The New Cold War & The Coming Rise of National Security
When I was finishing college, in the early 1980s and the Cold War was still raging, I had the opportunity to make the classic Euro Trip, care of my parents. I spent almost two months touring Europe in a big circle. I flew into Madrid, Spain, visiting the Prado and being exposed to Spanish flamenco dancing, then took a bus that headed to Southern France. I stopped in Marseilles, Nice, and Monaco. Then I was off to Geneva, the Swiss Alps, and Lake Lucerne then down through Italy to Venice, Florence, Rome, and Brindisi for the ferry to Greece. Once I landed in Greece, the next stop was the stunning ancient Greek Theater of Dodona, where I remember standing in the top area of the seats when someone whispered on stage over 100 feet away. It sounded loud and clear, as if they stood next to me and spoke directly into my ear. Then, I travelled up through Greece, stopping in Athens for the Acropolis and stopping near Thessaloniki to visit Mount Olympus.
Up until this point, I travelled in Western Europe or allies of the United States. When I reached the border with Yugoslavia, the world changed. The Cold War became reality. Marshall Joseph Broz Tito, who led the Yugoslav partisans in their fight against German occupation, ruled the country. He was an internationally recognized war hero, having received France’s highest honor, the Croix de Guerre in 1956. After World War II, he maintained the country’s neutrality outside the Soviet Union’s influence and ruled with an iron fist. Due to his personal strength and toughness, he held Yugoslavia together from his 1948 split with Stalin until his death in 1980. I remember crossing that border well. It was my first direct contact with the Cold War. First, I needed to procure a special Visa prior to leaving the United States. Then, at the border, we waited our turn at the highly guarded checkpoint with numerous soldiers and military equipment. When it came our turn, the guards came onto the bus with machine guns to inspect our passports and to check our Visas. No one spoke or even dared to breathe while they were there. Once we passed their inspection, we were allowed to continue onward. We stopped in Belgrade for the night and continued onto Budapest, Hungary, part of the Soviet sphere. More Visas and tough border checks, but the beauty of the city and the fabulous pastries made it worthwhile. Then a blur of cities, including Vienna, Prague, Munich, and Nuremberg, plus Dachau, the infamous concentration camp and a testament to the brutality of World War II, prior to heading to West Berlin. To reach West Berlin, we boarded a bus that could not stop as it traversed the agreed international corridor in East Germany. We were not allowed off the bus until we crossed over into Western controlled areas of the divided city of Berlin. Our hotel stood not far from the Brandenburg Gate and Checkpoint Charlie. I remember walking over towards the wall to one of the vantage points. What unfolded in front of me was miles and miles of tall wall, surmounted with barbed wire, and machine gun turrets with the no man’s land laid out in front of the machine gun turrets and their spotlights. It was a sobering image, reinforcing for me the reality of the Cold War, which would officially continue until the fall of the Berlin Wall in 1989. After West Berlin, I happily returned to the free portion of Europe, finishing my trip with visits to Copenhagen, Paris, and London.
Right as the Cold War ended, during the early 1990s, when a spreadsheet program called Lotus 123 still dominated the market, something called the Internet came along. It promised massive increases in speed from the modems on every PC that ran over telephone lines utilizing the telephone company offered DSL service. For the average household, at that time, Telephone providers offered Data Speeds over modems that could hit, on average, 28 kilobytes per second. And yes, that is not a typo. However, large corporations and major universities could access telephone company LANs and telephone switching centers enabling them to enjoy speeds of up to 10 megabits per second. The US Government, in order to expand access to broadband to the overall population, put in place the National Information Infrastructure Initiative. At that time, given the success from the long involvement of the U.S. Government in the economy to win the Cold War, there existed no question the government should push forward policies, rules, and regulations to ensure the U.S. remained ahead of rival countries. As part of this initiative, the government required the major telephone companies to open up their switching centers to allow competitors access to the phone system. These new competitors, such as Time Warner Telecomm, began to build out fiber optic rings in major cities such as New York, Chicago, and Los Angeles. They then signed up businesses, office buildings, and other commercial customers by offering better service with much faster speeds at rates below the regulated rates offered by the traditional phone companies. As this proved profitable with good Return On Invested Capital (ROIC), these companies expanded their fiber rings and entered new markets. Given their success, other entrepreneurs entered these same marketplaces to put up competing fiber rings. And with all these fiber rings being built, the need for fiber between cities began to grow exponentially. So, new companies arose to link the cities together. As the major cost of the fiber was not the fiber itself but digging the trenches and laying the conduit pipes in which the fiber was placed, these companies decided to put multiple strands of fiber between the cities. This way they possessed extra fiber in place they could light up as needed. Of course, this long distance fiber required repeaters, every so often, to maintain the signal strength over long distances. Thus, companies such as Corning and Cisco experienced a boom in demand, forcing them to add capacity to their plants to accommodate this new-found demand. With the phone companies facing real competition for the first time, they began to build out their fiber infrastructure as well. In addition, the rise of the cable companies put the phone companies in a quandary. They needed to upgrade their infrastructure to compete with them. This loop looked like this:
Chart based on data compiled by Green Drake™ Advisors. Copyright © 2022. All Rights Reserved.
At the same time as all these companies were building out the fiber across the country, major corporations found themselves faced with a dilemma. The mainframes that ran their companies came with a fatal bug called the Y2K (Year 2000) Bug. These mainframes ran programs written as far back as the 1960s. These programs only used 2 digits for a year. So, instead of stating 1988, they stated 88. Many computer analysts believed that when these computers got to the year 2000, they would use 00 which would make the year 2000 indistinguishable from the year 1900. To fix the problem, companies followed two pathways: replacing portions of their computer networks and hiring programmers to rewrite massive amounts of software code. Sometimes they did both. The net effect of this was to cause corporations to bring forward a massive amount of IT Spending. This led to further demand on technology goods. All in all, combining the Broadband Initiative to build out the Internet with the need to address the Y2K bug, the US spent massively on its telecom and technology infrastructure during the 1990s, leading to an economic boom.
Fast forward to today. The US faces a major technology transition that requires a major industrial supply chain and infrastructure buildout. This buildout will occur against the backdrop of a New Cold War, in which both Russia and China seek to weaken the United States global position. While the focus is on EVs in the media, numerous other technologies stand poised to explode into the mainstream including 3D Manufacturing, Nano-technology, Genetics, Material Science, Green Manufacturing, and Space. The U.S. possesses a choice: either it can build out the industrial infrastructure of the future, capture the economic growth it represents, and maintain its global economic position or it can see other countries benefit by participating in these new technologies and capturing the growth with the U.S. falling behind. Just as in the 1990s, U.S. Government intervention appears critical to ensure the country does not falter in the global race to produce the next generation of technology.
Coupled with the buildout to ensure multiple new technologies’ production occurs in the U.S., there exists a recognition that the US possesses a number of Strategic Vulnerabilities, laid bare by the Pandemic. This cuts across numerous industries including semiconductors, industrial manufacturing, pharmaceuticals, raw materials, biotech, telecom equipment, and other key areas. In a recent report issued by the Government Accountability Office (GAO), it noted the following in relation to the pharmaceutical industry:
“FDA is responsible for ensuring the safety and effectiveness of all drugs marketed in the U.S., regardless of where they are produced. Globalization—and the outbreak of COVID-19—have complicated FDA’s oversight of the more than 4,000 establishments manufacturing drugs for the U.S. HHS reported that 73 percent of establishments manufacturing active ingredients, and 52 percent of those manufacturing finished drugs for the U.S., were located overseas as of March 2021.
GAO’s concerns about FDA’s ability to oversee the increasingly global drug supply chain led it to designate the issue as a high risk area in 2009.”
GAO Report 22-103611. Drug Safety: FDA Should Take Additional Steps To Improve Its Foreign Inspection Program. January, 2022. Available at: https://www.gao.gov/products/gao-22-103611 .
While the GAO notes the difficulty in policing foreign plants by the FDA, it accidentally highlighted a much broader issue. Today, 73% of drug ingredients and 52% of finished drugs are manufactured overseas. As the Pandemic highlighted, this represents a huge Strategic Vulnerability, especially given the New Cold War. If those supplies are cut off, the United States cannot produce the pharmaceuticals it populace needs on a regular basis, let alone those needed in a Pandemic, a traditional War, or under Bio-Warfare. Such an issue just came to the fore for the Semiconductor Industry. Over 90% of US Semiconductor Grade Neon is produced in Ukraine (refining of crude Russian Neon) and Eastern Europe produces 50% of Global Neon Supply. A war in Ukraine will cut off part of these supplies and surely will drive prices vastly upward in the short term, before new sources of supply become available, as companies compete for scarce product. There exists a simple explanation as to why this state of affairs exists in the pharmaceutical, semiconductor, and every other U.S. industry: Profits. U.S. companies source these pharmaceutical ingredients, key raw materials, critical parts and components from overseas due to a cheaper price that enables them to deliver more profits to the bottom line. National Security does not enter the picture. The Economic Policy Institute (www.epi.org) tabulated data from the Bureau of Economic Analysis, Census Bureau, and Federal Reserve to see the impact of this profit maximizing behavior over the past 30 years. The data demonstrates that almost 70,000 factories closed in the U.S. as companies moved supply chains overseas to take advantage of foreign government subsidies, cheap labor, and undervalued currencies.
Separately, the Department of Defense, in its recent release, State of Competition Within The Defense Industrial Base, highlighted the erosion in the number of competitors and how consolidation led to a smaller defense industry, less capable of meeting the country’s needs. In peacetime, this may make no difference. But under the leadup to a war or a Cold War, it can stand the difference between winning and losing. With this in mind, the report stated the following, given the rapidly evolving technology for leading edge weapons and defense goods, and the need to upgrade the military’s capabilities to meet the looming threats from China, Russia, and other rivals around the world:
Since the 1990s, the defense sector has consolidated substantially, transitioning from 51 to 5 aerospace and defense prime contractors.1 As a result, DoD is increasingly reliant on a small number of contractors for critical defense capabilities. Consolidations that reduce required capability and capacity and the depth of competition would have serious consequences for national security. Over approximately the last three decades, the number of suppliers in major weapons system categories has declined substantially: tactical missile suppliers have declined from 13 to 3, fixed-wing aircraft suppliers declined from 8 to 3, and satellite suppliers have halved from 8 to 4. Today, 90% of missiles come from 3 sources.2 As a result, promoting competition and ensuring it is fair and open for future programs is a critical Department priority.
In order to achieve this, the report further states the DOD should promote the following policies:
- Increasing New Entrants. To counteract the trend of overall shrinking of the DIB (Defense Industrial Base), DoD should endeavor to attract new entrants to the defense marketplace by reducing barriers to entry. This will be accomplished through small business outreach, support, and use of acquisition authorities like other transaction (OT) authority and commercial solutions opening (CSO) that provides DoD the flexibility to adopt and incorporate commercial best practices to reduce barriers and attract new vendors.
- Increasing Opportunities for Small Businesses. DoD should increase small business participation in defense procurement, with an emphasis on increasing competition in priority industrial base sectors.
- Implementing Sector-specific Supply Chain Resiliency Plans: DoD should take steps to ensure resilience in the supply chain for five priority sectors: casting and forgings, missiles and munitions, energy storage and batteries, strategic and critical materials, and microelectronics. Detailed recommendations are included in DoD’s report on Executive Order 14017, America’s Supply Chains.
In other words, the massive consolidation of the past 25 years coupled with the movement of supply chains overseas, puts the U.S. ability to wage war at risk. And to address these needs, the U.S. must focus on rebuilding its defense industrial capacity and the associated supply chains outside the defense industry.
In addition to the above, the U.S. faces another reality, care of NAFTA, renamed USMCA, and the WTO. The continued movement of supply chains overseas by major corporations, despite government goals and regulations, continues to drive the U.S. Trade Deficit upward. The easiest way to see this stands in the automotive industry where the U.S. produces ~10 million cars domestically yet consumers purchase 17+ million cars on average each year. The following two charts demonstrate the steady downturn in domestic auto production since 1994 and the steady upturn in imported autos, automotive parts, and supplies since the 1970s:
This stands in contrast to almost every other country or region in the world, whether China, Japan, South Korea, India, the EU, or Brazil, that requires the full supply chain or all but a small portion to be manufactured within each country or region. To indicate how countries act to protect their domestic industries, one merely needs to look at the “Free Trade” agreement that covered automobiles and other goods between Mexico and Brazil. Brazil saw this as an opportunity to export cars and goods to Mexico. To its surprise, Mexico ramped production of cars and goods, while making it difficult to sell Brazilian product into Mexico, driving Brazil into a Trade Deficit with Mexico. Brazil then abrogated the treaty, limiting Mexican imports.
The U.S. Government realized recently, that after 20 years where it allowed corporations to move supply chains overseas and source inputs as they saw fit, under the assumption that Global Geopolitics did not matter, it must rethink this approach. Global Geopolitics did not disappear. It merely went into hibernation in a period where the U.S. Government enabled foreign countries to build out critical industries as well as supply chains for advanced technology. Over the past few years, after competing countries strengthened their global position through 20 years of investment, Global Geopolitics came out of hibernation ravenous, ready to eat anything that stood in its path. With this reality staring it in the face, of a ravenous bear and dragon looking for their next meal, suddenly National Security returned as a driving force. Given China’s global goals and Russia’s alliance with China to improve its European and Global Strategic Position, supply chains that appeared of no interest, now require attention. This means everything from raw materials to components to intermediate goods to finished products. For example, in raw materials everything from Magnesia, which goes into aluminum production, to Neon, for semiconductors, to Lithium, for Lithium Ion Batteries for EVs, to Vanadium, which goes into steel, to every other raw material of consequence, must now come from reliable sources that can withstand a conflict with Russia or China. The same reasoning applies to inputs into the economy, whether basic transformers to connect a new apartment building to the electric grid, basic pharmaceutical ingredients needed to manufacture drugs, or leading edge semiconductors needed to build telecom networks and AI platforms. For many areas, such as Pharmaceuticals, EVs, Semiconductors, and Technology Goods, this will mean a deep dive into supply chains to establish domestic sources of production, prevent location of potential chokepoints in foreign countries, and ensure supply from safely located US allies ends up serving the needs of the United States and its other allies. For other areas, it will mean protecting basic industry from foreign market share grabs. In infrastructure, it will mean hardening the electric grid to withstand EMP, strengthening the Internet to withstand cyberwarfare, and ensuring critical inputs and components possess domestic manufacturing sources. Anything less than strong government focus to address these issues, regulations requiring entire supply chains to locate in the US, and strict deadlines with strong enforcement actions to demonstrate government resolve, will push the United States into a second tier global country status with no more influence than the UK around the globe as both China and Russia seek to weaken the U.S. global position.
A simple deep dive into the Electric Vehicle (EV) Battery supply chain will demonstrate the challenge the U.S. faces. It also demonstrates the opportunity for the U.S. to displace foreign production with the natural positive impact on the economy. The EV Battery supply chain is complex as the following diagram demonstrates:
Chart based on data compiled by Green Drake™ Advisors. Copyright © 2022. All Rights Reserved.
Each piece of the supply chain consists of multiple suppliers handling different aspects to produce the good involved. It could be something as simple as the plastic needed or something as complicated as creating the separator for the layers of the cell. A simplified diagram of the Cathode Electrode Supply Chain demonstrates the multiple inputs needed for just this piece of the supply chain, each piece of which requires multiple suppliers as well:
Chart based on data compiled by Green Drake™ Advisors. Copyright © 2022. All Rights Reserved.
Each box in the diagram represents billions of dollars of investment needed to supply U.S. needs. And this excludes, of course, the upstream raw material production and processing to enable the production of key chemicals, such as Lithium Carbonate (Li2CO3). Of course, China realized how controlling critical pieces of the above supply chain can give them a chokepoint on competing countries in producing EV Batteries and thus EVs. China locked up much of the supply of Lithium by building massive domestic capacity to create Lithium Carbonate from Lithium and entering into long term contracts to lock up the ore. In addition, Chinese State Owned Enterprises (SOEs) or entities controlled by those SOEs bought control of mines around the world. This includes mines close to the United States that could displace Chinese production, such as the Bancanora Lithium Mine in Mexico. (Evidently, unbeknownst to China, the Mexican government considers Lithium a strategic asset like oil. As such, foreign control of the country’s Lithium resources likely will not be allowed.) As a result, China produces over 50% of the Lithium Carbonate globally and possesses over 75% of the world’s EV Battery Giga-Factories according to the International Energy Agency. The following chart from the National Blueprint for Lithium Batteries published by the Energy Department in June 2021 lays out this fundamental issue:
FIGURE 3. Cell manufacturing capacities.
Source: “Lithium-Ion Battery Megafactory Assessment”, Benchmark Mineral Intelligence, March 2021.
As the report states quite clearly:
“The challenge to creating a competitive and sustainable battery manufacturing industry in the United States is immense, and the country needs to move fast. Other countries have developed vertical battery manufacturing supply chains supported by their own national strategies, such as China’s “Made in China 2025” strategy released in May 2015 and the European Union’s “Strategic Action Plan on Batteries,” released in May 2018. As China and others ramp up production capacity, they stand to gain a first-mover pricing advantage from economies of scale, process learning, and control of critical inputs, impacting the competitiveness of U.S. industry.”
Please see https://www.energy.gov/eere/vehicles/articles/national-blueprint-lithium-batteries for a full copy of the report.
While companies such as General Motors are building out EV Battery manufacturing plant, this will still leave the U.S. shy of fulfilling its needs and reaching the scale to compete globally. Just for National Security needs, not to have its auto industry beholden to China, the U.S. must build out the EV infrastructure here at a rapid rate.
Another aspect of car manufacturing, that possesses high tech implications, stands Autonomous Vehicles (AV). While cars cannot deliver this capability yet, the key technologies to produce this technology, such as Lidar and Cameras, continue to evolve with the leading companies today likely to dominate production tomorrow. Despite the US possessing leading technology, China adopted a strategy to manufacture the critical components for key global leaders to integrate itself into the global supply chains and eventually forward integrate into producing final product, a strategy successfully employed by China over the past 20 years to dominate industry after industry. As with EVs, China continues to support multiple companies in the AV Supply Chain. For example, LianChung, the Chinese lens and module company, obtained exclusive certification from Nvidia and agreements with Tesla and Mobileye for camera products. The company works with corporations such as Facebook (US), Magicleap (US), and Leapmotion (US Company purchased by the UK’s Ultrahaptics in 2019). Or, for example, Focuslight produces solid state LiDAR transmitters. Customers include Conti Group (US), Argo AI (US), and Luminar Technologies (US). In addition, Focuslight supplies ASML and TSMC, in the leading edge semiconductor area, with its light-field homogenizer, as China seeks to create world class, home grown semiconductor equipment manufacturers to eliminate dependency on foreign rivals. Given the New Cold War with China and Russia, it appears the United States stands asleep at the wheel by allowing China to sell product to leading US companies and to integrate critical components into advanced technology products.
In addition, to developing indigenous technology, the U.S. allowed foreign countries to purchase U.S. technology companies and then transfer the technology and manufacturing out of the U.S. The purchase of Omni Vision Technologies by Will Semiconductor, the Chinese semiconductor company, in 2016 stands a classic example. Omni Vision Technologies is the #2 manufacturer globally of CMOS Image Sensors (CIS). With CIS becoming a key component for pixel upgrades for Autonomous Driving, the market appears set to grow 10x by 2027. Will Semiconductor plans to accelerate the movement of CIS production from the U.S. to China as well as to move all technology development to China, thereby eliminating U.S. production, I.P., and competition. To date, it appears the U.S. government has taken little to no action to stop this transfer. Mattson Technology stands another example of a leading U.S. technology company purchased by China. Mattson, a global leader in RTP for semiconductor fabrications, stands an integral portion of all semiconductor manufacturing. In this case, Beijing E Town, the economic development agency of the Beijing municipal government, a direct arm of the Chinese government, purchased the company. Unlike the U.S., China would never allow a foreign company to purchase a technology leader or a company involved in a critical area of manufacturing. And while China stands the poster child here, other countries such as Malaysia, India, South Korea, Japan, and Indonesia follow similar industrial policies to create clusters of domestic manufacturing that can supply the home market and export around the globe. Harman International, the well known, U.S. manufacturer of audio equipment, was purchased by Samsung Electronics, one of South Korea’s leading firms, in 2016. Less well known, Harman International had purchased several firms to create an automotive cyber-security division with applications in the Internet of Things (IOT). This stands a critical piece of AVs, given the highly interconnected nature of the vehicles, and the Connected IOT. It stands highly unlikely that South Korea would allow a U.S. company to come into the country to purchase any company with a similar market position.
Despite what appears a bleak outlook for the U.S., as other countries outflank it in developing technology and buying up U.S. companies and technology, there exist some fundamental positives for the United States, that, if levered properly, can stalemate other countries actions in these areas. The first factor remains its size. The U.S. stands the #1 economy in the world with the largest consumption market globally. This provides a ready market for any increase in domestic production which displaces imports. The second factor consists of U.S. R&D spending. The United States continues to spend heavily on R&D. In fact, over the past 50 years, U.S. steadily climbed relative to its GDP:
On an actual hard dollars basis, the U.S. remains #1 globally in R&D spending, still slightly ahead of its chief rival, China. The issue comes down to where the products get built. While the U.S. thinks up the goods, corporations then manufacture the goods in such a way to maximize their profits, as pointed out above. And why shouldn’t they. The U.S. Government allows them legally to manufacture parts, components, and finished goods elsewhere and ship them back to the U.S. If this produces more profit than manufacturing in the U.S., then any rational CEO will build product outside the U.S. However, the issue comes down to National Security. Such actions, in broad strokes, undermine the United States National Security and put America’s Global Strategic Position at risk. If corporations manufacture more and more goods outside the U.S., the U.S. does not possess the Industrial Manufacturing to support its economy or to defend itself in a conflict. And, if they move technology manufacturing outside the U.S., the U.S. loses its leading edge in technology, putting itself at the mercy of its foreign rivals. The following chart illustrates the two stage collapse in Industrial Machinery Investment relative to GDP that resulted from such government decisions. The first occurred as the U.S. government allowed companies to move production to South America in the 1980s, followed by NAFTA in 1993. The second occurred in 2000 once the WTO came into existence:
If foreign rivals, such as China, took advantage of this, over the past 30 years, to boost their economies at U.S. expense, it should come as no surprise. They acted in a perfectly rational manner to advantage their economies and nations.
There stands a simple fix. Require critical supply chains, from raw materials to finished product, to relocate to the United States. Should the U.S. require manufacturing in the U.S. of key products and critical supply chains, then this annual Investment could rise 50%+ from its current level relative to GDP. If the U.S. were to get serious about supplying its own demand, then this could easily rise 100%+, as the U.S. produces less than half the goods it consumes. Taiwan provides a clear example of how this could impact the U.S. Taiwanese growth slowed as its leading manufacturing companies put in place capacity in mainland China instead of Taiwan as China required technology goods to be manufactured in China. Several years ago, in 2019, the Taiwan government told its companies to start investing in Taiwan as opposed to mainland China. As a result, economic growth accelerated as Investment occurred in Taiwan not China. This then positively impacted the real estate markets and employment as faster economic growth led to rising living standards, which produced positive feedback. Should the U.S. do something similar, then Investment would rise, driving economic growth. As these plants came on line, this would further raise economic growth and increase productivity growth. In addition, this process would drive living standards upward, which would lead to higher demand producing a positive feedback loop. The following diagram, first laid out in 2019, lays out this loop:
Chart based on data compiled by Green Drake™ Advisors. Copyright © 2022. All Rights Reserved.
However, given the current treaties, such as USMCA (NAFTA) and the WTO, and the massive economic incentives for large corporations to produce parts and goods outside the U.S., any push to move production onshore would likely produce significant large company corporate resistance. Simply put, any change that negatively impacts corporate margins, profits, free cash flow, and return on invested capital will not find a warm reception. As a result, the government will need to jumpstart this process over corporate objections. The easiest lever stands National Security, through which the government could force production to move back to the United States. With a Russian invasion of Ukraine to take over the country and with China continuing its global military buildup to become the dominant global power, such a rationale could easily find justification. Just as the U.S. intervened in the private markets to encourage the buildout of the Internet in the 1990s, the government could intervene today in the private markets to build out the needed industrial supply chains. Starting with National Security, the economic loop would look like the following:
Chart based on data compiled by Green Drake™ Advisors. Copyright © 2022. All Rights Reserved.
Such a jumpstart by the Government would clearly address the National Security issues. However, it would also produce significant benefits to the United States by driving Investment, Living Standards, Employment, Economic Growth, Taxes, and Infrastructure. In effect, it would accelerate U.S. economic growth on a secular basis. And by displacing imports, it would put economic pressure on those countries that seek to utilize the large U.S. consumption economy to benefit their economic growth or that seek to undermine critical U.S. industries for their global strategic gain. (For more details on the rivalry between the United States and China, please see The Great Game of Power: It’s A Cold, Cold World Out There – Communism vs. The Free World Once More, published in January 2022.
With the recent legislation expanding the powers of CFIUS (Committee for Foreign Investment in the U.S.) and the U.S. Congress finally starting to put in place the incentives for business to locate production capacity domestically, should the U.S. add a National Security component that addresses America’s Strategic Vulnerabilities, then Investment into the U.S. to produce the goods it consumes could explode upward. And, for those who think there does not exist sufficient U.S. legislation to move down this path, that stands untrue. Under numerous pieces of legislation, passed over the past 100+ years, the U.S. President possesses significant powers delegated to him or her to limit foreign goods and ramp U.S. production in the name of National Security or to protect U.S. industry from the predations of foreign countries. The key pieces of legislation include:
USMCA (NAFTA Replacement): Chapter 10 permits the U.S. to impose anti-dumping duties as needed. Chapter 34 permits the U.S. to withdraw from the treaty on six months notice.
Trade Expansion Act of 1962, Section 232(b): The President can impose the necessary import restrictions after a finding that national security is at risk. (“If, as a result of such investigation, the Director is of the opinion that the said article is being imported into the United States in such quantities or under Such circumstances as to threaten to impair the national security, he shall promptly so advise the President, and, unless the President determines that the article is not being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security as set forth in this section, he shall take such action, and for such time, as he deems necessary to adjust the imports of such article and its derivatives so that such imports will not so threaten to impair the national security.”)
Trade Act of 1974: There are 2 sections that apply:
Section 122: The U.S President can impose temporary tariffs and import restrictions for 150 days for any reason.
Section 301: After finding a foreign country restricts U.S. commerce, the President can take retaliatory action.
Trading with the Enemies Act of 1917: Section 5(b) of the act delegates to the U.S. President broad wartime powers to regulate all aspects of international commerce and both to freeze and seize foreign assets. The definition of wartime is deliberately left out of the statute.
The International Emergency Economic Powers Act of 1977: The Act delegates to the U.S. President broad powers to regulate all international commerce and to freeze assets in a National Emergency. The Act defines National Emergency as an “unusual or extraordinary threat”.
As these various legal acts make clear, should there exist the political will to act, the legal basis to act in the National Interests of the United States exists aplenty. And given the geopolitical environment, there exists plenty of incentive for the United States to act in the name of National Security to address its Strategic Vulnerabilities.
While the past 30 years benefitted corporate bottom lines at the expense of the United States, under the rubric What’s Good for GM Is Not Good for America, events continue to rush forward that will force a break with this past. Whether it is the conflict with Russia over Ukraine and Eastern Europe; the conflict with China over the South China Sea and its goal to dominate Asia and the globe; the issues with Iran in the Middle East as well as its expansionist goals; the need to participate in the key industries of the future that will drive economic growth; the need to address critical infrastructure needs to support the economy going forward; or the need to grow the economy to pay for all the government promises; basic approaches on how to manage the economy and international trade must change in order for the United States to meet the challenge of a New Cold War as well as the challenge of America’s place in the 21st Century. The surest path to answering all these challenges lies in the difficult but necessary: Invest in America to drive the economy and to provide the country with the National Security required.
In 1961, the United States faced a similar challenge globally in fighting totalitarianism, with its two branches of communism and fascism. President Dwight D. Eisenhower, in his Farewell Address in January, summed up, in two short paragraphs, America, its ideals, and the threats to its existence:
Throughout America’s adventure in free government, our basic purposes have been to keep the peace; to foster progress in human achievement, and to enhance liberty, dignity and integrity among people and among nations. To strive for less would be unworthy of a free and religious people. Any failure traceable to arrogance, or our lack of comprehension or readiness to sacrifice would inflict upon us grievous hurt both at home and abroad.
Progress toward these noble goals is persistently threatened by the conflict now engulfing the world. It commands our whole attention, absorbs our very beings. We face a hostile ideology– global in scope, atheistic in character, ruthless in purpose, and insidious in method. Unhappily the danger it poses promises to be of indefinite duration. To meet it successfully, there is called for, not so much the emotional and transitory sacrifices of crisis, but rather those which enable us to carry forward steadily, surely, and without complaint the burdens of a prolonged and complex struggle–with liberty the stake. Only thus shall we remain, despite every provocation, on our charted course toward permanent peace and human betterment.
Given the backdrop in 1961, the United States possessed no choice but to persevere with difficult choices in order to preserve democracy for America and for countries abroad. With a similar challenge facing the United States in 2022 and the country’s National Security at stake, the country will need to persevere and make difficult choices, in the words of President Eisenhower, in order “to carry forward steadily, surely, and without complaint the burdens of a prolonged and complex struggle–with liberty the stake.” (Data from US Federal Reserve, Department of Energy, and US Congress coupled with Green Drake Advisors analysis.)
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