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How to Strengthen Our Economy against Foreign Threats
Engineer analyzes a computer chip in a lab. (D-Keine/Getty Images)
Engineer analyzes a computer chip in a lab. (D-Keine/Getty Images)

How to Strengthen Our Economy against Foreign Threats

Douglas J. Feith

American industry’s role in making computer chips is not what it used to be, and the shrinkage has created national-security vulnerabilities. America still designs the most advanced silicon semiconductors, but it no longer makes them. A bipartisan congressional majority enacted the CHIPS Act in 2021 to incentivize investments in this field in the interests of American defense. But should that law be welcomed as a national-security measure or opposed as a governmental intrusion into the economy?

American military and economic interests depend on silicon semiconductors. Taiwan is the world’s leading manufacturer of these chips, and produces 90 percent of the most advanced models. China relentlessly threatens Taiwan with forced reunification, and among the stakes in that conflict is Taiwan’s dominant role in the computer-chip industry. Through military action, China could certainly disrupt the world’s supply of advanced semiconductors and might be able to take over the leading Taiwanese manufacturers. This would have grave consequences for Americans, who depend on Taiwanese chips for a huge range of products from cellphones to automobiles to medical devices — not to mention weapons systems.

While it is debatable whether Russia’s invasion of Ukraine has made a near-term Chinese attack on Taiwan more or less likely, that war has surely focused U.S. policy-makers on the dangers China’s expansionist ambitions pose to Taiwan.

The CHIPS Act won bipartisan support, but Congress has not yet appropriated funds to implement it. Some conservatives, though they support the aim of bolstering U.S. national security, are wary of government efforts to shape (or distort) the economy through incentives for this or that industry.

These lawmakers may want to consider how President Reagan handled similar questions. Reagan was committed both to “peace through strength” and to respect for free markets. A study of his tenure sheds light on how economic policy relates to national security.

First, however, it bears noting that America’s current conflict with China differs in important ways from the Cold War, which Reagan was instrumental in winning.

The Soviet Union was militarily formidable, but its economic role in the world was insignificant. It always struggled to maintain sufficient foreign-currency reserves. It needed to import wheat and had difficulty paying for the crop. Its non-military technology was generally second-rate, and it manufactured almost nothing that world markets wanted to buy, other than weapons.

China, of course, is a different story. It is a pervasive force in the world economy, technologically advanced and influential, with large foreign-currency reserves. Already a major chip-producer, China is investing heavily to catch up with Taiwan, the United States, and other leaders in chip design and manufacturing, even as it continues to threaten the Taiwanese with the use of military force. China’s rulers use foreign trade and investment to advance the Chinese Communist Party’s strategic purposes abroad and at home.

The Soviet Union could never squeeze the United States by economic means. But in some cases, China can, and U.S. officials have to anticipate how and when to manage that danger.

The United States used economic means to fight the Cold War. Reagan pressured European allies not to buy Soviet natural gas. If those allies made themselves dependent on the Yamal gas pipeline from Siberia, the president warned, they would give Moscow leverage in a crisis and, in the meantime, provide it with hard currency, allowing it to increase its military spending. (Those warnings have been amply validated in recent weeks in the course of Russia’s war against Ukraine.) Reagan also imposed export controls to restrict the flow of sensitive technologies — for example, supercomputers — to the USSR.

Reagan invested in stockpiles of commodities that America might need in a war — for example, oil, chrome, and cobalt. That policy was challenged on grounds similar to those invoked by opponents of the CHIPS Act: Why should the government make these investments? Why can’t the free market produce the necessary resources?

The Reagan team looked for guidance to Adam Smith, the great Scottish proponent of free-market principles. In his Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776, Smith wrote about Britain’s Act of Navigation, which boosted the British shipping industry as a way of protecting against naval threats from Holland. The law impeded freedom of trade, making foreign goods costlier and lowering revenues from the sale of British goods. “As defence, however, is of much more importance than opulence,” Smith concluded, “the act of navigation is, perhaps, the wisest of all the commercial regulations of England.”

The U.S. government should now assess which fields of technology and commerce require regulation or subsidies in the interest of defending the nation against threats from China, Russia, Iran, North Korea and other hostile foreign powers. It is obvious that the computer-chip industry should be a top priority. But we should take care in adding other sectors to the list, because special interests that advocate regulation of industry for their own political or commercial purposes sometimes disingenuously make their cases on national-security grounds.

Meanwhile, the Ukraine war has highlighted the West’s reliance on Russian energy and the worldwide effects of sanctions, underscoring the intimate relationship between economic policies and national security. Congress is now considering a 25 percent tax credit to support semiconductor research, development, and production. In weighing the cost of the credit, lawmakers should recall Adam Smith’s wisdom, and recognize that some commercial regulations really are necessary to our national defense.

Read in National Review

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