Will National Security be the Death of Us?
In 1825, in his first State of the Union address, John Quincy Adams laid down the fundamental principle of strategy for a commercial republic: “let us not be unmindful that liberty is power; that the nation blessed with the largest portion of liberty must in proportion to its numbers be the most powerful nation upon earth…”
This proposition, which must have seemed far from obvious at the time, has proved remarkably true. American power flows from American wealth and our wealth from our freedom.
Yet almost necessarily, the job of making strategy for national defense falls to people whose work is not to encourage enterprise but to compel outcomes: soldiers, military historians and academic strategists, diplomats who must always think of war as a continuation of politics by other means.
These are honorable undertakings. Yet the natural result of ceding strategy to those whose professions give them little practical experience of commerce is to give short shrift to that liberty. It’s not that those professionally concerned with defense and diplomacy don’t value liberty. They devote their lives to liberty’s defense. Yet they naturally tend to underestimate how essential free enterprise is to our power.
Thus makes our strategists vulnerable to such destructive notions as government imposed industrial policy. How much, after all, should we expect the State Department to grasp about how the US became—and remains—by far the global leader of the semiconductor industry?
Not much apparently. The State Department has been the driving force behind sanctions against U.S. semiconductor exports to China. Predictably—to everyone but the denizens of that agency-- those sanctions have weakened U.S. companies and strengthened the Chinese. Micron, the only large U.S.-based manufacturer of memory chips, is losing some $2 billion a year in sales—nearly 10% of its revenue—thanks to our diplomats. Qualcomm by far the world’s leader in advanced telecom chips, is losing more. Meanwhile,deprived of access to U.S. chips, the Chinese semiconductor industry has made a decade of progress in one-fifth that time.
The CHIPS act, authorizing some $280 billion in subsidies for the same U.S. firms the sanctions punish, was originally drafted by the State Department. It passed the Senate only after 60 senators attended secret briefing in a “secure room” where Deputy Defense Secretary Kathleen Hicks and National Intelligence Director Avril Haines lectured them on what would happen to a chipless America.
Fantastically, according to Time magazine, the senators found most compelling Hicks’s claim that 98% of the chips bought by the U.S. military were “packaged and tested” in Asia. Apparently, no one told the senators that packaging and testing have traditionally been down-market activities. They were the first aspects of chip manufacture outsourced to Asia because the required skill levels were so modest. Nor it seems were the senators told that packaging and testing is increasingly done not in China or even Taiwan but in other Asian nations.
The CHIPS act itself displays titanic ignorance of the industry it seeks to foster, bribing U.S. companies to get into the lowest margin sector of the semiconductor industry, the actual manufacturing of the chips. The development of the “foundry” (contract manufacturing) system, whereby manufacturing was split off from design, unleashed more than three decades of astonishing creativity in electronics. Where once to bring a new chip to the world the inventor needed to own a billion dollar chip fab, or be employed by a company that did, today there are hundreds of independent design firms churning out new entrants every year. If the design pleases a customer, it is shipped off to a foundry.
Jensen Huang, founder and CEO. of Nvidia
The real money in semiconductors, however, is not in the foundries. It is in those designs, in which the United States leads the world by far. Apple (AAPL), Qualcomm (QCOM), Advanced (AMD) Micro Devices, --and now even Amazon (AMZN), Microsoft, (MSFT) and Google (GOOGL) which develop their own chips for their data centers-- companies worth hundreds of billions or even trillions, do not manufacture a single chip.
Nor does Nvidia (NVDA) with its current market cap circa $1.5 trillion. Nvidia invented the Graphics Processing Unit that made Artificial Intelligence practical. It required no subsidies to do so. The GPU was originally developed for video games! No government agency would have foreseen that path; for that matter neither did Jensen Huang, Nvidia’s founder and CEO. There are no subsidies for serendipity.
And yet serendipity is just what traditional strategists cannot work into their plans. Edward Luttwak writes brilliantly of “the paradoxical logic of strategy” by which every national initiative draws out some canceling opposite. But the paradoxes of strategy do not hold a candle to the paradoxes of freedom, by which the only way to achieve the nation’s goals is to leave things alone.
The justification for the CHIPS act subsidies is that the United States must “onshore” chip manufacturing lest someday China—presumably having conquered Taiwan, the world’s leading chip manufacturer—refuse to sell us chips. Left unmentioned is that this fantastical fear is even remotely plausible only because of the State Department’s determination to wage guerilla war on China’s nascent semiconductor industry, starting with the lie that Huawei was sneaking little spy devices into its telecommunications equipment.
National security is catnip for Republicans who shed lifelong commitments to free enterprise with startling alacrity whenever that phrase is invoked. Despite all the talk about our polarized politics, the CHIPS act passed the Senate by nearly a two-thirds vote, while the House delivered an overwhelming majority: 243–187–1.
As long as U.S. strategy is dominated by people and institutions who fail to appreciate that “liberty is power,” both our liberty and our power remain at risk.