I’d like to begin, as any good argument should, with a story about German business in the United States. In 1891 the German chemical and pharmaceutical producer Merck established a subsidiary in the U.S. Within a few years, the company offered the first commercial smallpox vaccine in the U.S. in 1898. When the U.S. entered World War I in 1917, 80% of the company’s stock was seized under the Trading with the Enemy Act. After the war, George Merck, a naturalized U.S. citizen and member of the Merck family purchased back the controlling stake in the U.S. subsidiary, but it remained severed from its German parent. This leads to the confusing situation today of there being two Mercks, Merck & Co. headquartered in New Jersey and Merck KGaA with its historic headquarters in Darmstadt. Over the years, Merck & Co. would go on to release several pharmaceutical innovations including the first MMR vaccines, antibiotics for tuberculosis, and treatments for Parkinson’s.
Why do I lead with that? Well, if U.S. policymakers in 1891 or 1915-16 during the lead up to the United States joining WWI had decided that German investment posed an insidious threat to American society, the U.S. would have said nein, Danke to one of the 20th century’s most innovative companies. I’m sure U.S. soldiers in WWII appreciated having a reliable domestically produced source of penicillin. I’m certainly glad I got an MMR vaccine as a kid. Having domestic pharmaceutical production is a key asset to national security and a country’s overall quality of life - an asset U.S. policymakers today are scrambling to protect. Yet that’s precisely the argument state and federal lawmakers are making about rejecting Chinese investment in sectors that will define our next century.
There’s no way around China
Germany in the early 20th century was the China of its day - a rising power that economically dominated its neighborhood with ambitions on the world stage that worried its rivals. There’s an open question over to what extent China mirrors the Kaiserreich’s pursuit of military hegemony, but there are similarity’s between the Wolf Warrior turn in China’s diplomatic engagements and Wilhelm II’s brash tone and ill-defined Weltpolitik. Economically, at least, the comparison fits pretty well to me. China now and Germany then have/had large, technologically advanced, export-driven economies featuring national champions in critical sectors. Like German dominance in the chemical sector then, Chinese dominance of solar and robotics technologies now means that if you want those capabilities at scale, you need to work with Chinese companies.
The facts on the ground: Chinese companies produce over 96% of the world’s solar cells and polysilicon wafers and 80% of its battery cells. China is the leading refiner for 19 out of 20 energy-related minerals with an average market share of 70%. China also leads in the deployment and development of industrial and humanoid robots.
There are valid national security reasons for wanting China-free supply chains in defense-related sectors like drone manufacturing or geographic-based restrictions forbidding building facilities near U.S. military installations. Given the current relatively small size of the world rare earth market, the U.S. could also make strides in building out domestic extraction and refining operations, but it still likely won’t reach self-sufficiency. Nevertheless, in several sectors crucial for the necessary climate transition and industries of the future, there’s no alternative to cooperation with China.
Place-based security
Books like Underground Empire by Henry Farrell and Abraham Newman or Chokepoints by Edward Fishman highlight how the U.S. weaponized the world’s “economic plumbing” by using the dollar’s centrality to the world financial system for sweeping sanctions regimes. America’s control of the commanding heights in the world financial system is one of the reasons U.S. sanctions and export controls focus primarily on the ownership and control of affected companies. This has given the U.S. considerable leverage over geopolitical rivals when targeting the Iranian or Venezuelan oil industries or cutting Chinese AI companies off from U.S. designed chips. However, I believe U.S. dominance in the financial sector has led American economic security strategy to over index on ownership as the most important criterion when crafting policy. Restricting tax credits in the Inflation Reduction Act or Chips and Science Act from going to Foreign Entities of Concern (i.e. Chinese-owned companies) has reduced potential investment opportunities in precisely the sectors the U.S. wants to build out quickly. A location-based approach promoting onshoring and near-shoring would be more effective in actually advancing American economic security.
Which brings me back to Merck. Germany did pose tangible national security risks to American interests between 1914-1945. But policymakers at the time did not choose to ban German investment, even in dual-use sectors such as chemicals. To be sure, there are valid concerns about the impact commercial entanglements with geopolitical adversaries can have on domestic politics. Fears about Nazi influence led to the founding of the House Unamerican Activities Committee and the Foreign Agents Registration Act. But when the conflicts with the predatory authoritarian regimes in Germany in the first half of the 20th century did go connect, the U.S. was better off for having the facilities and infrastructure German companies built than if it had excluded them altogether.
In a worst case scenario, you can expropriate the factories your enemies’ companies have built in your country. For more recent example than 1917, take a look at Russia after its full scale aggression against Ukraine in 2022. Numerous western companies closed their operations in Russia, but they couldn’t take their facilities with them when they left. When McDonald’s closed their doors in Russia, the restaurants reopened shortly afterward with new Russian ownership. That is to say, security risks from foreign investment from adversaries are real but manageable and the upsides for investment recipients can outweigh the risks.
Learning from China
If, as the Economist argues, economic power is returning to the physical realm from the ethereal world of software, so too should the focus of economic security strategy. The U.S. could emulate China’s strategy of attracting foreign investment, but imposing strict conditions such as forced joint ventures or technology sharing. While the Trump Administration’s strategy of buying direct stakes in companies and demanding golden shares from investors like Nippon Steel seems primarily to be an exercise in self-dealing, some of the tools could be preserved in a longer term rules-based framework.
In some areas, the prudent move may in fact be to set up fully China-free supply chains, just as China has excluded many American social media and digital service providers from its market. China has its own Underground Empire strategy for the world’s economic plumbing, including network infrastructure and shipping. Huawei President Ren Zhengfei has likened himself to a maker of pipes, making the metaphor explicit. Reducing U.S. dependence or exposure to Chinese providers in these areas will help preserve economic and foreign policy freedom of action.
Too often, however, U.S. restrictions on Chinese investment rely on rank fearmongering. In 2023, then Virginia Governor Glenn Youngkin blocked a $3.5 billion joint Ford-CATL battery plant. The facility is now planned to be built in Michigan, but it faces scrutiny from the House China Committee. Several states are enacting bans on foreign ownership of U.S. agricultural land or blocking Chinese or other foreign nationals from buying residential property. China does pose threats to U.S. economic and security risks, but not every transaction is a CCP psyop. I sincerely hope the U.S. and the PRC never go to war. But if they do, I think we will be better off if we have more solar panels, batteries, and robots built in the U.S. Right now, the only companies that can build those factories at a competitive scale and cost are Chinese.