Chris Miller’s fascinating book “Chip War” put semiconductor manufacturing prowess front and centre of global geo-politics. This brilliant blog by Noah Smith puts manufacturing muscle in general in the context of geo-political conflict, primarily between China and the US (and its allies). Over the past few decades, China emerged as a factory to the world. But just to what extent is China’s dominance of world manufacturing:
“In the year 2000, the United States and its allies in Asia, Europe, and Latin America accounted for the overwhelming majority of global industrial production, with China at just 6% even after two decades of rapid growth. Just thirty years later, UNIDO projects that China will account for 45% of all global manufacturing, singlehandedly matching or outmatching the U.S. and all of its allies. This is a level of manufacturing dominance by a single country seen only twice before in world history — by the UK at the start of the Industrial Revolution, and by the U.S. just after World War 2. It means that in an extended war of production, there is no guarantee that the entire world united could defeat China alone.”
China today already makes up more than a third of world manufacturing. But why is this a concern:
“That is a very dangerous and unstable situation. If it comes to pass, it will mean that China is basically free to start any conventional conflict it wants, without worrying that it will be ganged up on — because there will be no possible gang big enough to beat it. The only thing they’ll have to fear is nuclear weapons.
And of course other nations will know this in advance, so in any conflict that’s not absolutely existential, most of them will probably make the rational choice to give China whatever it wants without fighting. China wants to conquer Taiwan and claim the entire South China Sea? Fine, go ahead. China wants to take Arunachal Pradesh from India and Okinawa from Japan? All yours, sir. China wants to make Japan and Europe sign “unequal treaties” as revenge for the ones China was made to sign in the 19th century? Absolutely. China wants preferential access to the world’s minerals, fossil fuels, and food supplies? Go ahead. And so on.
China’s leaders know this very well, of course, which is why they are unleashing a massive and unprecedented amount of industrial policy spending — in the form of cheap bank loans, tax credits, and direct subsidies — to raise production in militarily useful manufacturing industries like autos, batteries, electronics, chemicals, ships, aircraft, drones, and foundational semiconductors. This doesn’t just raise Chinese production — it also creates a flood of overcapacity that spills out into global markets and forces American, European, Japanese, Korean, and Taiwanese companies out of the market.
By creating overcapacity, China is forcibly deindustrializing every single one of its geopolitical rivals. Yes, this reduces profit for Chinese companies, but profit is not the goal of war.”
Noah shares data on how China has decimated Germany and Japan, erstwhile industrial powers:
“America’s most economically important allies — Germany and Japan — are bearing the brunt of China’s most recent industrial assault. In the 2000s and 2010s, Germany’s manufacturing exports boomed, as they sold China high-tech machinery and components. China has now copied, stole, or reinvented much of Germany’s technology, and are now squeezing out the Germany suppliers.
Meanwhile, China has already taken away much of the electronics industry from Japan, and now a flood of cheap Chinese car exports is demolishing the vaunted Japanese auto industry in world markets.”
He blames free market democracies for this lopsidedness:
“The democratic countries have all struggled to respond to China’s industrial assault, because as capitalist countries, they naturally think about manufacturing mainly in terms of economic efficiency and profits unless a major war is actively in progress.
Democratic countries’ economies are mainly set up as free market economies with redistribution, because this is what maximizes living standards in peacetime. In a free market economy, if a foreign country wants to sell you cheap cars, you let them do it, and you allocate your own productive resources to something more profitable instead. If China is willing to sell you brand-new electric vehicles for $10,000, why should you turn them down? Just make B2B SaaS and advertising platforms and chat apps, sell them for a high profit margin, and drive a Chinese car.
Except then a war comes, and suddenly you find that B2B SaaS and advertising platforms and chat apps aren’t very useful for defending your freedoms. Oops! The right time to worry about manufacturing would have been years before the war, except you weren’t able to anticipate and prepare for the future. Manufacturing doesn’t just support war — in a very real way, it’s a war in and of itself.
Democratic countries seem to still mostly be in “peace mode” with respect to their economic models. They don’t yet see manufacturing as something that needs to be preserved and expanded in peacetime in order to be ready for the increasing likelihood of a major war. Fortunately, both Republicans and Democrats in America have inched away from this deadly complacency in recent years. But both the tariffs embraced by the GOP and the industrial policies pioneered by the Dems are only partial solutions, lacking key pieces of a military-industrial strategy.”
Noah goes on to give his solution to American policymakers to revive its industrial strengths.
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
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