SMOKE ON THE WATER

The symbiotic link between our navy and our modern tech economy took root near the end of World War II.?

With most of the global economy in ruins, 720 delegates from 44 nations convened at the sprawling Mount Washington Hotel in Bretton Woods New Hampshire to address reconstruction.?

?The Bretton Woods conference created many institutions of the post-war era to help fund a global economic recovery: the International Monetary Fund (IMF), the World Bank, a set of rules for stable international currency trading, and, crucially, a governance model for the world's oceans.? In brief, the Bretton Woods baseline philosophy sent the world economy down a path to where we are today.

?That baseline philosophy can be traced back to the founding of our great republic.? In 1776, while the U.S. was declaring its independence—itself an economic revolt—a Scottish economist and moral philosopher named Adam Smith published a seminal work called The Wealth of Nations.? Smith linked together political, economic, and individual motivations to show how countries grow rich.? Along with other philosophers of the day like Locke, Montesquieu, and Rousseau, our founding fathers put a lot of stock in the economic freedoms espoused by Smith.? Thomas Jefferson once wrote to a friend, “In political economy, I believe Smith’s Wealth of Nations is the best book extant.”

?If a given society was free and honest, Smith wrote, then the “invisible hand” of self-interest would drive national economic efficiencies.? Some countries might be rich in labor or natural resources, for example, while others might be rich in manufacturing expertise.? The invisible hand of self-interest would create wealth and efficiency by making smart decisions—buying low and selling high wherever it could. So long as money and goods could safely cross borders, went the thinking, then all nations—and indeed free peoples—could prosper.?

?A few decades later, another U.K. economist, David Ricardo, took Smith’s philosophy a step further.? In his 1817 book On The Principles of Political Economy and Taxation, Ricardo argued that nations should specialize based on their “comparative advantage.”? Comparative advantage, he wrote, is an economy’s ability to produce something at a lower cost than its neighbors.? In other words, national economies prosper when they specialize.?

?While there were competing voices at Bretton Woods, overall the delegates believed in the Smith-Ricardo philosophy of specialized free trade.? Since then, one could argue we’ve seen the philosophy successfully practiced.? In the ensuing seventy years, nearly every global metric of societal and economic health has steadily improved—things like life expectancy, food supply, and individual net worth. ?The invisible hand, it seems, has been hard at work. It’s probably got calluses by now.

?Yet, ironically, just as we have grown to depend on this global system, we’ve introduced an inescapable vulnerability that is often overlooked: the safe passage of goods over the world’s oceans.

?Back at Bretton Woods, the United States advocated that the world’s oceans be treated as a “commons” with equal access to maritime trading routes.? As long as these trading routes were safe and free, went the argument, then free trade could flourish, and the world would prosper.?

?Keeping those sea lanes open didn’t seem like a major challenge at the time because the U.S. Navy was so dominant.? After all, it had just vanquished the Japanese and maintained bases all over the world.? At that moment in history, no other nation could match American sea power.

?For the past seventy-odd years, with the U.S. as a guarantor of sea freedom, countries have flourished under the Bretton Woods, Adam Smith, and David Ricardo global free-trade and specialization model.?

?Whether you realize it or not, you live with it every day.? Think of Apple’s product branding that says, “Designed in California and made in China.”? That phrase tells you that the U.S. company (Apple) has specialized in technical innovation while the Chinese supplier (Foxconn) has specialized in efficient manufacturing.? There has been no issue moving the complicated supply chain of your iPhone around the world’s oceans.?

?When it comes to tech, our entire economy is predicated on physical freedom of movement.? For example, the micro-processors (chips) that power just about everything come from overseas.? Yes, Silicon Valley designs most of them—but due to scale economics, nearly all of them are fabricated in Taiwan, China, or Korea.?

Therein lies the yin-yang of freedom of the seas and the philosophy of global trade.? We have taken scaled national economic specialization to such a degree that, remarkably, just one company, Taiwan Semiconductor Manufacturing Co (TSMC), physically fabricates 67% of the world’s microprocessors.? And when it comes to the new advanced AI chips that use powerful graphic functions, TSMC makes 95%.? ?Yes, we have passed the “Chips Act” which will subsidize TSMC to build plants in Arizona—but all that’s going to take a while.

?This then begs the question: what if, right now, those seas that were supposed to be “commons” were suddenly no longer free?

?Amazingly, since Bretton Woods, we’ve advanced to the point where two-thirds of worldwide goods arrive via sea transport.? And those seas have choke points simply because of geography.? Some of them include the Straits of Hormuz (global oil), the Malacca Straits (tech supply chain), the Suez Canal (Asia to Europe), the Panama Canal (Asia to U.S. East Coast), and the Taiwan Straits (the whole world’s chips).?

?Back in the Cold War as a midshipman in training, I was forced to memorize the primary missions of the U.S. Navy.? One of them was “to protect the Sea Lines of Communication (SLOCs).”? The Navy didn’t just torture midshipmen with this stuff.? Since we said the seas should be a “commons,” the Navy always conducted “freedom of navigation” exercises to make sure other navies didn’t try to close off any SLOCs. But when we became the oceans' de facto enforcer, we had 6,800 ships. ?Today we have about 280—less than China.? Our current fleet is about half the size of the force we had in the 1990s.

?And it’s getting old.? While we’ve been enjoying the supposed “peace dividend” after the Cold War, we haven’t been building many new ships, which have a lifespan of about 30-50 years.? Many of our 1980s/1990s ships are often undergoing repairs or being turned into razor blades.?

?All of this means that we no longer have the global coverage to defend the SLOCs.?? This lack of coverage helps explain why a relatively small Iran-backed rebel group like the Houthis can close the Red Sea. ?The deterrent force that used to prowl the waves simply isn’t big enough to be everywhere at once.? If the Houthis can pull that off, just imagine what a determined “peer” adversary like China or Russia could do. ?Seizing those SLOCs or invading those countries that are so specialized could bring the world economy to its knees.? While we haven’t been paying much attention to our naval decline, other countries certainly have.

?The good news is that we can change this.? Just as our founding fathers worried about having a large standing army, we tend to creep away from defense investment when the threat isn’t obvious.? Before World War II the navy had 380,000 people and about 700 ships.? By the end of the war, both of those numbers were ten times larger.?

?Ironically, however, we were less dependent on global trading partners then.? If we want to continue to enjoy the world we’ve created, we had better start thinking about how to cover those SLOCs again.? Your next iPhone depends on it.

#technology #nationalsecurity #economics

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