ROBERT KUTTNER
The Chinese economic model starts with state-directed and -subsidized capital. Imports are either blocked or conditioned on technology transfer and “partnerships” with Chinese state-owned or -allied companies whose eventual goal is to displace imports. Western companies are incentivized by cheap labor and capital subsidies to produce in China, but only for export back to the West (Apple), or locally but subject to sharing trade secrets (GE). Whatever China does not get through negotiated technology transfer, it gets through industrial espionage. Exports, meanwhile, are subsidized, with the objective of making China the worldwide low-cost producer. China also manipulates the value of its currency, to keep export prices artificially low. Wages are suppressed, and of course there are no labor rights.
This model has produced growth rates of 7 to 10 percent per year for more than three decades. It has driven U.S. producers out of industry after industry, making those remaining heavily reliant on Chinese supply chains. It has enriched U.S. financiers and upended America’s domestic middle-class labor market, while trying to mollify consumers with cheap goods. The Chinese state, directed by its Communist Party, is pursuing nothing less than global political and economic hegemony. Undeniably, the U.S. has facilitated this advance.
American Enablers
American elites have been blind to the nature of this threat for two basic reasons. First, China’s success defies orthodox assumptions. A state-led economic system with managed capitalist elements, run by a ruling party that prohibits dissent, is not supposed to work. Second, China has astutely given U.S. multinational corporations and investment banks a huge piece of the action. America’s most powerful economic players are part of the domestic China lobby, and resist a more assertive U.S. policy. In global geopolitics, we have never had to deal with such a Trojan horse.
It’s instructive to compare U.S.-China relations with America’s 40-year Cold War with Soviet Russia. The USSR posed a clear geopolitical and military threat to the democratic capitalist West. Both the West and the Soviets had global alliances, making the lines of conflict even clearer. But Russia posed no economic threat. On the contrary, as a clumsy bureaucratic economy the Soviet Union was a useful and instructive failure. Economics, geopolitics, and ideology thus aligned.
China today has no formal alliances comparable to NATO or the Warsaw Pact. But its economic entanglements divide loyalties, making it a far more insidious threat. There were no American capitalists working behind enemy lines, as it were, because Russia offered no investment opportunities. The Russians had pathetic American domestic allies, in the form of a U.S. Communist Party riddled with FBI informers. The Chinese have Apple, Intel, GE, Tesla, and Goldman Sachs.
In 2000, Bill Clinton allowed China into the World Trade Organization with no enforceable quid pro quos other than access for U.S. investment bankers. The policy was called “constructive engagement.” A key architect was Clinton’s economic-policy chief, Robert Rubin, late of Goldman Sachs and later of Citigroup. One political leader after another, seconded by the media and corporate echo chamber, assured Congress and the public that two benign consequences were sure to ensue: America’s trade imbalance would shrink, and China would become more open, democratic, and conventionally capitalistic.
On the latter point, Clinton himself contended: “By joining the WTO, China is not simply agreeing to import more of our products. It is agreeing to import one of democracy’s most cherished values, economic freedom. The more China liberalizes its economy, the more fully it will liberate the potential of its people … The Chinese government will no longer be everyone’s employer, landlord, shopkeeper and nanny all rolled into one. It will have fewer instruments, therefore, with which to control people’s lives.”
Seldom has a projection proven more wishful. The regime has only become more totalitarian. Our trade deficit has quintupled. When China formally joined the WTO in December 2001, its annual trade surplus with the U.S. was $80 billion. In 2018, it hit $400 billion.
Looking at China as a long-term threat, the closest analogy is global climate change.
China simply did not carry out its WTO commitments to end its illegal subsidies, coercive partnership agreements, barriers to imports, and thefts of intellectual property. Yet for the better part of another two decades, U.S. policy under George W. Bush and Barack Obama resisted pushing back in any serious way. To the shame of Democratic presidencies, it took Donald Trump to reverse course.
The money made by investment bankers in particular since China selectively opened is staggering. The regime wanted Western capital to invest in state-owned enterprises, to link them with the West’s financial system, and to give them international legitimacy. According to Clyde Prestowitz, a prophetic China policy dissenter and author of the indispensable 2021 book The World Turned Upside Down, between 1993 and 2010 Chinese state-owned enterprises raised some $600 billion in U.S. capital markets, with underwriting fees and markups flowing to large brokers like Goldman. Unlike industrial and tech corporations subjected to rigid terms if they wanted to operate in or export to China, the big financial firms were given a free hand. They became investment bankers to the Chinese Communist Party.
China also needed U.S. financial expertise in mergers and consolidations. For example, before the mid-1990s China’s phone service was fragmented and inefficient. Goldman helped China create a single national carrier, called China Mobile. At the time, China Mobile existed only on paper, but with Goldman’s help, the company was taken public in New York and Hong Kong, and quickly raised $4.5 billion. Today, China Mobile is the largest mobile phone company in the world. Despite Beijing’s WTO commitments to open its markets, none of the Western carriers are able to operate in China.
The undertow against changing course on China remains fierce. Multinationals and big banks profit handsomely from the status quo, and hold enormous influence in domestic politics. Career policymakers are invested in the old model. Most economists and their echo chamber in the media still preach free trade and condemn protectionism and the sin of government “picking winners” when it comes to the U.S., but not on the part of China. The apostles of constructive engagement are loath to admit that they got China wrong.
The New Silk Road
It’s not as if U.S. intelligence had to ferret out China’s grand designs. They were publicly and proudly broadcast by the regime, and documented with great specificity in the reports of the U.S.-China Commission and in the work of China scholars.
For example, the One Belt One Road initiative, launched in 2013, is a decade-long, multitrillion-dollar worldwide infrastructure program that will link some 70 countries to Beijing, economically and geopolitically. Chinese state-owned companies are buying, modernizing, or building from scratch massive projects in Africa, Asia, Latin America, and Europe. The EU’s neoliberal austerity policies help China by creating financial shortfalls and inviting fire-sale transfers of national assets to Beijing’s state-owned enterprises.
Belt and Road projects include rail lines from Nairobi to Mombasa in Kenya, from Addis Ababa in Ethiopia to Djibouti, from Budapest to Belgrade in Eastern Europe, and three different routes linking Singapore, Thailand, Laos, Cambodia, and Vietnam with the Chinese rail hub of Kunming. Chinese interests have bought all or part of the ports in countries that are American military allies, such as Haifa, Piraeus, Trieste, Antwerp, Bilbao, and, appropriately enough, Dunkirk. They have bought European airports, such as Frankfurt’s, as well as entire national electrical systems, such as Portugal’s previously state-owned REN.
In these deals, China provides the up-front capital, controls the development and construction, and secures the project through extensive debt. All of this gives China extensive economic intelligence as well as commercial and diplomatic influence. Key components are of course made in China, adding to Beijing’s trade surplus and technical leadership. The West offers nothing that comes close.
To complement One Belt One Road, in 2015 Beijing launched a rival to the World Bank and U.S.-sponsored regional development banks. The Asian Infrastructure Investment Bank launched with $100 billion in capital from China, its dominant shareholder. To the shock of Washington, the bank enlisted as members not just most Asian countries, but Britain, France, and Italy, as well as America’s most dependent Asian protectorate, South Korea. Compared to the World Bank, which tends to be slow, bureaucratic, and inclined to impose conditions, Communist China paradoxically knows how to cut red tape. Separately, the Made in China 2025 initiative, also created in 2015, is a ten-year plan to leverage mercantilism and achieve supremacy in every significant advanced technology, from artificial intelligence and robotics to advanced manufacturing with synthetic materials.
Meanwhile, China has become more territorially aggressive. The Chinese military already has more ships than the U.S. Navy. It has increased pressure on Taiwan and asserted regional supremacy in the South China Sea, using dredging operations to create artificial islands claimed as Chinese territory, many with airstrips. Beijing has also destroyed democratic Hong Kong, unilaterally breaking the terms of its 1997 “one country, two systems” treaty with Britain.
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But military muscle isn’t the prime locus of Chinese aggression. Rather, appropriately enough, the Chinese Communist Party relies on silken threads such as One Belt One Road, complemented by strategic purchases of entire Western corporations. This strategy flummoxes traditional U.S. assumptions about how geopolitics works. It is the economic equivalent of guerrilla warfare.
Between 2008 and 2019, Chinese state-owned enterprises purchased some 360 European companies, in deals valued at about $255 billion. The U.S. and its allies, committed to open markets, have no strategy for blocking such strategic purchases (which they might do on the reasonable ground that China is not a market economy), except in special cases on narrow national-security grounds.
Looking at China as a long-term threat, the closest analogy is global climate change. The time to get serious about global warming was 40 years ago, before the current self-reinforcing cycle of worsening catastrophic weather events. The time to alter China policy was at least 30 years ago, after the outrage of Tiananmen, when China was far weaker and more isolated, and before it was in the WTO. Beijing’s economic threat and climate change also come together in that China seeks to dominate the green technologies of the future, while still building coal plants domestically and in other countries.
There is one other analogy between the twin existential threats of climate catastrophe and death by China. Both were the result of preposterous assumptions about the efficiency of markets. In the case of climate, markets priced carbon disastrously wrong. In the case of China, elites insisted that markets had to be more efficient than state-led economies; thus China would have to become more market-like. This was not primarily an unfortunate error of economic theory. These catastrophic actions were driven by the raw economic and political power of corporate capitalists.
Biden’s Work in Progress
Joe Biden has thankfully broken with prior Democratic orthodoxy on China. He has resisted pressure to reverse Trump’s constructive policies, most importantly the imposition of across-the-board tariffs on Chinese imports. But though Biden’s approach is directionally encouraging, he has yet to fashion a coherent master policy or sort out a hierarchy of sometimes competing goals on industrial, trade, environmental, and foreign policy. What’s occurred so far is a patchwork—a mix of bold but narrow measures, temporizing, and even some backsliding, all reinforced by cross-pressures and turf rivalries.
Biden has hired mostly dissenters from the previous China consensus. The best is Katherine Tai, his U.S. trade representative, who is fluent in Mandarin and a well-informed critic of China’s mercantilism. She previously worked as the senior Democratic House staffer on trade and before that as a China negotiator at USTR. But Tai tends to be undercut on some issues by the old guard, including career USTR staff and senior White House officials, most notably Steve Ricchetti, the most corporate of Biden’s inner circle. In addition, Treasury Secretary Janet Yellen did Tai no favors by publicly describing the China tariffs as a tax on American consumers and expressing concern about their impact on inflation.
John Kerry, Biden’s climate chief, is famously naïve in thinking that a climate bargain with China might lead to warmer relations generally. He has met 18 times with his Chinese counterpart, hoping to broker a grand entente built around climate collaboration.
Key players in the Biden administration on China (L–R): U.S. Trade Representative Katherine Tai, White House adviser Steve Ricchetti, Treasury Secretary Janet Yellen, Special Presidential Envoy for Climate John Kerry, and National Security Council Coordinator for the Indo-Pacific Kurt Campbell
Kurt Campbell, who runs China policy at the NSC, is intermittently hawkish, but very turf-conscious, and has sparred with Tai on some policies. Under Obama, when he served as assistant secretary of state for Far Eastern affairs, Campbell was old-school. He was a champion of the proposed Trans-Pacific Partnership, a traditional pro-corporate trade deal that would have done nothing to seriously contain China.
By contrast, Campbell’s writings in 2018 and 2019 read like rebuttals of his own previous views. Campbell also hired one of the best-informed China hawks, Rush Doshi, author of the superb book The Long Game, as his deputy. Yet Campbell has also been promoting a dubious Asian digital trade deal, a kind of cousin to the TPP. It would mainly improve access for American companies to other Asian markets, but would not address China’s flagrant “Great Firewall” suppression of free speech. Campbell has less institutional clout as China coordinator than his Trump counterpart, NSC principal deputy Matt Pottinger. Campbell is one level below Biden’s five deputy national-security advisers.
These contradictory Biden advisers have produced inconsistent and ad hoc China policies. In April, Biden reversed a November 2020 Trump order that exempted some 300 medicines and medical devices from the World Trade Organization’s Government Procurement Agreement, as part of the effort to secure supply chains. The Trump order allowed the U.S. to give preferential treatment to supplies made in the United States. The big drug companies pushed back in meetings with Ricchetti. When Biden reversed Trump’s order, it was news to Tai. According to my sources, a senior senator got wind of this and asked USTR what happened. The senator was told, “We got rolled.”
In another skirmish that combined turf and ideology, Yellen demanded that Biden shift management of a key blacklist of Chinese military companies from the more hawkish Pentagon to the more dovish Treasury. An executive order in June approved the shift. The blacklist was created in 1999 as a quid pro quo for permanent normal trade relations. Treasury Departments under four presidents blocked its implementation. Only with a Trump executive order in 2020 did the Pentagon actually create the blacklist.
XIE ZHENGY/AP PHOTO
Chinese companies are heavily subsidized by the state, with the objective of making China the worldwide low-cost producer.
The tangle of Biden appointees echoes the limits of available policy leverage. The conventional tool kit of policies to resist unfair trade practices simply was not designed for a powerhouse nation like China that flagrantly and proudly defies the entire system. So if America is serious, we need a much more potent tool kit, as well as more resolve. The usual tools include:
Countervailing Duties and Tariffs. The default premise of the trading system is that nations must not directly or indirectly subsidize exports, or sell them in foreign markets below their true cost of production (this is known as dumping). The two often overlap, but are not identical. An exporter seeking to gain market share might dump exports, whether or not they have been subsidized by the state. And when a nation like China, with suppressed labor and subsidized capital, enters a market where there is already worldwide oversupply, dumping is inevitable.
When countries do subsidize or dump, there are remedies both under domestic law and via the WTO. In the case of countries with market economies and rules of law, the mechanisms are creaky but serviceable. But the remedies are simply swamped when an entire economic system is one grand case of illegal subsidy and pricing. Making a case against China’s predatory exports individually is all the more difficult because the system is non-transparent, and subsidies and pricing decisions are well hidden.
The remedy for illegal subsidy or dumping is selective tariffs, known as countervailing duties, which are supposed to offset the value of the subsidy or the damage caused by the dumping. The process of proving illegal subsidy or dumping is Kafkaesque. Basically, you file a petition with the Commerce Department. Your complaint gets a preliminary investigation. If it’s found to have initial merit, it is referred to a quasi-judicial body called the U.S. International Trade Commission for further investigation and eventually a ruling. For those with morbid curiosity or insomnia, the government has prepared a helpful 117-page handbook, available at this link.
The process typically drags on for years and incurs costly legal fees. By the time a domestic company files a subsidy or anti-dumping complaint (much less wins it), the company has already suffered grave economic injury. “These cases have to be brought after the damage is done,” says Lori Wallach of Public Citizen’s Global Trade Watch. “By the time you get relief, you are on a ventilator and you may well die anyway.” Prestowitz cites the case of SolarWorld, a pioneering U.S. solar panel company that was the victim of Chinese subsidies and pricing below market. By the time SolarWorld won its case, it had been so weakened that it was forced out of business.
China has had no difficulty purchasing most kinds of advanced technologies that do not have explicit national-security bans.
Since 1995, there have been only 35 such cases filed under Section 301 of the Trade Act, a reflection of its inadequacy. The genius of the several rounds of tariffs directed by Trump’s U.S. trade rep, Robert Lighthizer, was that they cut the Gordian knot and in effect levied one grand countervailing duty on the entire Chinese system, affecting nearly all of the $540 billion worth of Chinese goods that come into America annually. The tariffs, as high as 30 percent and in one case 50 percent, were not a precise, sector-by-sector offset to the Chinese subsidies and the damage to U.S. producers, but the overall countervail was ballpark accurate.
These tariffs began on solar panels, steel, and aluminum produced anywhere outside the U.S., but were gradually modified over the next three years to mainly target China on a more comprehensive basis. At one point, in January 2020, China promised to reform the abuses that it committed to ending as part of its WTO accession agreement 20 years earlier, in exchange for tariff relief. But no progress ensued and some China tariffs were reinstated. Today, tariffs are imposed on Chinese goods with an annual value of some $340 billion.
The value of the tariff strategy was economic, political, and ideological. For starters, the tariffs provide some respite to several U.S. industries—like steel, aluminum, solar, and auto parts—that were on the verge of being destroyed by Chinese and other dumping. Secondly, the tariffs created a new status quo, to be used as leverage in any future U.S.-China grand bargain for drastically revised terms of engagement. And though the initial reaction to the tariffs was a gasp of horror from the trade establishment, editorial scolding for “China-bashing,” and predictions of dire economic consequences, not much else happened. Many of the price increases were absorbed by sellers. “The Earth did not fall off its axis,” Lori Wallach says. The tariffs gave U.S. China policy strategists permission to think way outside the box.
However, the relentless pushback continues. Industry groups keep lobbying Biden to rescind the tariffs. A provision rolling the tariffs back for a year and refunding the money to business made it into an omnibus bill sponsored by Senate Majority Leader Chuck Schumer (D-NY) that is otherwise intended to counter the Chinese threat. Even climate groups are divided between those that want the U.S. to rebuild capacity, and promoters of solar who want cheap imports from China to lower its cost and hasten its deployment.
Press coverage echoes the industry line. A September 2 feature piece in The New York Times reads like a U.S. Chamber of Commerce handout: “American businesses say they are growing increasingly frustrated by the White House’s approach to China … Mr. Biden has amplified some of the Trump administration’s punitive moves.” The piece did not contain word one about China’s predatory strategies that belatedly prompted these moves. Other “news” pieces insist, in the words of this headline, that “American consumers, not China, are paying for Trump’s tariffs.” These analyses myopically focus on short-term prices, not the long-term damage to the U.S. economy from unabated Chinese mercantilism. Had the Chinese leadership taken its advice from these economists and pundits in the 1990s, China would have simply purchased goods from the low-cost producer of the time (the U.S. or Japan), and would never have made the state investments to become an industrial powerhouse.
WIKTOR SZYMANOWICZ/AP PHOTO
In late August, U.S. Customs seized a shipment of solar panels suspected to be manufactured partly with Uyghur forced labor.
National-Security Restrictions and Export Controls. Restrictions on trade based on national-security considerations have traditionally been fairly narrow, except in the case of well-established military enemies and terrorists. The U.S. has proven it can engage in comprehensive economic warfare. The sanctions against Iran have done grave damage, and Washington has enforced a general embargo against Cuba since the 1960s. Those vintage Chevys and Fords driving around Havana are not there because Cubans have a nostalgic fondness for ’50s cars. But in the case of China, and its tight interlocks with U.S. corporations and investment bankers, national-security restrictions are treated as isolated special cases. They are also scattered among several agencies, making a coherent strategy more difficult.
Since 1988, under the Exon-Florio Amendment, the president has been granted the authority to block a commercial transaction deemed harmful to national security, with investigative powers delegated to the Committee on Foreign Investment in the United States (CFIUS), chaired by the Treasury secretary and with participation from 16 federal agencies. China-watchers have long complained that the criteria CFIUS uses are far too limited. In 2018, the Republican Congress passed legislation written by Lighthizer, the Foreign Investment Risk Review Modernization Act, toughening these standards. That legislation added to CFIUS review foreign investments in any company that deals with “critical technology,” “critical infrastructure,” or “sensitive personal data of United States citizens that may be exploited in a manner that threatens national security,” and expanded jurisdiction to cover the purchase of minority stakes. Trump also issued several executive orders. Even so, China has had no difficulty purchasing most kinds of advanced technologies and companies that do not have explicit national-security bans.
In addition, the Commerce Department maintains an “entity list” of companies owned or directed by foreign governments or otherwise deemed harmful to the national interest. Any U.S. dealings with such companies require a special export license, which is seldom granted. There are some 260 Chinese companies currently on the list, most famously Huawei, which is a leading-edge company in 5G technology with multiple links to the Chinese state and Communist Party and spying opportunities.
In July, the Commerce Department added 19 Chinese companies to the list, as enablers of either human rights violations or military modernization. China was explicitly targeted under the Uyghur Human Rights Policy Act, signed into law by President Trump in June 2020. In late August, U.S. Customs seized a shipment of solar panels, on the ground that they had been manufactured partly with Uyghur forced labor. Hoshine, the world’s largest producer of metallurgical-grade silicon, has three facilities in Xinjiang, home to Uyghur concentration camps. A tougher law increasing sanctions on China based on human rights violations has passed both houses of Congress in slightly different versions.
All of this sounds impressive, and the system of controls does block some of the most flagrant cases. But it does not add up to either a comprehensive industrial policy or a China containment policy. For one thing, crown-jewel U.S. companies such as GE have long been doing business directly with the Chinese state, helping Chinese state-owned or -directed companies acquire advanced technologies such as avionics that clearly have both military and commercial uses. This helps China in its quest to displace the U.S. as the world’s leading producer of aircraft, both civilian and military.
Even under Trump, GE got an export license to sell engines for China’s new C919 jetliner. This was part of a deal between China hawks such as Pottinger and Lighthizer, and China enablers like ex–Wall Streeter Treasury Secretary Steve Mnuchin and Trump son-in-law Jared Kushner. Under the deal, GE would not be permitted to sell engines to China’s next-generation wide-body jets. It remains to be seen whether Biden will retain the prohibition. (The fault lines within the Trump and Biden administrations are uncannily similar, with the hawks at the NSC and the USTR, and China’s enablers at Treasury and Commerce.)
Other multinationals seeking the same relationships as GE often win reversals or work-arounds to export controls. In September 2020, Qualcomm, a leading U.S. maker of advanced semiconductors, was initially barred from selling chips to key Chinese companies, most notably Huawei. By November, Qualcomm had lobbied furiously and got approval to sell Huawei 4G but not 5G microprocessors. More recently, Qualcomm was cleared by the U.S. government in August to sell its most advanced mobile chips to a phone company called China’s Honor, which is a Huawei spin-off that is technically no longer part of Huawei.
A comprehensive industrial strategy, pursued in combination with tough measures to resist China’s predatory behavior, would amount to full-on economic nationalism.
Ironically, Qualcomm was previously protected by a CFIUS recommendation that resulted in a Trump executive order in 2018, blocking an attempted takeover of Qualcomm by a Singapore-based firm, Broadcom, on national-security grounds. Broadcom, the creation of a Malaysian Chinese named Hock Tan, had a business strategy of acquiring companies, cutting back their R&D outlays, and making money from licensing deals. Yet, having been saved from Broadcom, Qualcomm pursued its own China ties. America’s tech companies are all too eager to do business with China and are a potent lobby for weak controls.
Buy America and Its Loopholes. In principle, the U.S. government can use procurement policies to require that all materials used in projects financed by taxpayer money be made in the United States. The problem is that our government has tied its hands by being a party to the World Trade Organization’s Government Procurement Agreement. The exports of all 45 countries that have signed the GPA agreement plus 15 more with similar bilateral deals must be given “national treatment,” another term for a blanket waiver from Buy America. In return, U.S. companies are able to compete for foreign government procurement contracts.
That sounds reasonable, but trade is so lopsided today that the GPA denies the U.S. a major tool of economic development and reshoring of production and jobs. One can also make a good case that, if U.S. taxpayer money and U.S. debt financing are used in public projects, their materials should be made domestically.
Just to confuse things further, there are actually two relevant laws and concepts here. One is called Buy America; the other is called Buy American. The older of the two, the Buy American Act, dates to 1933. Under that law and its successors, projects underwritten with the roughly $600 billion in annual federal procurement dollars must use goods made in America. That figure will only increase with expanded infrastructure spending. But due to definitions specified by executive orders, a product with as little as 55 percent domestic content is considered U.S.-made for purposes of the law. A recent Biden order gradually increases that to 75 percent. But even so, due to the Government Procurement Agreement, the exports of some 60 countries are considered domestic.
Beijing has been brilliant at moving final assembly of goods made in China to offshore producer nations that are GPA members, so that China-made products qualify as made in U.S.A. So the GPA doesn’t even give member countries refuge from China flooding the zone with subsidized exports. The president has authority to withdraw from the GPA on 60 days’ notice. Biden has shown no interest in doing this. Instead, details and definitions are being tweaked.
Buy America, without the “n,” refers to requirements of the Transportation Department and its Federal Highway Administration, covering concrete, steel, and other construction materials. In principle, construction-grade steel is not subject to the constraints of the procurement agreement, though some major projects such as the rebuilding of the San Francisco Bay Bridge were nonetheless done with Chinese steel, thanks to other loopholes.
Capital Markets. The aforementioned loopholes are trivial compared to the biggest loophole of all. Despite a few limited recent restrictions, China’s state-affiliated companies are free to raise money by listing themselves on U.S. stock exchanges, or on other exchanges such as Hong Kong’s, where American citizens make investments.
Exchange-traded funds (ETFs) invest in Chinese companies, giving Americans yet another avenue to underwrite the growth and expansion of Communist China. George Soros, in a recent piece in the Financial Times, noted that “In BlackRock’s ESG Aware emerging market exchange-traded fund, Chinese companies represent a third of total investments.” Soros added that such passive investments “have effectively forced hundreds of billions of dollars belonging to US investors into Chinese companies whose corporate governance does not meet the required standard.”
The few restrictions on Chinese access to U.S. capital markets are instructive. Once again, most are the work of Trump’s trade and national-security officials. The most far-reaching is a law signed by Trump in December 2020, the Holding Foreign Companies Accountable Act. This requires foreign companies to comply with the transparent accounting requirements of the Sarbanes-Oxley Act, or be delisted from U.S. stock exchanges. It also requires listed companies to certify that they are not controlled by a foreign government. The law potentially covers all 248 Chinese companies listed on U.S. stock exchanges, with a market capitalization well in excess of $2 trillion.
Chinese-owned companies that sell stock in the U.S., such as Alibaba and the oil giant PetroChina, routinely ignore U.S. securities law disclosures as enhanced by Sarbanes-Oxley, and neither the SEC nor the stock exchanges have required compliance. China has taken the position that this was confidential or classified information, itself quite an admission.
Open Secrets reported that 133 separate lobbyists representing every corner of Wall Street got involved on this law, including at least 28 on behalf of the U.S. Chamber of Commerce alone. The lobbying succeeded in watering down the law, so that a company can be delisted only if it is not in compliance with accounting disclosures for three years in a row. There is no such loophole for U.S.-owned companies. This creates few obstacles for Chinese companies, other than the small number that are formally blacklisted for being tools of the Chinese People’s Liberation Army, to raising money in U.S. capital markets or soliciting U.S.-based investors to put money into China via offshore exchanges or ETFs.
The U.S. has had bits and pieces of an industrial policy, but the Biden administration has embraced domestic manufacturing.
Getting Serious About Industrial Policy
The U.S. has bits and pieces of a de facto industrial policy: Pentagon procurement, targeted investments in new technologies and companies, R&D incubators like the Defense Advanced Research Projects Agency (DARPA) and its Energy Department clone, ARPA-E, and episodic strategies to save vital industries such as semiconductors, dating to the SEMATECH research consortium funded with an initial $500 million from the Defense and Commerce Departments in 1987 under President Reagan. Federal investment in biotech, such as the Human Genome Project, also amounted to a tacit industrial policy. Likewise federal support for research universities and the National Labs. Indeed, if you look at any U.S. export leader that relies on advanced technology, behind it is the invisible hand of the federal government. Yet because of its self-defined role as world leader of the free-trade crusade, the U.S. has been loath to describe these as industrial policies or to embrace industrial policy as good and necessary.
This has changed under the Biden administration, a significant advance over both previous Democratic administrations and Trump’s China policy, which got tough with China on tariffs and talked a good game on rebuilding America but did nothing to advance domestic industry. The most comprehensive and far-reaching Biden blueprint to date is a book-length White House report released in June with the disarming title “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth.” The blueprint was the work of four Cabinet departments and was written jointly by the NSC and the National Economic Council (NEC). A principal final author was Elisabeth Reynolds, former director of MIT’s Industrial Performance Center, who works for NEC director Brian Deese.
The report is one of the most comprehensive national economic-planning documents since the World War II era. It looks in detail at four vital sectors (semiconductors, large-capacity electric storage batteries, pharmaceuticals and active pharmaceutical ingredients, and materials critical to the national defense) and asks what it would take for the U.S. to regain leadership, both in supply chains and in final products. The report is not shy about targeting China, which “stands out for its aggressive use of measures—many of which are well outside globally accepted fair trading practices—to stimulate domestic production and capture global market share in critical supply chains.”
In the case of semiconductors, the report points out that the U.S. share has declined from 37 percent in 1990 to just 12 percent today. It recommends a $50 billion minimum investment to support domestic manufacturing and R&D, “to ensure the next generation of semiconductors is developed and produced in the United States.”
There are other crucial industries, technologies, and supply chains; but this report, pulled together in 100 days in response to a Biden executive order, can be read as a serious template. The overall strategy unapologetically defies the norms of the WTO. A more extensive report that addresses America’s entire industrial base, including energy and communications technology, will be prepared and delivered in February 2022.
A comprehensive industrial strategy, pursued in combination with tough measures to resist China’s predatory behavior, would amount to full-on economic nationalism. The world, however, is not just comprised of the U.S. and China. A much tougher China policy will need to be coordinated with America’s allies. This will require some delicate diplomacy.
Keeping China out of U.S. capital markets for violating American securities laws is one key strategy because it need not sanction or alienate other countries that follow the rule of law and have compatible financial-disclosure regimes. The same is true of national-security restrictions, which don’t target nations that are no threat to the United States, except in the case of the most sensitive military technologies. But industrial policy is trickier. If the U.S. moves more in the direction of industrial planning, targeting, and technology subsidy, it must allow trading partners that are democratic nations the same rights. This seems a drastic shift, yet it is reminiscent of the pre-neoliberal era after World War II, when all our democratic allies engaged to a greater or lesser degree in state subsidy and economic planning.
The larger point here is that a successful China strategy is not just about China. It will require the greatest government involvement in the economy since World War II, as well as a fundamental rejection of free-market ideology. This will be fiercely opposed, not only by China’s fifth columnists of U.S. companies with lucrative China deals, but by corporate America generally, by Wall Street, and corporate Democrats. That’s why China policy to date has been limited to half measures.
Under Trump, there were fierce divisions between the China hawks and the Wall Street contingent led by Mnuchin. Lighthizer and Pottinger were able to get tougher trade and export control policies; Mnuchin made sure there would be no restriction on China’s access to U.S. capital markets. The same splits are evident among Democrats. Chuck Schumer managed to get a tough bipartisan China bill through the Senate, the U.S. Innovation and Competition Act. It did a great deal on the industrial policy and export control front, but nothing on capital markets.
The reaction to the intermittent toughening of Biden’s China policies has been fierce. Since August, Chinese President Xi Jinping has delivered even clearer warnings to Chinese capitalists that they exist at his pleasure. The screws have been tightened on Hong Kong. Ultranationalist language is now common on official pronouncements. A blogger close to the regime posted an essay that was widely quoted in official media. It warned of the “savage and ferocious attacks that the United States has begun to launch against China,” adding that “It is necessary not only to destroy the decadent forces but also to scrape the bones and heal the wounds.”
In a September 1 speech to the National Committee on U.S.-China Relations, China’s new ambassador to the U.S. Qin Gang scrapped the conciliatory tone and warned of “disastrous consequences” if the U.S. uses a “Cold War playbook.” He explicitly excoriated U.S. support for Taiwan’s independence and its blacklisting of Huawei.
As the Biden administration responds, there’s a risk of foreign-policy concerns crowding out economic ones. China will press the U.S. to relent on its economic moves, in exchange for easing military tensions. And as the big November climate meetings approach, China will be offering a deal for climate collaboration in exchange for keeping the economic status quo. When Vice President Kamala Harris made her much-touted Asia trip in late August, the one truculent remark she made regarding China was a warning that the U.S. would defend the freedom of the South China Sea. Astonishingly, there was not word one about China’s economic predation. The speech must have been reviewed a dozen times by multiple players.
Critics of Trump’s China policy, and now Biden’s, warn of a new cold war. The fact is that we are in one. George Kennan’s strategy of containment is not a bad model. If we can slow China’s rush to global and domestic domination, the internal contradictions in its model just might become more evident and problematic. What remains to be seen is whether Biden will be able to be radical enough.
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