By Jake Guglin, CEO, Co-Founder, Foundation Alloy
A steady current in today’s national discourse is America’s competitiveness with China, most notably in economic and military spheres. It is heartening to see the challenges America faces being brought into the light. The first step in solving a problem is, after all, recognizing there is one. One of the key areas of competition—in many ways, the heart of the matter—is manufacturing, which supports both economic growth and military strength. In this domain, the situation is grimmer than many admit. As it stands today, America has already lost the Production War to China. To rebuild American economic and military leverage, we cannot exclusively rely on a nostalgic reimagining of America’s role as the arsenal of democracy by trying to beat China at its own game. Instead, we will need to build fundamentally new capabilities where we have the lead from the outset.
The evidence is clear: if we had to declare a single victor in manufacturing, China would claim the title. China can manufacture a greater mix of goods, at lower costs, higher speeds, and larger volumes, than the U.S. and its allies. The data to support this abounds. The Wall Street Journal recently detailed the depths of America’s relative decline in military manufacturing, noting that, “a single Chinese shipbuilder last year produced more commercial ships by tonnage than the entire U.S. shipbuilding industry has made since World War II.” Similarly, a recent Economist analysis points to the reality that even if the U.S. could match China’s cost structure, China would still prevail on scale alone.
This is a sobering admission that extends beyond the manufacturing sector. Production capacity is at the heart of military might between near kinetic peers—as the old saying goes, “Amateurs talk tactics; professionals talk logistics.” And while many countries have used excellence in services to punch above their geopolitical weight (Singapore, Switzerland, Hong Kong), no world economic power has ever dominated without, in large part, controlling the flow of goods.
There is a critically important revelation in the focus on China’s scale-based advantages: automation and robotics alone will not restore American economic and security leverage. If we play the race-to-zero-labor-cost game out to its endpoint, where manufacturing is fully automated and costs are purely a mix of raw materials and capital expenditure amortization, China will still dominate under the current paradigm. Even if we assume that the U.S. could leapfrog China in robotics innovation and deployment (which, to be clear, we should not), China’s domestic market size and its control over the raw materials underpinning today’s technologies give them a structural advantage that America and its allies will struggle to match.
So how do we rebuild American economic and military leverage? As a first step, we need to understand America’s competitive advantages over China and the rest of the global market. There are three core drivers of America’s rise to industrial superpower in the 19th and 20th centuries that worked in concert: our legal system, our capital system, and our entrepreneurs’ ingenuity. These factors formed a nation-scale flywheel driving technological advances by working together to continually, and increasingly, reward progress through their unique natures:
- First, our legal system protects entrepreneurs from liability in the case of business failure, while the tax code allows for near infinite upside earnings. This creates a low-risk, high-reward financial profile for founders, incentivizing people to take chances to create something new and valuable.
- Second, our capital system is immense. In former SEC Chair Gary Gensler’s words: “the U.S. economy and, importantly, the public—both investors and issuers—benefit from our large, vibrant $120 trillion capital markets.” The NYSE alone is four times the size of the Shanghai Stock Exchange, without even considering the tech-laden Nasdaq and non-equity sources. This capital doesn’t only feed the prototypical Silicon Valley-style entrepreneurship, though it is a critical component of that sector of the economy. It is also what underpins growth across the small and medium-sized businesses that are the backbone of the American economy via a massive network of local banks and lenders.
- The third, and most critical, factor is American ingenuity. The seeds of modern aerospace, power generation, computing, transportation, and industrial goods—as well as the commercial processes and core inputs that brought these to market—were first planted by American scientists and entrepreneurs.
This engineering and inventive prowess, combined with supportive legal and capital systems, allowed these industries to grow up on American terms, making the U.S. the dominant force in these industries and so many more for much of their history. In most cases, we started the race before the rest, and with better accelerants, left the rest of the world to fight for second place.
Therein lies the means to re-establish American leverage: we must build fundamentally new capabilities in the domains where we can lead from the outset. We already see the power of this approach in the sectors where the U.S. still holds a competitive edge. In the recent economic tit-for-tat with China, it was U.S. leverage in aircraft and semiconductor systems, balancing out China’s near monopoly on rare earth materials, that enabled a deal to be struck. But that near-term deal does not amount to a strategy, nor does it secure long-term protection of American interests. This where the Council on Global Competition and Innovation – CGCI has stepped in, promoting a model that aligns capital with national strategy across the critical technology sectors that will drive American competitive leverage.
America’s future strength depends on creating the systems, infrastructure and technologies of the future, not trying to catch up on today’s playing field. By putting money behind this effort and focusing the ingenuity of American entrepreneurs on meaningful new advancements, we can create the next generation of critical technologies on American terms, once again setting the pace for the world in the decades to come.
