Released earlier this year, the US Department of Defense’s National Defense Industrial Strategy (NDIS) is what DOD describes as a “first of its type” document for strengthening the defense industrial base. By clearly articulating industrial policy objectives relevant to the defense sector, the NDIS seeks to “build a modernized industrial ecosystem” including strengthening supply chains, addressing workforce issues, and reforming the acquisitions process. DOD views these measures as necessary to empower the defense industrial base, which has atrophied in the decades following the Cold War, to be able to “produce the warfighting capabilities at a speed and scale” necessary to “win in any conflict.” Additionally, the NDIS lists “economic deterrence” as a priority, making the point that deterring China from engaging in economic activities that harm the defense industrial base is a necessary component of US efforts to modernize it.
Most of these initiatives are long overdue, and the NDIS shows that DOD understands the large-scale transformation of US industry that is necessary to compete with China. However, the “economic deterrence” aspect of this transformation is not the best approach for the US. The economic sphere is poorly suited to deterrence. Unlike classic nuclear deterrence, with its clear red lines, economic deterrence can only vaguely define punishable infractions. The threat that makes deterrence credible is equally uncertain. Sanctions and export restrictions require collective action across nations and have economic costs at home. Rather than pursuing the hazy and hard-to-achieve goal of economic deterrence, the US should make strengthening the resilience of the defense industrial base the centerpiece of any economic strategy to counter China.
The Downsides of Economic Deterrence
The NDIS says that under economic deterrence, “fear of materially reduced access to US markets, technologies, and innovations sows doubt in the minds of potential aggressors.” To be deterred, Beijing must believe that if it continues economic actions that the US finds objectionable, the US will impose unacceptable costs. Unfortunately, neither the NDIS nor the follow-on NDIS Implementation Plan released last month articulates what they expect China to do (or not to do), nor how the US should enforce it. Worse still, this “deterrence” framework creates an unnecessarily confrontational approach toward Beijing that distracts from the focus on collaboration with US allies and partners.
The “red lines” problem is that a country seeking to deter an adversary from some behavior must present the adversary with a clear choice: if the adversary refrains from a specific undesired action, the deterrer will not carry out its threat. Merely issuing vague statements—for example, that Beijing should adhere to a “rules-based order” or stop trying to deploy “adversarial foreign investment” against US companies—is insufficient. The multifaceted nature of economic competition, where competitor behaviors can run the gamut from subtle but unfair trade practices to brazen intellectual property theft, makes drawing clear and credible red lines very challenging. It is unlikely the US will succeed at doing so.
Even if an economic red line were visible to Beijing, “fear of materially reduced access to US markets” might not be a sufficient deterrent. Beijing views acquisition of advanced foreign technology and dominance of critical supply chains as fundamental to its security and prosperity. For economic deterrence to force Beijing to change its behavior, it would have to impose anticipated costs in excess of what China’s leaders are willing to bear. And any policy measures sufficiently drastic to be effective would likely be unbearable for US civilian industry as well as allies and partners, given widespread dependence on trade with China.
Targeted Economic Deterrence
Various scholars have argued that there may still be a way to impose highly targeted costs on China without crippling US and allied industry. For example, Victor Cha of the Center for Strategic and International Studies (CSIS) argues that the US should work with key allies to threaten to restrict exports of certain commodities—such as silver powder—that have high strategic value to China and where it is import-reliant. Similarly, a group of other authors from CSIS observe in a recent report that China relies on the US and its allies for certain advanced manufactured goods like high-performance epoxy resins from South Korea. They argue that targeted sanctions of these goods could prove effective if upheld by major producing countries.
However, as these authors recognize, efforts at such “collective deterrence” face numerous hurdles. In the case of high-performance epoxy resins, South Korea relies on Chinese market demand for these resins. Getting South Korean leaders to sign onto sanctions on resins could prove difficult. If South Korea did join these sanctions, it could be subject to retaliation from Beijing, as occurred in 2017 with boycotts and other government-supported economic actions by China against South Korean businesses following South Korea’s agreement to host the US military’s Terminal High Altitude Area Defense (THAAD) system.
Economic Resilience vs. Economic Deterrence
So if an economic deterrence strategy is unlikely to work in practice, what might an alternative approach look like? Fortunately, the NDIS already supplies that answer: resilience. A resilience-centric strategy assumes that efforts to economically deter China will have limited effect, and instead focuses the US government’s scarce time and resources solely on defeating, or at least mitigating, Beijing’s attempts to acquire technological and supply chain dominance. Many of the measures in the NDIS already support this objective.
A resilience-centric strategy will also pay diplomatic dividends. The language of economic deterrence is unhelpful in US efforts to gain ally and partner support, especially from Indo-Pacific countries that are subject to intense economic and diplomatic influence from China. Labeling a portion of Washington’s defense industrial policy as “deterrence” bolsters China’s argument to these countries that the US seeks to suppress China’s economic development—and by extension, that of countries close to China.
In contrast, the language of economic resilience does not suggest that the US is targeting China, or indeed any country with which it has economic frictions. Rather, “resilience” connotes a US policy that is defensive in nature: to protect itself and like-minded nations from malign economic activities. Optimizing the language of US industrial policy will help build the broadest possible international coalition to ensure the US and its allies and partners retain an economic and military edge.
