In a discussion that Hudson Institute senior fellow Arthur Herman described as “particularly chilling,” a panel of experts hosted by the institute spoke about the threat of China’s economic coercion to the supply chains for defense-critical advanced batteries.
In introducing the discussion, Nadia Schadlow, who served as U.S. deputy national security adviser for strategy under President Donald Trump, noted China’s present control over the supply chains for advanced batteries, including lithium-ion batteries and emerging solid-state batteries.
“China dominates this supply chain—everything from the critical minerals to the processing to the battery cell production to the recycling as well,” Schadlow said. “One of our briefers noted that China was about a decade ahead of the United States in that supply chain.”
Anthony Vinci, an adjunct fellow with the Center for a New American Security who served as chief technology officer for the National Geospatial-Intelligence Agency under Trump, said: “Has the issue of batteries and supply chain tripped over that wire to where we’re now moved from normal, quote-unquote ‘normal,’ economic competition to economic coercion and into economic warfare? I would propose that we’re not quite there yet, but we’re in a state that I would call ‘preparation of the battlefield.’
“Batteries are so key to Department of Defense capabilities in the next five to ten years.”
He recommended that national intelligence capabilities be developed to assess supply chain vulnerabilities, arguing that the U.S. federal government may even fail to compete in this arena with actors in its own private sector.
“I would suggest that there are companies, individual singular companies, in Washington or New York, that probably have better economic intelligence collection analysis capability than the entire United States intelligence community—and that is a problem,” Vinci said.
CCP’s Conditions for Doing Business in China
Pavneet Singh, a nonresident fellow at the Brookings Institution who served on the National Security Council and the National Economic Council under President Barack Obama, highlighted some of the hazards for U.S. firms seeking to do business in China, saying that the country’s coercion “takes many forms.”
“As a condition for doing business in China, the playbook requires that these companies [software companies] transfer IP [intellectual property], set up a joint venture, or cede ultimate ownership of their company,” he said.
Singh said that shifts in venture capital financing also present risks. Limited partners, once content to provide capital without becoming significantly involved, have begun asking for confidential information and proprietary data.
“This is a dramatic change in the VC [venture capital] model, and it presents a real vulnerability because there’s no real oversight,” he said.
Drawing on his experience in Australia’s government, Hudson senior fellow John Lee, who served as senior national security adviser to Australian Foreign Minister Julie Bishop, presented what he called Beijing’s “vision of success” in relation to other countries.
“It comes down to three things,” Lee said. “It wants a capacity to coerce—and that’s not just through material means, but importantly, the demonstration of superior resolve over other countries and governments.
“Two, it wants the capacity to offer material incentives and inducements to, particularly, smaller nations, to gain their submission—and this is done bilaterally or through multilateral regimes, such as the [Belt and Road Initiative].
“Third, it wants to attain not just legitimacy, but it wants tribute and acceptance of its alleged superiority, and it does that through dominating regional and institutional norms and standards.”
Lee argued that China needs to maintain and grow its power over battery supply chains to realize these goals, and that China’s goals and strategy could be rather subtle.
“It’s not necessarily about bringing a country like Australia to its knees, because it probably can’t really do that,” Lee said. “It’s actually more a political and psychological ploy, concerned with creating division within that country such that coerced firms and individuals pressure their governments to change their policies in ways that better suit Chinese interests.”
China-Proofing Critical Supply Chains
According to Lee, countries can develop their psychological resilience against Chinese influence by being honest about the nature of the Chinese Communist Party (CCP).
“We no longer need to censor ourselves, as we’ve done for the last few decades, regarding the Chinese Communist Party—and certainly I think the less we censor ourselves, the better we are as a society,” he said.
After stressing the need for “China-proofing critical supply chains,” Lee said the future of the Indo-Pacific could hinge on whether wealthy countries can generate a strategy for developing countries, which he said are more susceptible to Chinese coercion.
The panelists also debated the nature and level of force the government should use in relation to an issue, such as battery supply chains, involving both economics and national security.
“It’s a complex issue because of the nature of the American economy, which is basically a laissez-faire, capitalist system,” Vinci said. “You’re seeing, in my personal opinion, Xi [Jinping, leader of the CCP,] having similar concerns that his own system is not as directed as he wants as well, and he’s trying to control it more. That may backfire for him. I suspect people at the Hudson Institute would agree with me that it will.
“The DOD [Department of Defense] can have an effect on the economic system if it uses its tools in a strategic way,” Vinci said, arguing that DOD often lacks the technical expertise to know which incentives to use.
“We [Australia] often found that, as the government, you need a sledgehammer, not necessarily a scalpel,” Lee said, arguing that even a “blunt tool” at the policy level can meaningfully change private-sector behavior toward China.
Singh said, “I just don’t think that DOD could make the kind of change in our economy that we need.
“I think we’re trying to shift a whole mindset and shift a whole operation of our economy without becoming a command economy.”
Vinci agreed with Singh, saying, “This is really truly a whole-of-government situation—you’d really call it whole-of-nation.” He added that tax incentives are “probably the biggest sledgehammer we have in this country.”
In his closing remarks to “Powering Innovation,” Herman stressed the potentially massive threat presented by China’s control of battery supply chains.
“I wonder even if our audience understands just how disquieting some of the discussion was,” Herman said. The U.S. economic competition with China is “not just about the strength of our economy, or even about protecting national security, but may ultimately be an issue about national survival.”
The panel “China, Supply Chains, and Economic Coercion” took place on Oct. 14 at the Hudson Institute in Washington, D.C.