Managing competition with China

In Vice President Pence’s most recent speech on China, he called for a “fundamental restructuring,” of the United States-China relationship, but also for “practical cooperation” and “no” decoupling. The critical task is to turn those potentially inconsistent objectives into implementable actions. To navigate successfully the competition with a “strategic and economic rival,” the United States will require a long-range strategy of managed competition that responds to the significant systemic differences that China presents but also provides for measured cooperation as interests dictate in appropriate areas.

A good starting point is to recognize that “fundamental restructuring” cannot be built on the hope that China will any time soon change its internal structures or its driving ideology.

China is deliberately different from other participants in the global market economy. It is a country where the Communist Party of China is the “east, west, south, north, and center;” that differentiates itself from free market democracies, “protect[ing] against the corroding influence of decadent capitalist and feudal ideas,” as the CPC constitution provides; and that is highly authoritarian with CPC leader and Chinese president Xi Jinping as the “core” leader.

To be sure, to reach its “Two Centenary Goals” focused on economic prosperity, China depends heavily on achieving success in the global economy, and that success involves “going out,” as China describes it, through trade and investment, by diplomacy, and by maintaining a stable security environment. Even in “going out,” however, China engages in significant malign behavior including excessive subsidies, forced technology transfers and other market distortions, as well as cyber espionage at massive scale.

The United States and its close allies and partners necessarily need to firmly and vigilantly respond across the full spectrum of economics, diplomacy, and security, while recognizing that the most important challenge China presents — aside from any future direct military confrontation — comes from the concurrency of economic and security interactions.

China’s state-driven economic approach, an industrial policy committed to ensuring global success for selected industries and particularly its use of subsidies, has already had consequential market distorting effects on numerous industries as varied as steel, textiles, solar panels, wind turbines, and fishing. But the greatest risks are for the future, arising from the massive subsidies and national champions approach being undertaken by China’s Made in China 2025 program as well as the additional emphasis on artificial intelligence, quantum computing and similar technologies.

For the United States, its close allies and partners, establishing fair and efficient market conditions where privately-owned firms can successfully develop and provide advanced and emerging technologies in the face of state-driven market distorting actions will be a critical task.

Achieving that goal will require a two-fold approach.

First, innovation is critical to future economic competitiveness and to national security, and the United States should undertake a comprehensive program effectively supporting innovation efforts. That would include increased federal funding for research and development as well as  coordination with close allies on R&D; government incentives to focus and encourage the private sector in key areas such as artificial intelligence, quantum computing, nanotechnology, genomics, cyber security, and climate change; developing manufacturing and nonmanufacturing “clusters,” that bring together public, private, and academic entities in precompetitive research and development; expanded university programs and K-12 talent growth for science, technology, engineering, and mathematics (STEM); and increased collaboration between national security agencies and the private sector.

Second, to ensure efficient and fair operation of the United States economy in the face of China’s state-driven, market distorting behavior will require a multi-tier economic approach differentiating strategic sectors and those sectors heavily skewed by market distortions — where selective limitations are warranted — from those sectors where the United States would benefit from continuing reciprocal trade of commercial products and services to commercial entities. A key element will be to ensure that innovative advanced and emerging technologies can be developed and competitively provided by private firms.

For the strategic sectors of the economy — firms and technologies vital to national security — there need to be limits in the United States on Chinese investment, trade, licensing, financial and similar transactions. Likewise for markets in China, it will be important to limit transfers of technology, particularly for advanced and emerging technologies, and to bar the use of Chinese products and components in the supply chain for strategic sectors, unless each are approved through an enhanced review mechanism by the United States government. Generally, China should not be involved in the establishment of United States national security.

For non-strategic sectors unfairly affected by China’s state-directed economic practices, frameworks need to be developed that will have selective but effective offsetting impact including import restraints and/or selective countervailing tariffs so as to assure a level playing field for American firms. This is most important for advanced and emerging technologies such as those identified in China’s Made in China 2025 initiative. Especially as World Trade Organization dispute efforts and existing legislation have not been successful in curbing Chinese market distorting practices, Congress should enact new framework legislation to guide such actions including both the creation of limitations to offset unfair Chinese competition, such as through excessive subsidies and the provision of resources and incentives to support American firms.  

For other sectors that are nonstrategic and where there are no market distortion factors, there can be practical cooperation through generally open trade (and that cooperation can carry over to “one world” issues such as climate change). But that conclusion should be subject to the caveat that access to the American market should depend on comparable access to China’s domestic market — yet such access is far from guaranteed given the constraints that China’s state-driven system establishes. An approach of achieving effective access through direct actions including bargaining by governments — such as Germany’s recent signing of eleven cooperation agreements or the apparent arrangement for significant Chinese purchases of American agricultural products — appears to be necessary since it will not be likely that any rules-based mechanism could be created to remove the many Chinese non-tariff and informal barriers that effectively prevent reciprocal access.

The net result of a strategy of managed competition would entail limitations as a consequence of strategic and important equitable market competition considerations, but would not result in wholesale decoupling of markets.

It should be clear, however, the character and far-ranging nature of Chinese state-directed economy is a significant challenge that needs to be met in part by a government response, albeit one that works through competitive markets and with privately-owned and commercially-motivated firms. Combined with the support to innovation, the establishment of fair and efficient markets for strategic sectors and advanced and emerging technologies will provide the elements critical to the future economy and security of the United States.

Franklin D. Kramer, a former Assistant Secretary of Defense for international security affairs, is a distinguished fellow and on the board of the Atlantic Council. This op-ed derives from the forthcoming “Meeting China’s Challenges: Managed Competition in a Multivector World,” that covers diplomatic, influence, and security issues as well as economic.