Clark Packard and Scott Lincicome
Over the past several years the U.S.-China economic relationship has soured and become subordinated to broader concerns about national security and geopolitics. After a decades‐long reform agenda in China that lifted hundreds of millions out of grinding poverty, Chinese president Xi Jinping has increasingly turned inward—reembracing Maoist socialism and heavy‐handed central planning. Washington’s response to these worrisome developments has been reflexively hawkish economically, scattershot, and woefully inadequate for the economic challenge that China presents.
Fearing that China is inexorably poised to become the world’s leading economy, policymakers in the United States have embraced tariffs, investment restrictions, export controls, and massive domestic subsidies to favored industries such as semiconductor manufacturing. These moves have failed to change Beijing’s behavior, but they have counterproductively weakened the U.S. economy and alienated allies that Washington needs to rally in defense of market‐based democracy against 21st‐century mercantilism.
This analysis explains that instead of mimicking China’s increasingly interventionist economic policies, the United States should focus on promoting the competitiveness of the American economy and the economies of our allies. Policymakers should rely on the market‐oriented policies that propelled the United States to unprecedented wealth and power, including openness to international trade and investment; liberalized immigration; lighter‐touch regulation, particularly in the burgeoning technology industry that sits at the epicenter of the economic competition with China; and smarter tax policies. These policies are not a panacea with respect to all that ails the U.S.-China economic relationship, but they would be much more successful than the failed status quo.
Introduction
The U.S.-China relationship is increasingly complex and is the top geopolitical issue facing the world today. How the two countries manage this relationship will greatly affect global peace, prosperity, and stability in the 21st century. Concerning economic and trade policy specifically, the United States should focus on affirming the market incentives that boost the performance and competitiveness of American companies and those of our allies. Unfortunately, Washington policymakers have instead embraced economically hawkish rhetoric and policies that are at best superficial and at worst counterproductive. As former treasury secretary Henry Paulson astutely observed, “We have a China attitude, not a China policy.”1
China faces a significant brain drain among technology workers and other entrepreneurs, most of whom prefer the freedom offered by the United States and other Western countries.
The bipartisan consensus in policymaking circles around Washington today is that China is an economic juggernaut, inexorably poised to overtake the United States as the world’s leading economy. To many policymakers, Beijing’s increasingly interventionist and mercantilist policies have supercharged its economy and promise to displace the United States at the top of the global order unless Washington matches China’s economic interventionism.
This consensus is rife with problems. For starters, China’s economic rise has a lot more to do with its brief abandonment of heavy central planning decades ago than it does with today’s reembrace of industrial policy and Maoist socialism. Indeed, the Chinese economy today is not the powerhouse many believe it to be. Short‐term issues and longer‐term systemic trends will further constrain future economic growth and dynamism in China—obstacles created in no small part by China’s relatively recent shift away from economic liberalization.
Beijing’s draconian “zero‐COVID” policy shuttered large portions of the Chinese economy in 2022. President Xi Jinping’s embrace of heavy intervention in the tech industry has paralyzed a once dynamic and growing sector of the economy.2 The country’s real estate sector is overinflated and has led to a debt default by giant property developer Evergrande.3 And China’s ever‐expanding bureaucracy has been paralyzed by the inevitable conflict between eradicating COVID-19 and hitting Beijing’s predetermined growth targets.4
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Scott Lincicome discusses his article, “Checking In on China (and America’s Undeserved Crisis of Confidence),” on WBT’s The Pete Kaliner Show
These forecasts are notoriously difficult, especially given the uncertainties caused by the pandemic and China’s recent reopening.5 However, China’s longer‐term headwinds are more certain and daunting. Productivity is slowing and has been for quite some time.6 China also has an enormous demographic problem, exacerbated by its cruel, now abandoned One Child Policy, that will both slow growth and strain government social spending.7 China faces a significant brain drain among technology workers and other entrepreneurs, most of whom prefer the freedom offered by the United States and other Western countries.8 Likewise, China has seen its international standing erode in recent years for myriad reasons, including human rights abuses such as forced labor in the Xinjiang region; effectively annexing Hong Kong in 2020 with the passage of the national security law meant to quash dissent and criticism of Beijing; an aggressive foreign policy posture in the region, including threatening Taiwan’s sovereignty; and its misinformation about the origins of COVID-19. This analysis will focus almost exclusively on the U.S.-China economic relationship. China engages in several repressive practices, which deserve a straightforward U.S. response, but those are beyond the scope of this analysis.
That is not to say that the United States should do nothing about China’s economic practices. There are legitimate concerns about numerous international trade and investment policies pursued by Beijing, its increasingly brutal human rights practices, and its geopolitical bellicosity and coziness with Russia and rogue regimes, which all demand attention. Yet concerning the challenges that China poses economically, U.S. policymakers seem intent on rejecting the very policies that have propelled the United States to enormous wealth and global influence and instead are mimicking Beijing’s heavy‐handed industrial policies and interventionism. That would be a mistake. There is a better way: one that relies on America’s traditional strengths.
China’s Troubling International Economic Practices
There is an emerging awareness in Washington and other Western market‐oriented democracies that China’s international trade and investment practices pose significant challenges to the United States and the rules‐based trading system.
In 2017, then president Donald Trump directed his United States Trade Representative (USTR) to begin an investigation into Chinese commercial practices pursuant to Section 301 of the Trade Act of 1974.9 Over the next seven months, USTR compiled a 301 Report that served as an indictment of China’s international trade and investment practices. The overarching theme of the report is that China uses a number of unfair and malicious methods to acquire U.S. technology in service of Beijing’s high‐tech indigenous innovation policies known as “Made in China 2025.”10 According to USTR, these policies inhibit U.S. exports; undermine American innovation, manufacturing, and services; and bolster jobs in China at the expense of American workers.
The list of complaints is long, and it encompasses both major problems as well as smaller irritants. First, China engages in widespread and unauthorized state‐sponsored cyber espionage into U.S. commercial networks in order to steal trade secrets and abuse intellectual property. These stolen materials include “trade secrets, technical data, negotiating positions, and sensitive and proprietary information internal communications.” Many of these cyber intrusions target American firms that operate in markets and industries deemed strategic by Beijing, including those with a national security nexus.11
Next, China uses hidden industrial policy and foreign discrimination, including via its numerous state‐owned enterprises (SOEs), that hurt American competitors. This is done on a massive scale and in a completely nontransparent way. It is worth noting that the International Monetary Fund (IMF) estimates that Chinese SOEs are about 20 percent less productive than private sector competitors in the same market.12 Beijing’s increasing reliance on SOEs will slow growth in China over the long run, but it hurts U.S. firms in the short run and erodes business confidence in foreign trade.
Next, China uses foreign ownership restrictions “to require or pressure technology transfer from U.S. companies to Chinese companies” as a condition of accessing the Chinese market. This is done, for example, through requirements that U.S. companies establish a China‐based joint venture partner. Pressure is then exerted on the foreign manufacturers to turn over cutting‐edge and core technologies to their Chinese joint venture partners.13
Despite identifying many of the problems with China’s international trade and investment practices, the U.S. approach to addressing these challenges has been woefully inadequate across the last two presidential administrations.
Beijing also uses opaque and unevenly applied licensing restrictions to discriminate against American firms that are seeking to operate in China and reach consumers in its market. The 301 Report describes how the Chinese government often requires firms to turn over sensitive technical information to secure approval to operate in the country but does not require the same of domestic Chinese firms.14
Likewise, there is a “pervasive” state‐sponsored effort to direct and facilitate investment in, and acquisition of, U.S. companies and assets by Chinese companies. Such investments and acquisitions have strategic and military goals. These transactions are often undertaken by China’s numerous SOEs and state‐supported banks and investment funds, which are not subject to market disciplines.15
In total, the 301 Report casts doubt on Chinese international economic practices—essentially 21st‐century high‐tech industrial policy on a massive scale—and demonstrates how such policies undermine the U.S. economy, both workers and firms. These are real challenges and require a concerted response, one that has thus far failed to materialize.
The Failing Approach
Despite identifying many of the problems with China’s international trade and investment practices, the U.S. approach to addressing these challenges has been woefully inadequate across the past two presidential administrations. First, the United States levied a series of tariffs, which triggered predictable retaliation from Beijing, in the past few years. Then, in 2022, policymakers decided to copy Beijing’s inefficient industrial policy by establishing our own subsidies for favored industries. Neither tariffs nor domestic subsidies are up to the serious task of outcompeting China in the 21st century.
Scott Lincicome discusses reports of the Biden administration lifting the Trump China tariffs on CBS Radio
In total, tariffs now cover about 70 percent of all imports from China and the average rate is nearly 20 percent, which is more than six times higher than before the trade wars began. Meanwhile, retaliatory tariffs cover about 60 percent of American products and services sent to China, at an average rate above 21 percent, which is up from about 7 percent before the trade wars.16 Together, the tariffs and reprisals constitute an even larger share of GDP than the infamous Smoot‐Hawley tariffs, which exacerbated and prolonged the Great Depression according to recent research by Pablo Fajgelbaum of Princeton University and Amit Khandelwal of Columbia University.17
In January 2020, Washington and Beijing signed a truce informally known as the Phase One Agreement. The two sides agreed to forgo additional tariffs, but the existing tariffs remain in place. China agreed to purchase large quantities of American exports over a two‐year period and promised to make certain structural changes to its economic practices. Now, after more than two years, the status quo—tariffs and the Phase One Agreement—has failed on multiple levels.
First, despite Trump’s repeated statements to the contrary, countless academic studies have found that Americans, not the Chinese, paid the tariffs (and continue to do so).18 As a result, the tariffs’ economic harms to the U.S. economy were significant. The New York Federal Reserve, for example, estimates that the tariffs increased costs for average American households by about $830 per year, accounting for direct costs and efficiency losses, and resulted in approximately $1.7 trillion in lost market capitalization for firms through investment slowdowns.19 Meanwhile, Moody’s Analytics estimates that the trade wars cost about 300,000 jobs.20 Table 1 summarizes academic research on the tariff’s economic costs. Figure 1 shows that these costs erased up to half of the average household’s savings from the tax cuts enacted by the Tax Cuts and Jobs Act of 2017.
Second, in a Sisyphean attempt to close the bilateral trade deficit, the United States spent considerable political capital to get the Chinese to agree to specific purchase requirements over a two‐year period. This distorted markets, angered allies, and empowered Chinese SOEs, which were used to make the purchases. Moreover, by the end of the two‐year period, China was well short of the level of American products it had promised to buy. As Chad Bown of the Peterson Institute for International Economics noted, “In the end, China purchased only 57 percent of the total US goods and services exports over 2020–2021 that it had committed to” under the Phase One Agreement.21
Third, and perhaps most importantly, Beijing has done little to overhaul its troubling economic and trade practices, as U.S. Trade Representative Katherine Tai herself admitted before Congress.22 Instead, as the U.S.-China Economic and Security Review Commission’s 2021 report to Congress highlighted, Beijing’s pursuit of industrial policy continues apace.23 The Wall Street Journal recently reported, in fact, that “China has doubled down on the state‐led economic model the Trump administration had set out to change. Chinese authorities increased their use of subsidies—including cash infusions, discounted loans and cheap land—to dominate high‐technology industries.” And the U.S. approach may have hardened attitudes in Beijing and among the Chinese public. As former U.S. trade representative Charlene Barshefsky noted, Chinese leaders “did not change their economic model one iota, reinforcing to Xi Jinping that their economic model can withstand even aggression by the United States.”24 Recent research also found that the trade war reduced Chinese citizens’ support for both trade with the United States and international trade in general.25
Mimicking Beijing’s 21st‐century industrial policy is simply not a panacea in the economic competition between the United States and China.
Likewise, Congress recently passed the Chips and Science Act of 2022 on a bipartisan basis. At the center of the legislation is about $80 billion in federal grants and tax credits for semiconductor production. The supposed purpose of the trade‐distorting subsidies is to induce firms to produce more semiconductors and related technologies domestically. Policymakers argued that such subsidies are necessary because China heavily subsidizes its own industrial production of semiconductors and it could invade Taiwan, a U.S. ally and a major supplier of chips to the U.S. and global markets.
Yet there are compelling reasons to be circumspect about the transformative power of these subsidies. If history is any guide, this bout of industrial policy will be no more successful than previous iterations.26 Indeed, it is likely that inefficient semiconductor subsidies will dampen innovation, enrich rent seekers, and trigger trade tensions with the very allies the United States needs to rally to exert pressure on Beijing to curtail its predatory commercial practices.
Mimicking Beijing’s 21st‐century industrial policy is simply not a panacea in the economic competition between the United States and China. Likewise, the U.S.-China trade war—easily the most aggressive bout of unilateral, tit‐for‐tat protectionism in decades—is imposing enormous costs on innocent bystanders in a misguided effort to fundamentally change Beijing’s mercantilism and nationalism. Indeed, it most likely has made things worse.
Smarter Policy Responses
There is a far better approach to China than ineffective bellicosity and sclerotic protectionism. This approach focuses less on trying to change Chinese government behavior, which seems unlikely, and more on using time‐tested policy tools to supercharge the U.S. economy and reassert America’s global leadership.
International Trade Tools
First, policymakers should lift the Section 301 tariffs, which are doing significantly more harm than good to the United States. They have utterly failed to discipline China’s mercantilism and instead have imposed significant costs on the American economy, especially American manufacturers. Other tariffs should also be liberalized, particularly those on industrial inputs. More than half of all imports in the United States are capital goods, raw materials, or intermediate inputs used by American firms to make products here. Tariffs on these goods raise manufacturers’ production costs and instantly make them less globally competitive than foreign competitors who have freer access to the same inputs. Policymakers should unilaterally eliminate existing duties on such capital goods, raw materials, and intermediate inputs, which would strongly enhance America’s global competitiveness.
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The most obvious place to start in this regard is the Trump administration’s tariffs on imported steel and aluminum, which were implemented on bogus “national security” grounds and have harmed both metal‐consuming American manufacturers and relations with key trading partners.27 The tariffs also triggered predictable retaliation, ensnaring unrelated industries like agriculture into the morass. The tariffs’ big winners have been a handful of politically connected U.S. companies and unions and American manufacturers’ global competitors who pay far less for these critical industrial inputs.28 The United States should also reform its trade remedy system, which has resulted in duties on hundreds of imported products—primarily industrial inputs—that are imposed with no regard to their potential harms to downstream consuming industries.29
The tariffs’ big winners have been a handful of politically connected U.S. companies and unions and American manufacturers’ global competitors who pay far less for these critical industrial inputs.
Removing these tariffs would not only make American manufacturers more competitive vis‐à‐vis their Chinese competitors, but also provide some relief for inflation‐weary American families. While today’s historic inflation has been primarily caused by loose fiscal and monetary policy and various supply‐side bottlenecks, recent research from the Peterson Institute finds that eliminating the Trump administration’s trade war tariffs (both on China and metals) could save American families hundreds of dollars per year.30 Eliminating tariffs will not completely solve inflation or fix U.S.-Sino commercial relations, but it is a good and obvious place to start.
Second, the United States should end its blockade of new appointments to the World Trade Organization’s (WTO) Appellate Body, the highest court of international trade. As a result of U.S. intransigence, the WTO’s dispute settlement system is paralyzed.31 Where there are legitimate grievances about Chinese protectionism in violation of Beijing’s commitments under the World Trade Organization Agreements, the United States and its like‐minded allies should pursue dispute settlement in the Geneva‐based tribunal. Many of the practices highlighted by the United States in the 301 Report are prohibited by WTO rules, including forced technology transfer, while there is an affirmative—and enforceable—obligation to protect intellectual property.32 Research from the Cato Institute finds that China has an imperfect but decent record of complying with adverse decisions by the WTO.33
Third, the United States should rejoin the Trans‐Pacific Partnership (TPP), which was subsequently renamed the Comprehensive and Progressive Trans‐Pacific Partnership (CPTPP) after the Trump administration’s ill‐advised withdrawal from the partnership at the beginning of Trump’s term in office. The TPP was a U.S.-led effort to create a major trading bloc in the Asia‐Pacific region, which was launched in the waning days of the George W. Bush administration and finalized in October 2015. It was signed by the 12 Pacific Rim countries in February 2016. The agreement’s objectives were threefold:Economics: the TPP/CPTPP reduced a number of trade barriers between the parties to the agreement. This would lead to increased efficiency, productivity, and economic growth for the members. The Peterson Institute found that, if implemented, the TPP would have raised real incomes in the United States by $131 billion annually by 2030 and increased U.S. exports by nearly $360 billion over that span, more than 9 percent above the 2014 baseline used by the authors of the study.34 The U.S. International Trade Commission found that by 2032, the TPP would have raised real incomes by $57.3 billion, increased gross domestic product by $42.7 billion, and created 128,000 jobs, while exports to new trading partners would have grown by nearly 20 percent.35 These are small but significant gains for the United States.
New Trade Rules: the TPP/CPTPP also included new rules covering various aspects of the modern economy that were not captured by previous trade agreements, including the North American Free Trade Agreement (NAFTA) and the WTO Agreements. Such disciplines included digital trade, industrial subsidies, and SOEs. Even though it was not a member of TPP, China loomed large in the agreement’s negotiations: these rules targeted a lot of Beijing’s “state capitalist” trade and investment practices. The goal was to write new rules and eventually “multilateralize” them at the WTO. The TPP thus established a high bar for any eventual Chinese accession to TPP and helps WTO members to pressure China into accepting the new rules on a multilateral level.
Geopolitics: although the TPP made economic sense, foreign policy benefits drove the agreement. At its core, TPP was designed to counter China’s growing influence in the Asia‐Pacific region. First, TPP members would have an alternative market to China: the United States. Countries tend to trade with large nearby countries under what’s known as a “gravity model.” The TPP’s elimination of trade barriers was intended to offset China’s massive gravitational pull in the region. This could help reorient supply chains out of China and into neighboring TPP member countries as well as the United States. The TPP also provided a forum to promote regional cooperation, consultation, and dispute settlement, similar to the WTO, albeit in a nimbler form. Finally, TPP was intended to be an ever‐growing platform for new members to join, especially close allies in the region like South Korea and Thailand. (Seoul recently applied to join CPTPP.) Adding members would give the agreement extra heft and increase the leverage of the United States while bolstering the “TPP supply chain.” China would be faced with a choice: raise its commercial standards to join the ever‐growing TPP bloc or face competitive disadvantages in its own backyard.
But the TPP was far from perfect: it contained a fair amount of special‐interest protectionism (e.g., on intellectual property and textiles), while certain laudable provisions (e.g., constraining subsidies and state‐owned enterprises) were diluted to appease certain signatories. But, as the Cato Institute’s chapter‐by‐chapter analysis of the agreement concluded in 2016, it was on‐net liberalizing—by a significant margin—and deserved support.36 This conclusion has since been bolstered because CPTPP signatories have removed some of the most offending provisions.
The TPP’s original motivations, moreover, have since proven sound. Unfortunately, American exporters are on the outside of the agreement looking in: they face significantly higher trade barriers than their competitors within the TPP bloc. Lost market access is an especially acute problem for American farmers and ranchers attempting to reach notoriously closed Asian agriculture markets, which were pried open in TPP negotiations. Likewise, American consumers face higher tariffs and other trade barriers than consumers in TPP countries—relief that would have been welcome during a period of high inflation and supply chain chaos. And perhaps most tragically, the United States forfeited its economic leadership role in the Asia‐Pacific region, ceding the ground to China. Beijing is working hard to fill that void. At the beginning of 2022, the China‐led Regional Comprehensive Economic Partnership (RCEP)—a large, albeit lower‐quality trade agreement than TPP—went into effect. The imperative to rejoin CPTPP grows every day as China’s influence and assertiveness in the region grows. Figure 2 shows the parties to the CPTPP and the RCEP, as well as countries currently applying to join the former agreement.
The Indo‐Pacific Economic Framework is simply no substitute for rejoining the CPTPP and expanding its membership to include longtime allies like South Korea, Taiwan, and the post‐Brexit United Kingdom.
The Biden administration is now seeking to reassert American international economic leadership in the Asia‐Pacific region with its Indo‐Pacific Economic Framework (IPEF) initiative. The IPEF negotiations recently began, but the administration’s refusal to put market access issues on the table means the impact of the agreement will be extremely limited.37 The IPEF is simply no substitute for rejoining the CPTPP and expanding its membership to include longtime allies like South Korea, Taiwan (a high‐tech manufacturing hub), and the post‐Brexit United Kingdom, all of whom have expressed an interest in joining the pact.
Fourth, the United States should pursue more trade‐liberalizing agreements with other partners, either through the CPTPP or outside of it. It has now been more than 10 years since the United States entered into a new trade agreement (the last bilateral agreements were with South Korea, Panama, and Colombia, respectively). The rest of the world has moved on while the United States has dithered. As mentioned, RCEP went into effect in early 2023 and the African Continental Free Trade Agreement is now in place. Over the long term, a stagnant U.S. trade agenda will lead to a less dynamic and slower‐growing U.S. economy, not to mention a decline in American prestige and influence over foreign policy decisions made around the globe.
The most obvious place to start is the Transatlantic Trade and Investment Partnership (T‑TIP) with the European Union, which stalled during the Trump administration but has received newfound attention following Russia’s invasion of Ukraine.38 The T‑TIP has the potential to be a high‐quality, comprehensive modern trade agreement between economic superpowers. Cutting trade and investment barriers and streamlining regulatory recognition would be a boon on both sides of the Atlantic. (Just imagine, for example, if the FDA had accepted European regulatory practices before the U.S. infant formula crisis.) Like TPP, T‑TIP would strengthen important geostrategic ties in the face of an increasingly aggressive Russia and reaffirm the United States’ commitment to the transatlantic relationship. It would also provide the United States with another trading bloc committed to high‐quality commercial rules that could be leveraged to help discipline Beijing’s trade and investment transgressions.
Another trade tool available to policymakers concerned about U.S.-China trade and investment is the Generalized System of Preferences (GSP), the authorization for which lapsed at the end of 2020. The GSP cuts tariffs on certain products coming to the United States from about 120 developing countries, including several of China’s competitors, including Thailand, the Philippines, Cambodia, and Indonesia. As the Wall Street Journal recently documented, after the Trump administration’s tariffs, many companies relocated manufacturing out of China and into GSP‐beneficiary countries to take advantage of the tariff disparity.39 Now that GSP has lapsed and tariffs have increased on products from GSP countries, however, several of those companies are moving production back into China—at the same time a bipartisan chorus of policymakers is urging producers to exit the Chinese market. As Dan Anthony, the executive director of the Coalition for GSP, and Steve Lamar, the president and CEO of the American Apparel and Footwear Association, wrote in the Wall Street Journal in late 2022 urging renewal of GSP, “Companies are looking to Congress for a signal. So far Congress is telling them to go to China.”40 Thus, Congress should quickly reauthorize and expand the GSP.
The United States should employ other tools of economic statecraft, but in a far more narrowly tailored way than has been recently proposed.
Finally, the United States should repeal the Jones Act (i.e., Section 27 of the Merchant Marine Act of 1920), which restricts domestic shipping services to vessels that are built in the United States, owned by Americans, U.S.-flagged, and U.S.-crewed. As a result of this act, our shipping laws are some of the most protectionist in the world. The Jones Act was once justified as necessary to ensure adequate domestic shipbuilding capacity and a supply of merchant mariners in times of war or other national emergency, but over the last 100‐plus years it has become apparent that the act fails to bolster national security, while it serves as a drag on the economy.41 The Jones Act inflates shipping costs because the transport of cargo between U.S. ports and inland waterways is off‐limits to foreign competition. These higher shipping costs have ripple effects throughout the economy: they increase demand for alternative forms of transportation, including trucking, rail, and pipeline services, which raises those modes’ rates and increases business costs throughout the supply chain, especially in manufacturing. Likewise, the Jones Act is a source of constant irritation to several trading partners, thus discouraging U.S. exports in those markets.
Sanctions, Investment Screening, and Export Controls
The United States should employ other tools of economic statecraft, but in a far more narrowly tailored way than has been recently proposed. For example, lawmakers recently bolstered the government’s ability to monitor and restrict potentially malicious foreign investment in domestic firms through the Committee on Foreign Investment in the United States (CFIUS). But CFIUS reviews should be scrutinized because they often lack transparency and could be (and arguably have been) used as a protectionist cudgel in industries with a tenuous national security nexus. Nevertheless, limited restrictions on Chinese investment (especially by SOEs) applied in a transparent and consistent manner can ensure that American trade secrets and sensitive technologies are not controlled by or transmitted to the Chinese government.
Scott Lincicome participates in the webinar, “The China Shock in Context: Understanding Normalized Trade with China and its Role in Contemporary Policy Discussions,” hosted by the R Street Institute
Narrow sanctions on specific bad actors—individuals or firms—can also be a legitimate policy tool. Sanctioning SOEs controlled by the Chinese Communist Party or targeting Chinese firms that engage in cyber espionage to steal American trade secrets may be justified in certain cases. These measures would be dramatically better than the blanket tariff regime currently in place, but—as with CFIUS actions—they must be narrowly tailored, thoroughly documented and supported, and fully transparent.
Likewise, export controls can be a useful tool to protect and advance American foreign policy and technological interests, but they can also be misapplied to the detriment of important U.S. companies and national interests. It is reasonable, for example, to restrict the export of materials used exclusively to make nuclear weapons. However, it is a muddier calculus when the product in question has both civilian and military applications, such as semiconductors. Policymakers considering deploying export controls should implement some basic guardrails to ensure a proper balance between protecting national security and ensuring the relative free flow of goods across borders, which is instrumental to American prosperity and security. In particular:Policymakers should clearly define national security concerns tied closely to defense and defense‐related goods and services. The Trump administration’s flagrant abuse of tariffs on imported steel and aluminum shows the dangers in loosely defining “national security.”
Policymakers should also be required to balance the security and economic ramifications of export controls. Like import tariffs, export restrictions can harm domestic exporters, who lose foreign sales, or harm importing firms that are denied access to inputs by foreign retaliatory “copycat” export control measures. An overly restrictive export control regime could dissuade foreign firms from even opening operations in the United States.
When there is a legitimate national security product or service involved and the threat outweighs the potential economic costs of the export restriction, unilateral sanctions should be avoided in all but the rarest of circumstances. In a globalized world with various suppliers of virtually every product, unilateral controls can lose their effectiveness and simply deny sales to a U.S. firm by diverting trade to a less‐efficient producer while doing nothing to enhance national security.
Policymakers should establish transparent procedures before and after export controls are implemented to ensure they are not unduly burdensome. The executive branch should work with the private sector to determine if there are ways to mitigate potential national security risks associated with the export of a product or service in question and to understand the full economic effect of the proposed control. Likewise, there should be a robust and timely judicial review process that allows appeals to be heard quickly. A time‐limited sunset for proposed export controls also makes sense.
Finally, export controls should be tailored as narrowly as possible. There is a high potential for sanctions to hurt people without achieving the desired policy aims. Serious scholars have questioned the efficacy of various sanctions, including export controls, when they remain in place for long periods of time.42
As an example of the danger of these policies, overbroad export controls caused certain Chinese firms to hoard semiconductors in recent years. That exacerbated a growing global shortage in semiconductors that became acute during the pandemic.43
Liberalize Immigration
If the United States is going to outcompete China in the 21st century, particularly in the fields that are likely to drive future growth, Washington needs to welcome far more immigrants into the country. Unique among the most powerful nations of the world, the United States is a nation of immigrants, and they are one of our greatest assets. Yet in recent years policymakers have unwisely restricted immigration. For example, it is estimated that legal immigration fell by about 50 percent between fiscal years 2016 and 2021, spurred by the false belief that immigrants somehow reduce Americans’ living standards.44 Such zero‐sum thinking is antithetical to American values and conflicts with both historical evidence and economic research. It risks undercutting an asymmetric advantage the United States has over China: the ability to attract and retain talented foreigners. Although immigration levels have returned to their pre‐pandemic levels during the last two years, given the aging population in the United States, more needs to be done to increase immigration.45 Indeed, immigration levels remain millions behind where we should be today.
If the United States is going to outcompete China in the 21st century, particularly in the fields that are likely to drive future growth, Washington needs to welcome far more immigrants into the country.
First, the academic literature is clear that immigrants are net job creators because they tend to be more entrepreneurial than nonimmigrants.46 Some of America’s most innovative and globally competitive firms were founded by immigrants, including Google, Uber, Qualcomm, Tesla, eBay, Yahoo, and Pfizer.47
Immigration is crucial if the United States is to continue leading the technology sector, which is at the nexus of the geopolitical competition with China. As economist Kimberly Clausing notes in her recent book, Open: The Progressive Case for Free Trade, Immigration, and Global Capital, “As of 2014, 46 percent of Silicon Valley’s workforce was foreign‐born. The share is even larger for workers between the ages of 25 and 44, and it rises to a whopping 74 percent of workers hired for their math and computer expertise in that age bracket.”48
Scott Lincicome discusses tariffs, trade, and China on the Bastiat Defender of Freedom podcast
Figure 3 depicts the increase in the U.S. foreign‐born STEM [science, technology, engineering, and mathematics] workforce from 2000 to 2019. Research shows that immigrants are particularly prevalent in, and essential for, important technology industries such as semiconductors and artificial intelligence.49 Openness to immigration is therefore essential to keeping R&D‑intensive multinationals in the United States and out of China, which has long struggled to retain or attract skilled human capital.50
Furthermore, it is estimated that between 1990 and 2010, the “inflows of foreign STEM workers explain between 30% and 50% of the aggregate productivity growth” in the United States.51 Immigrants are about twice as likely to be granted patents as nonimmigrants because they disproportionately have degrees in science and engineering. The same study found positive spillover effects from skilled immigration: “A 1 percentage point rise in the share of immigrant college graduates in the population increases patents per capita by 9–18 percent.”52 In other words, skilled immigrants provide a direct benefit to the United States, but they also spur innovation among nonimmigrants.
America’s colleges and universities have long been breeding grounds of innovative research and technology. Students who hold visas make up a disproportionate number of graduate‐degree‐seeking students in science, computer science, and engineering.53 Yet research by David Bier of the Cato Institute found that the Trump administration oversaw an enrollment decline of about 700,000 students in U.S. colleges and universities.54
At the same time, the United States remains a far more attractive spot than China for international scientists and engineers.55 Yet instead of capitalizing on China’s woes in attracting and retaining top scientists, Washington’s hostility toward Beijing is driving some of the top talent out of the United States.56 Recent research found that nearly 1,500 U.S.-trained Chinese engineers and scientists dropped their U.S. academic or corporate affiliations and exchanged them for Chinese affiliations in 2021, which represents a more than 20 percent increase from the prior year.57 This trend accelerated due to the Trump administration’s so‐called “China Initiative,” which the Justice Department intended to use to counter espionage and national security threats from China.58 Yet it became apparent that many of the cases were weak and those were quickly dismissed. Additionally, there were charges of racial profiling, which led the Biden administration to drop the program in 2022.59 Indeed, there is recent evidence that Washington’s hostility toward China is pushing scientists away from the United States and toward China.60 If this trend continues it risks undermining the asymmetrical advantage the United States has over China: the ability to attract and retain talented foreigners.
Policymakers should reverse course and liberalize immigration, particularly for high‐skilled immigrants. Specific ideas to attract and retain top‐notch foreign talent include exempting STEM graduates from green card caps, providing Chinese nationals who hold college degrees with work permits or green cards without numerical caps, creating a start‐up entrepreneur visa, and prioritizing visa applications in high‐tech sectors.61
Over the long term, immigration restrictionism would lead to a less dynamic and innovative economy and undercut the United States vis‐à‐vis China. A recognition of the positive‐sum results of liberalizing immigration would spur innovation from nonimmigrants, bolster our technology sector, and reduce the number of talented workers and innovators in China. It is a no‐brainer.
Tech Optimism and Light‐Touch Regulation
A primary goal for both Washington and Beijing is to set standards and dominate the commanding heights of technology. As noted, U.S. policymakers’ concerns about China’s embrace of industrial policies—focused on alternative energy vehicles, information technology, telecommunications, robotics, and artificial intelligence—are understandable. Yet U.S. trade and immigration policy have become increasingly hostile to the very American firms that are pushing the envelope in terms of research and development (R&D) and high‐tech products. Simply put, populist outrage toward superstar technology firms may be smart politics, but it is no way to “outcompete China.”
Specifically, lawmakers in Congress and lawyers at the Department of Justice are increasingly skeptical of major U.S. technology firms simply because of their size and not for any anti‐consumer concerns. They are looking at using antitrust tools to crack down on them, including by upending a century of predictable rules that center on consumer welfare. Antitrust is beyond the scope of this analysis, but it is worth considering the geopolitical and economic implications of severely cracking down on America’s leading technology firms given the ongoing struggle with China over technological supremacy.
With its historically more‐liberal regulatory policy, dedication to the rule of law, and embrace of openness, the United States has led the way in creating the type of environment necessary to cultivate technological innovation. In 2022, four of the top five global firms based on market capitalization were American technology firms (Apple, Microsoft, Amazon, and Alphabet [the parent company of Google]). Further, 63 of the top 100 global firms based on market capitalization were American firms. Of the total market capitalization of the top 100 firms, 70 percent is U.S.-based. In 2021, China was second, with 11 of the top 100 firms based on market capitalization, including tech giants Tencent and Alibaba. As Figure 4 shows, U.S. firms hold a higher share of total market capitalization than Chinese firms across all sectors, especially technology.62
A recent report from the Progressive Policy Institute (PPI) highlights how six of the largest American tech firms—Amazon, Alphabet, Intel, Facebook, Microsoft, and Apple—are driving large‐scale investments in research and technology. The Progressive Policy Institute estimates that these six firms made nearly $90 billion in private investment in 2020, which was up about 6 percent over 2019.63 That is remarkable given that the economy in 2020 was lagging because of the outbreak of COVID-19. Cracking down on U.S. tech firms will mean less investment in R&D in cutting‐edge technologies.
Scott Lincicome discusses the “China shock” narrative on Carolina Journal Video
The American tech giants already face heavily subsidized foreign competition and discriminatory treatment abroad, particularly from China. Despite this, the American technology industry pushes the envelope on exactly the types of R&D that policymakers should welcome: those current and next‐generation technologies the United States will need to outcompete Beijing. Kneecapping America’s most influential and successful technology companies will not only dim their R&D intensity but will also benefit Chinese competitors like Tencent and Alibaba.
The U.S. technology industry is the envy of the world. That is why China, the European Union, and others are trying to mimic it through subsidies and discrimination. Yet those policies are simply no match for a relatively free and dynamic economy fostered by economic openness and light‐touch competition policies. Making the United States less efficient and less dynamic through misguided efforts at targeting high‐performing American tech companies is a nonsensical way to counter China’s economic rise.
Kneecapping America’s most influential and successful technology companies will not only dim their R&D intensity but will also benefit Chinese competitors like Tencent and Alibaba.
Smarter Tax Policies
Finally, policymakers should bolster U.S. competitiveness by improving the tax treatment of R&D investment and capital‐intensive manufacturing in the United States. As part of the Tax Cut and Jobs Act (TCJA), which passed in 2017, domestic firms making investments in R&D are currently allowed to deduct those costs from their tax liability for the year in which the investments occur instead of amortizing those deductions over many years. This is a potent incentive for economic growth.
Unfortunately, that provision began to be phased out at the end of 2022 and it phases out entirely by 2026, returning firms to amortizing over a period of years. Likewise, the tax code requires firms to amortize deductions for nonresidential buildings, such as manufacturing facilities, over a 39‐year period. Because of inflation and the time value of money, a dollar today is worth a lot more than a dollar in 5—or 39—years from now. Over time, this will raise the cost of R&D, resulting in less innovation and fewer new technologies. This is a recipe for slower growth, lower productivity, and lower wages—and a less competitive economy vis‐à‐vis China. Instead, policymakers should make the immediate expensing of R&D permanent and expand it to include structures in order to ensure that the United States remains the best place in the world to innovate and create.
Conclusion
Policymakers are rightly concerned about Chinese policies that distort international trade and investment. But copying these policies won’t ensure that American companies outcompete their Chinese counterparts in the years to come. The policies laid out in this analysis will.
Policymakers need to understand that many of Beijing’s decisions are beyond Washington’s control and, moreover, will be self‐defeating for China in the long run. Rather than mimicking Chinese interventionism, policymakers should trust America’s traditional strengths: openness to international trade and immigration and a devotion to dynamic market‐based innovation. A reembrace of these policies will ensure that America’s next 50 years are as prosperous and harmonious as the last.
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