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Home»Finance»National Security and Global Supply Chain Risk
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National Security and Global Supply Chain Risk

October 15, 2024No Comments6 Mins Read
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National Security and Global Supply Chain Risk
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The Diplomat author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with Dr. Bradley Martin – senior policy researcher at the RAND Corporation, specializing in supply chain analysis, national security studies, and naval force structure and readiness, with a 30-year career in the U.S. Navy – is the 436th in “The Trans-Pacific View Insight Series.”

Examine how the Israel Defense Forces (IDF) and intelligence services penetrated the supply chain of pagers and walkie-talkies from Taiwan and detonated them among Hezbollah fighters in Lebanon.

The IDF and Israeli intelligence services knew that Hezbollah had been concerned about the security of cell phones and their vulnerability to targeting. Accordingly, they had begun switching to what they thought was a more secure means of communicating simple messages.

Israel obtained a factory and successfully marketed the product – which effectively no one else would use – and installed the explosive devices in the shipped pagers. The walkie-talkie penetration was similar in that Israel was able to introduce the walkie-talkies into a supply chain they knew would end up with Hezbollah. 

The episode demonstrates some key things about supply chain vulnerabilities: it is important to understand the origins of products, particularly when the products are niche and thus not likely to be used by anyone else. Also, having knowledge of supply chains, both friendly and adversary, can confer at least a tactical advantage.

Explain the relationship between national security and supply chains. 

The connection between national security, specifically military security, and supply chains is intuitive: if supplies are not available for the military or for key commodities that support the military, the impact on current and projected operations can be substantial. However, national security should not be conflated with military security. National security can be thought of as protection against threats to a nation’s prosperity, stability, and governance. A nation can be significantly harmed, and its influence diminished, by actions unrelated to keeping a ready military.

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In this light, supply chains are also an instantiation of the vulnerabilities – and opportunities – that come from economic interdependence. Nations are intertwined in unprecedented ways, to include supply chains. Nations cannot effectively isolate themselves from others, occasionally finding themselves connected in unexpected ways. Ensuring national security, in the broad sense of protecting national well-being, thus requires understanding of both the vulnerabilities and leverage opportunities.

China, for example, can threaten the United States with a variety of supply chain disruptions that could seriously affect its prosperity; at the same time, those same actions could have a dramatically detrimental effect on China itself. Managing the mutual vulnerabilities and possible cooperation opportunities is a national security process.

Describe the range of global supply chain risks that adversaries could seek to exploit.

Most manufactured goods contain materials that at some point passed through China, while at the same time China depends on both raw materials from, and the ability to export to, other countries. China dominates the processing of critical minerals, has a dominant position in manufacture of generic drugs and antibiotics, and is moving toward a dominant role in batteries and green energy. Taken together, these give China considerable leverage over those who purchase these materials. 

This leverage is partially offset by the fact that China’s prosperity requires that these nations are in a position to purchase these same materials. The most notable thing about supply chains is that while they might not be completely reciprocal, they generally are interdependent to the point that a nation cannot necessarily exploit vulnerabilities without exposing themselves.

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However, when vulnerabilities exist and a nation values an objective enough to be willing to suffer damage, the leverage can be powerful. An example is the oil embargo of the early 1970s. Oil exporters lost revenue, but the loss was acceptable in return for extracting concessions from the United States. In the current moment, if China were to place restrictions on key manufactured goods or critical minerals, there would be major impact on the rest of the world but also on China, both as the result of lost revenue and as the result of probable counter-sanctions. The outcome of the actions would then depend on which side is better able and willing to accept the damage.

It is worth noting that supply chain disruptions can occur for any number of reasons, not just from intentional action. When those happen, conflict can occur as nations scramble for scarce resources. 

What are essential mitigation measures to safeguard against supply chain risks? 

The most important initial action is to understand the degree and seriousness of vulnerability. In those areas where risks are identified, nations and individual companies can sometimes mitigate impact. For some commodities, this could be accomplished by stockpiling either complete products or critical inputs. In many cases, however, stockpiling may not be practical or sufficient. Alternative manufacturing capabilities may also be essential, either from having more than one source or by purchasing additional reserve capacity, knowing that this capacity will likely not be necessary in normal operations but will be needed to deal with both disruptions and surges.

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As China-U.S. competition escalates, how should government agencies and corporate America factor geopolitical risks into supply chain risk analysis? 

China is in part held in check because it relies so heavily on the U.S. and other markets as a source of revenue. Complete decoupling is neither desirable nor even practical. However, clear awareness of vulnerability is essential, as is adoption of mitigation action. 

An important consideration dealing with China is that although China is typically mostly transactional (and thus somewhat predictable) in its dealings with other nations and companies, it does have long-standing national and ideological goals that might override rational considerations. Put another way, it may take actions that impose hardship and loss on itself if it believes those will lead to achieving those long-standing goals.

An example would be actions against Taiwan. Viewed purely from a supply-chain interdependence perspective, most actions [targeting Taiwan] would make little sense. However, when ideological or national prides considerations are taken into account, the perspective changes. What would seem counter to interest for a business make completely within the interests of the Chinese ruling party.

No one should assume that economic interdependence or supply chain challenges will overcome other long-standing interests.

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