It has become conventional wisdom around the Beltway that the United States and China are on a collision course—a new “cold war.” The new cold warriors on both sides of the aisle argue that trade and investment with China have enriched a brutal regime and made the United States much too vulnerable to the whims of Beijing. Though a flawed analogy, the chorus has grown louder as the United States tries to control the outbreak of a pandemic that originated in China. It is clear that tensions between Beijing and Washington are rising. But rather than decoupling the two largest economies in the world, there is a smarter approach to confronting legitimate problems posed by China’s economic model.
As a preliminary matter, it is important to note that China does engage in repressive human rights practices and has effectively annexed Hong Kong through its recently enacted national security law. The United States should confront these policies with narrowly tailored sanctions and visas for Hong Kong residents. Broad-based trade, investment and immigration restrictions are unlikely to improve China’s behavior while undermining the long-term competitiveness of the United States.
A nuanced understanding of the economic fault lines that exist — beyond the president’s obsession with China’s bilateral trade surplus with the United States — is imperative if Washington is going to outcompete Beijing. The crux of the United States’ complaints about China’s economic model revolve around the abuse of intellectual property, the transfer of technology from American firms to Chinese firms as a condition of doing business in China, cyber intrusions into commercial networks, and massive industrial subsidies. Together, the United States argues, these policies make it unfair and burdensome for American firms to compete in China. These are legitimate complaints, and a response from Washington was necessary.
Rather than decoupling the two largest economies in the world, there is a smarter approach to confronting legitimate problems posed by China’s economic model.
Next, tariffs—the president’s preferred tool—are unlikely to fundamentally transform Beijing’s economic model and have hamstrung the U.S. economy. Numerous economic studies confirm that American consumers, not Chinese exporters, are paying the tariffs, despite the president’s repeated statements to the contrary. Even after the “Phase One” detente signed by the United States and China in January, the president’s tariffs cover about $350 billion worth of imports from China with an average rate of almost 20 percent, more than six times higher than when the trade war began. The tariffs have been costly; it is estimated the tariffs cost the typical household more than $830 in 2019 and caused 300,000 job losses. In 2019, U.S. manufacturing slipped into a recession despite a strong economy overall and the tariffs were partially to blame. Likewise, a recent study estimates that the trade war with China cost American companies up to $1.7 trillion in lost market capitalization. It belies common sense to think that weakening ourselves with outdated tariffs will strengthen our position vis-a-vis China.
So if the United States has legitimate complaints about Chinese trade practices but tariffs are unlikely to change those practices, what should policymakers do? In short, we need to outcompete China.
The United States made an egregious error when it abandoned the Trans-Pacific Partnership (TPP). While imperfect, TPP was designed to strengthen vital supply chains in the Asian Pacific region by offering countries in China’s orbit an alternative market of approximately the same size—one based on the rule of law with enforceable commitments, not based on sheer economic might. TPP also provided a worthwhile template for confronting China with allies, rather than unilateral tariffs.
On top of the geostrategic benefits, by cutting tariffs and ferreting out some non-tariff trade barriers on both sides of the Pacific, TPP would have been a boon to American consumers and producers. Families buying consumer goods produced in TPP countries would see cost savings at the register. Meanwhile, American firms would have seen expanded market access in a growing region and enhanced competitiveness from cheaper component parts and capital goods sourced from TPP countries. In other words, TPP was a positive-sum agreement that could have helped raise commercial standards in the region and lessened U.S. dependence on China. Beijing was the single biggest beneficiary of the Trump administration’s unforced error. Rejoining TPP and expanding it to include Taiwan, a hub of high-tech manufacturing, and India, a massive country with untapped potential, should be a top priority for policymakers serious about the economic challenges posed by China.
Openness to trade and immigration are necessary components of any policy to outcompete China in the 21st century.
In many respects, tariffs on unrelated products are merely a manifestation of the larger competition over technological supremacy in an increasingly interconnected world. Huawei is a perfect example. Many policymakers in Washington believe the Chinese telecom giant is a national security risk to the United States. For Xi Jingping and the Chinese government, Huawei is the cutting-edge Chinese technology firm that could dominate the future of telecommunications networks. Over the last several years, Washington has wrangled with whether to restrict Huawei’s purchases of American products. To the extent that policymakers should restrict trade, it needs to be done on a transparent, consistent and limited basis where there is a genuine national security threat—not a pretext for protectionism.
If the United States wants to continue its dominance of the commanding heights of technology, we need to dramatically increase immigration. Immigrants are more likely than natives to apply for patents and start businesses; Google and Qualcomm, two cutting-edge technology firms, were founded by immigrants. It is estimated that about half of all those employed in Silicon Valley are foreign-born — a staggering figure. Meanwhile, between 30 percent and 50 percent of productivity growth in the United States between 1990 and 2010 was driven by foreign-born workers.
Unfortunately, the Trump administration has severely restricted immigration. A new study found that legal immigration will have declined by about 50 percent since the president was inaugurated. Meanwhile, universities, long an incubator of research and development, have seen international enrollments decline between 63 percent to 98 percent from 2018-19 levels, according to the same study. Over the long run, this type of sclerotic immigration restrictionism will dampen growth and competitiveness, particularly in technology.
Globalization—the movement of people, ideas, capital, goods and services—across borders helped propel the United States to unprecedented wealth and influence. With a global pandemic and China rising, policymakers are increasingly tempted to turn inward. That would ensure the slow decline of U.S. prosperity—and hasten China’s ascendency. Instead, openness to trade and immigration are necessary components of any policy to outcompete China in the 21st century.
Clark Packard is a resident fellow and trade policy counsel at the R Street Institute.