The New Age of Supply Chain Warfare

Compared to Iran’s stoking of the oil crisis, China maintains a far more formidable ability to bring the US economy to a halt.

The Strait of Hormuz crisis illustrates how America’s adversaries can abruptly manipulate supply chain dependencies as geopolitical weapons. Iran’s closure of the Strait of Hormuz has boosted oil prices to heights not seen in years. Meanwhile, China has already primed future US chokepoints.

China’s leaders have become experts at supply chain warfare. They follow the master Chinese strategist, Sun Tzu, who observed that the supreme art of war “consists in breaking the enemy’s resistance without fighting.” According to the congressional US-China Economic and Security Review Commission, “Beijing has shifted toward an explicit policy goal of establishing uncontestable dominance across global value chains, eliminating its own vulnerabilities while creating global dependencies on Chinese products.”

In April 2020, Chinese leader Xi Jinping explicitly directed that, “We must tighten international production chains’ dependence on China, forming powerful countermeasures and deterrent capabilities based on artificially cutting off supply to foreigners.”

China has manipulated global supply chains for years, from raw materials to final goods. Beijing’s victims have included Japan, Australia, South Korea, and many European countries. In recent years, the Chinese government has withheld exports of minerals to the United States for advanced electronics (gallium and germanium for semiconductors) and defense manufacturing (antimony, a mineral with no viable substitute in military ammunition). Many countries have suffered doubly from PRC-manufactured supply disruptions combined with Chinese dumping of excess production aimed at bankrupting potential foreign competitors.

Drawing on China’s dominance of essential raw materials and exploiting lavish government subsidies and large captive domestic markets, China now dominates the global supply of such economically and militarily critical products as printed circuit boards, foundational semiconductors, and active pharmaceutical ingredients.

For example, China has assiduously cornered the production of lithium-ion batteries, essential for both military and civilian purposes. Though perhaps best known for powering electric vehicles, lithium batteries are also critical components for computers, drones, and other advanced electronic systems.

What makes the Chinese challenge even more sinister is how the Chinese government manipulates its currency and subsidizes its companies through tax credits, cheap loans, and other assistance to lower the costs of its exports and build foreign dependencies. Chinese cyber-espionage and intellectual property theft help Chinese firms acquire foreign secrets.

Through its strategy of “military-civil fusion,” the authorities compel their own companies to transfer technologies and intelligence that they collect from foreign partners to the Chinese military. Conversely, the government has developed improved export controls to restrict foreign access to rare earth minerals, technologies, and other essential supplies.

A novel Chinese technique is to conceal Chinese control over foreign entities to circumvent legal limits on inward investment. Rather than visible ownership, China relies on Chinese-channeled supply chains, loans, technology licenses, and related means to exert control over a company without overt Chinese ownership. As a result, these companies function as de facto Chinese-controlled entities, positioned to cut off supplies at critical times and to orchestrate cyber and other forms of espionage until then.

Ironically, Western governments are subsidizing Chinese dominance. When Congress enacted the One Big Beautiful Bill Act, it included restrictions on foreign entities of concern (Prohibited Foreign Entities) to prevent them from benefiting from US tax credits intended to build American supply chains rather than subsidizing Chinese competitors. However, Chinese-influenced entities continue to access federal assistance through subsidiaries, shell companies, and creative debt structures that conceal Chinese control. As a result, Chinese rather than American workers are using Chinese- rather than US-made components to assemble batteries on American soil.

The US government has made more progress in the international sphere. Last year, the United States launched Pax Silica, an initiative among trusted global partners designed to construct a silicon supply chain independent of China. The priority is to build resilient critical mineral supply chains, reliable information technologies, and the strategic software and infrastructure indispensable for Artificial Intelligence.

But at home, the US government needs to eliminate loopholes that divert American tax dollars to Chinese companies. The Treasury Department should close the gap between congressional intent and regulatory reality. Government agencies can also support workforce training and infrastructure building as the backbone of these chains. If an entity develops an important technology, the government should help develop a supporting supply chain.

If Iran keeps Washington up all night, China should keep it awake for a generation.

*Richard Weitz is a senior fellow and director of the Center for Political-Military Analysis at Hudson Institute. His current research includes regional security developments relating to Europe, Eurasia, and East Asia, as well as US foreign and defense policies. Before joining Hudson in 2005, Dr. Weitz worked for the US Department of Defense, where he received an Award for Excellence from the Office of the Secretary of Defense.

Source: https://nationalinterest.org/feature/the-new-age-of-supply-chain-warfare