Magazine July 08, 2019, Issue

How China Weaponized the Global Supply Chain

(Luba Myts)

Ports, containers, and the Internet are now means for Beijing to project power.

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Ports, containers, and the Internet are now means for Beijing to project power

Before 9/11, no one thought of commercial airliners as weapons. But the attack on the Twin Towers transformed the air-travel system into a battlespace.

And although no one thinks of container ships as weapons today, China is weaponizing the global supply chain. The vessels of China’s state-owned shipping companies no longer merely carry merchandise. Sailing to a global network of ports under Chinese control, they’re carrying Chinese power.

China’s dominance of global manufacturing rests on a triad of commercial capabilities that emerged as byproducts of the country’s industrialization. China developed expertise in port construction and operation, container shipping and logistics, and electronic networks. In combination, these enabled the country to offer foreign companies the convenience of one-stop shopping — low-cost production and reliable global distribution from China’s coastal manufacturing sites. China’s port and logistics network also enables its cyber-surveillance efforts, increases Chinese financial leverage over Western countries, and provides China with a round-the-clock presence in the global maritime domain that threatens to limit U.S. naval access to the growing roster of commercial ports under Chinese control.

Lucky timing helped China put this all in place. The country’s entry into the World Trade Organization in 2001 sparked rapid growth in manufacturing. And even as China set about exploiting Western companies — by requiring “technology transfer” as a condition of doing business in China, and even through outright intellectual-property theft — Western intelligence establishments overlooked the security implications of the nascent commercial triad, instead focusing almost entirely on preventing further terrorist attacks.

The first vector of weaponization is a physical network of ports under Chinese control in locations that provide China with various forms of economic leverage: access to minerals, energy, or food; ability to deploy cyber-surveillance; and potential to deny access to U.S. naval vessels. Having built the ports that enabled China to become the world’s manufacturing platform, and having completed the artificial islands China needed to secure its claims over the South China Sea, Chinese state-owned port-construction companies are projecting Chinese maritime power with projects in the European Union, Latin America, East and West Africa, the Indian Ocean, and Southeast Asia. Much attention is focused on large greenfield projects in developing nations, but China has built its network largely by acquiring control of up-and-running assets that play an essential role in developed economies.

The second component is the introduction of Chinese cyber-capabilities, including the installation of digital networks at Chinese-controlled sites, typically by Huawei, and a subsea cable network being built by Huawei’s marine unit that will nearly encircle the globe by the end of this year. Chinese state-owned companies are leading a rapid, digitally enabled consolidation of the logistics sector — bringing together supply-chain functions that had previously been performed by separate companies, adopting centralized IT systems to control distribution from the doors of factories in China to the doors of consumers in America, and developing a wide array of technologies that can be used for both commercial and military purposes.

The most threatening aspect of China’s commercial triad is that the physical network of ports, ships, and terminals serves as a force multiplier for China’s cyber-aggression. From drones that monitor operations to facial-recognition technologies that control access to container yards, port facilities provide nearly perfect cover for cyber-espionage. There’s a lot going on in a seaport, and all of it is controlled and monitored by technology that feeds information over digital networks to buyers, sellers, regulators, financial institutions, and transportation companies. In short, ports are power. Power over imports and exports, power over economic-development policies, construction, shipbuilding, land transport, and electricity grids — and power over the digital information needed to move goods through global supply chains that originate in China and Southeast Asia. These critical supply lines have increasingly come under the influence or control of a handful of Chinese state-owned companies.

This situation — call it “logistics with Chinese characteristics” — poses a new threat to U.S. economic and national security. China’s commercial triad creates leverage with which it can exert sustained pressure on U.S. allies and U.S. companies to adopt or at least acquiesce to Chinese policies. Already some allies are quietly investing in Chinese expansion projects, even if they publicly question Chinese motives and commercial practices. China’s global logistics network will also complicate efforts to relocate supply chains — moving a plant from China to Vietnam, for example, might reduce exposure to Chinese IP theft but still leave a company dependent on Chinese state-owned entities to ship its goods to world markets.

The ongoing tariff spat should be seen as a reconnaissance mission, each side testing the other’s will and assessing the scope of international support for their respective positions in a sustained contest. But despite a sudden rise in anti-Chinese sentiment in Washington, a policy that recognizes the need to confront China’s commercial triad has yet to emerge.

While several Chinese state-owned companies are involved in the effort, the principal architect of the weaponization of the supply chain is China COSCO Shipping Corporation Limited. With shipping, port-management, and logistics divisions, COSCO has spearheaded China’s expansion into the EU and Latin America, acquiring the rights to operate and develop ports and terminals for terms as long as 40 years, typically bringing in Huawei to install new IT systems. Naval experts in the U.S. and other countries view COSCO as the principal logistical-support organization for the Chinese navy, and Chinese military strategists have suggested that the growing network of commercial ports will someday serve as bases for Chinese naval vessels.

Today COSCO controls China’s main Western commercial logistics base, in the port of Piraeus in Greece. COSCO began investing there in 2008 and in 2016 gained control of the publicly listed Greek company that manages the port and its development. Demonstrating that it is serious about asserting control over its logistics assets, COSCO wasted no time in changing the Greek company’s bylaws to allow board meetings to be held in China, and appointed Huawei Technologies to replace the port’s network infrastructure with Huawei Internet routers, firewalls, and switches for the port’s data center. Since 2012, the U.S. has said Huawei equipment could be used to conduct cyber-surveillance on behalf of the Chinese government, and it recently warned Germany and other allies that U.S. intelligence agencies might limit intelligence-sharing with countries that use Huawei gear in their national telecommunications networks. It’s not clear how far the U.S. concerns go, but even if Huawei gear is kept out of national phone systems, Chinese-controlled ports could serve as a back door into the critical networks of the countries that host them.

Moving quickly to establish economic influence, COSCO bought controlling or significant stakes in ports in Valencia, Spain, and Vado, Italy, rapidly upgraded those facilities, and used its shipping line to boost container volume. In 2018, ports under Chinese control in Spain, Italy, and Greece that had previously been faltering reported volume increases of 16 to 22 percent. Higher container volume increases revenue to host nations, which typically retain a share in the port’s financial performance. It’s the definition of leverage.

COSCO’s leverage is multiplied through the Ocean Alliance, one of three space-sharing arrangements that container lines formed in 2016 to help one another avoid sailing partially filled vessels. COSCO typically attributes some of the growth at its ports in Spain, Italy, and other countries to volume from its alliance partners. COSCO’s major ally in the Ocean Alliance is CMA CGM, a privately held company based in Marseille, France, formed when France privatized its state-owned shipping line. Chinese regulators played a major role in pushing CMA CGM into the alliance with COSCO. Chinese regulators scuttled a plan to form a space-sharing alliance that CMA CGM and two other major lines proposed during the shipping recession of 2014. China said the group would have too much market share on the ocean routes between Asia and the EU. In 2015, a Chinese state bank injected more than $1 billion into CMA CGM, in a deal that included an undisclosed strategic investment in the company and required CMA CGM to buy ships and containers from Chinese suppliers. In 2016, CMA CGM nailed its flag to the mast of Chinese maritime expansion, signing on with the Ocean Alliance. Despite the Ocean Alliance’s dominance of the Asia-to-EU routes, Chinese regulators approved the arrangement.

Under the original plan, members of the Ocean Alliance were to decide in 2022 whether to renew the deal for another five years. But the alliance is working so well that its members couldn’t wait that long — they met quietly in Hainan in January and agreed to extend the arrangement through 2027. The power of the alliance hinges on one feature its competitors can’t match — Chinese state support. Its principal members are China’s main shipping enterprise and a de facto French vassal company financed by China’s state-owned lenders. If trade conflicts heat up in the future, Ocean Alliance ships are likely to enjoy continued access to Chinese ports that serve as the critical link between manufacturers in China and markets around the world.

Non-Chinese shipping lines and alliances haven’t fared as well. Japanese lines formed the ONE Alliance in 2016, and Maersk and MSC formed the 2M Alliance. ONE had a rough start when problems adopting a new IT system caused some customers to switch carriers; one line had to cut its fleet after announcing it would lose almost $1 billion this year. In a sign that the Ocean Alliance’s market position is attractive to shipping lines that are members of other alliances, Switzerland-based MSC has made vessel-sharing arrangements with COSCO or CMA CGM in the past several months that will help MSC improve its services on routes from the East Mediterranean to India, and from Northern Europe to Australia. Perhaps that is what Xi Jinping has in mind when he says Chinese maritime expansion is about win-win cooperation.

In the digital domain, CMA CGM’s home port of Marseille will soon become the French connection for the globe-circling undersea cable network being built by Huawei Marine Networks Co. Ltd. The Chinese company that runs Hong Kong’s phone network plans to work with Orange S.A., the former France Télécom S.A., to bring Huawei’s undersea cable onshore in Marseille by 2020. Already home to two data centers, the Marseille port authority plans to use the new connection to create a major maritime data hub.

Huawei Marine’s undersea cable powers China’s physical port network. Ahead of a meeting of leaders in late March, Brazilian officials reportedly rebuffed warnings from their American counterparts that Huawei equipment could be used for cyber-espionage. After all, Brazil has become a key depot on China’s weaponized supply chain. Last fall, Huawei completed the undersea link from the northeast coast of Brazil to Kribi in Cameroon; there, CMA CGM is part of a Chinese group that began work in 2011 on a new deep-water port to handle bauxite, iron ore, and other mineral exports. In Brazil, the Huawei cable will support Chinese state-owned enterprises; one is building a port for soybean exports in the northern city of São Luís, and another has acquired the rights to operate Brazil’s most profitable container terminal, in the southern port of Paranaguá. To aid adoption of Chinese digital standards, Huawei early this year donated 5G equipment to the technical training institute in the Brazilian state of Paraná, where the terminal is located.

The Ocean Alliance has also reached U.S. shores. In March, CMA CGM acquired nearly 90 percent of the voting shares of CEVA Logistics AG, a Swiss freight company that runs the largest freight network in the U.S. It’s not clear whether the U.S. has any recourse to review the purchase. But it’s worth a look. The purchase gives control of a major U.S. logistics network to a company that’s financed by Chinese state banks and whose principal ally is the logistics arm of the Chinese navy.

Not quite 20 years after China joined the WTO, the U.S. has wound up in a situation where American consumers’ package-delivery fees will be subsidizing the Chinese navy’s support ships. Meanwhile, the U.S. Navy told Congress last year that the U.S. sealift fleet will face a modernization crisis starting after 2020 if a replacement program can’t be started soon.

There are signs that the U.S. recognizes the national-security threat that Chinese logistics power poses. As a condition of U.S. approval of COSCO’s takeover of Orient Overseas International Limited (OOIL), the U.S.’s Committee on Foreign Investment required COSCO to sell a highly automated terminal that OOIL owns in the Port of Long Beach. But more needs to be done. While the terminal was sold to an Australian investor, COSCO pocketed a gain of more than $1 billion on the sale — a windfall the company said it will use to further expand its logistics network. At the highest level, the U.S. should be assessing the security of U.S. access to bases and facilities in Italy, as well as to ports that have fallen under the control of Chinese state-owned companies and their allies.

Under its authority to monitor vessel-sharing agreements, the Federal Maritime Commission should review the extension of the Ocean Alliance in light of consolidation in the logistics industry, the weak condition of competing shipping lines, and the manifest national-security aspects of the alliance’s role in China’s maritime-power expansion. It’s also time for the U.S. to engage allied governments and the private sector in a maritime-security dialogue aimed at restoring U.S. and Western capabilities in the commercial dimension of sea power. The initial aim should be to ensure the viability of at least one of the alliances that compete with COSCO and the Ocean Alliance. Longer-term objectives could include slowing the pace of technological development at Chinese shipbuilders, bolstering Western merchant-marine training, working with allied governments and private investors to reestablish a Western shipyard presence in the Pacific or Southeast Asia, and devising a plan to move key supply chains beyond the influence of China’s logistics network.

On the digital frontier, the administration needs to heed the semiconductor industry’s warning against agreeing to large Chinese purchases of U.S. chips as part of a trade deal. Such purchases would force U.S. chipmakers to revamp their supply chains so that operations now done in other countries would be moved to China. It’s no surprise that the idea for large Chinese chip purchases came from China’s National Development and Reform Commission, the architect of China’s maritime commercial triad. China has used its regulatory powers to change the structure of the global logistics industry and is taking a similar approach in semiconductors, with the NDRC warning Western chipmakers not to go too far in their efforts to comply with the latest U.S. restrictions on doing business with Huawei. There’s no reason the U.S. should help China increase its control over the global supply chain, particularly in technologies that are essential to the Huawei equipment and undersea cables that help convert China’s network of commercial ports into instruments of Chinese national power.

In our image-driven world, a visual aid might spark efforts to understand the scope and impact of China’s logistics power: Media outlets often use generic photos of container ships and ports to illustrate stories about trade. But China’s takeover of global supply chains means container ships are no longer generic. The ships of COSCO, CMA CGM, Orient Overseas, and other Ocean Alliance members are China’s ships of state — adversarial vessels carrying Chinese power deep into Western territory. It’s time to stop using images of those ships without identifying their allegiance to Beijing.

Thinking of something as seemingly routine as a container ship or cargo dock as a weapon might seem far-fetched. After all, ports are just dots on a map. But how did we miss 9/11? No one connected the dots.

— This article is based on “Asia Rising: Ships of State,” Mr. O’Dea’s study of the role of infrastructure investment in national power published by the Naval War College Review.

Christopher R. O'DeaMr. O’Dea is an adjunct fellow at the Hudson Institute. He is working on a book about China’s maritime commercial network.

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