, while the others have gained the reverse of power.

And it is this work, specifically the above strategy, that China adopted and implemented diligently over the past 20 years. It used protective tariffs and other non-tariff barriers to favor Chinese manufactured goods to supply domestic consumption. It invited foreign manufacturers into the country to supply these goods and to share the technology with local firms and the government. It forced, through these policies, other countries to become raw material suppliers to its domestic industry. It exported the surplus of its industry to other countries to prevent the rise of their manufacturers in competition and to undermine their manufacturers’ ability to produce a profit. It levered this excess industrial capacity to modernize its military and to expand its ability to project its power around the globe. In summary, it whole-heartedly embraced the economic philosophy of Friedrich List. Any educated 19th Century German would recognize this policy as that embraced by Germany to replicate the policies that drove England’s economic and military rise. And with the successful implementation of these policies placing China in ascendance for the past 20 years, the country views the future as belonging to itself. In fact, the country already has begun to act as if it is the leading country in the world and started to treat other countries, including the US, as inferior. The latest action to exhibit this approach was to refuse the US President a state welcome at the airport. Thus, denying recognition of the US as an equal power.

However, just as in the 19th Century, when England, France, The Netherlands, and the United States recognized the growing challenge from Germany both economically and militarily and reacted to stymy its ambitions, today, the United States, Europe, Japan, and Southeast Asia are recognizing the rising challenge from China on both these fronts and beginning to act accordingly. The US appears on the verge of a significant break with its advocacy of free trade, a policy followed since World War II, including the wholesale repudiation of free trade pacts. This is due to the pernicious and predatory impact on US manufacturing of the protectionist policies adopted by China to aid the global competitive position of its manufacturers. In addition, with the military expansionism demonstrated by China in the South China Sea, a turn in military spending is already underway in the US to respond to the growing challenge. This will only accelerate under the next President. This turn is similar to Great Britain’s naval expansion from 1902 to 1910, with its Dreadnought class ships, to meet the growing challenge from Germany. In Europe, European manufacturers have begun to complain about the lack of access to China’s markets and its ability to export unfettered to Europe. While the EU bureaucracy continues to advocate free trade and take no action, the individual countries that make up the EU voted unanimously to deny market status to China. Should the current state of affairs not change, it is likely individual countries will respond to protect their industry, despite the wishes of the EU bureaucracy. In Japan, there is talk of increasing military expenditures significantly to meet the growing threat from China. Japanese military expenditures have remained below 1% of GDP since WW II. This action would represent a sea change in policy and signal the remilitarization of the country. South Korea plans to develop its own indigenous fighter jets. In addition, the country plans to deploy an anti-missile shield provided by the US. In Southeast Asia, the US military is once more seen as a welcome force to provide balance to China. The Philippines invited the US back to five military bases over the past year. More Philippine bases are expected to be added over the next few years. In Vietnam, there is talk of inviting the US back to Cam Ranh Bay Naval Base. While the wheels grind slowly, grind they do, as the world comes to recognize the policies and ambitions of China.

All these actions reflect a return to the economic history that Friedrich List documented and its impact on European economic and military rivalry. That there is an alternative to Adam Smith’s invisible hand and free trade. That policies that benefit a particular country’s economy at the expense of free trade can lead to economic power. That this economic power undergirds military power which in turn reinforces a country’s economic power. And that the combination of the two in unison creates “incalculable power”. With this philosophy coming to the fore again, the world is once more focused on The Great Game of Power, as in the 19th Century, and the role of Industrial Might, Economic Growth, and Military Power. (Data from public sources coupled with Green Drake Advisors analysis.)