The best way for US to counter China in the Indo-Pacific

Delegations from 14 nations will meet in Los Angeles this week to put some meat on the bones of Joe Biden’s Indo-Pacific Economic Framework. The grouping includes the largest economies in Asia, minus China, leading to the narrative that this is the administration’s attempt to lead a decoupling from China to rebuild American economic leadership and relevance.

There is truth in this, but it needs to be understood in its proper context. Economic decoupling is terminology that gained traction during the Trump administration when that administration levied tariffs and other executive order measures against China. While China does not use the term “decoupling,” it has been pursuing a far more ambitious and aggressive version of economic separation from America — long before the latter fell out of love with unfettered globalization.

Indeed, Beijing has sought to restrict its economic exposure and dependence on America for decades. In more recent times, defense has turned into attack in China seeking to establish a Sinocentric economic order in Eurasia and the Western Pacific that excludes America in important respects and limits American involvement in others. The bad news is that Beijing has a considerable head start on Washington. The good news is that America retains powerful and even decisive options to ensure partial decoupling occurs on its terms.

Take the Belt and Road Initiative which is not generally conceived as part of a Chinese decoupling grand strategy. There are understandable economic benefits for China to advance the BRI, not least to create projects and external markets for its large and lumbering capital-intensive infrastructure and construction firms. But consider what else it is designed to achieve.

One goal is to build regional Sino-centric infrastructure, platforms and institutions which will facilitate trade, investment and other beneficial economic exchanges between China and countries within the BRI. If this sounds all quite innocent, we need to look at what the Sino-centric model looks like in practice. The immediate goal might have been to create external capital investment opportunities for Chinese firms. But the greater and grander purpose is to ensure that roads, rail, ports, cables, digital networks, and infrastructure begin and end in Chinese provinces — and operate on terms favorable to Chinese interests.

Bear in mind that using state resources to build the vast Sino-centric economic system within which Chinese firms and entities dominate means the latter is in an insurmountable position of strength to negotiate the conditions for any deal. Disputes and disagreements will not be resolved by pre-existing laws and rules but though a negotiation where Chinese political and economic leverage is brought to bear, or according to BRI rules and processes drafted by Beijing.

Additionally, and with a greatly reduced commercial presence in Eurasia and the Western Pacific, the capacity for American firms and authorities to either set or revise commercial and quality standards in all sectors is greatly diminished. Once such standards are set, it is expensive and usually prohibitive for firms and economies to operate in a different economic ecosystem. When combined with Sino-centric infrastructure, institutions, logistical networks etc., regional economies become captive to China while outsiders such as America are in a much weaker position from which to enter or impose themselves.

That Chinese economic policy is the earlier and primary trigger for the unravelling of globalisation is further evidenced by complementary plans such as Made in China 2025 and the more recent Dual Circulation Policy (DCP). These plans seek not just technological self-sufficiency but Chinese control over — and dominance of — entire manufacturing processes, supply chains, and associated services in the most important and lucrative high-tech sectors. The explicit objective is not simply to ensure China becomes an advanced and innovative economy but that it controls the global supply chains, innovation, and know-how required to ensure Chinese firms permanently dominate these sectors in global markets.

Now the good news. The IPEF is better than nothing, but the quick-fix way to outflank China is for America to find the political courage to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and go from there. This would give regional nations better alternatives that avoid Chinese economic and technological capture.    

Meanwhile, it is essential to prevent Chinese dominance in sectors such as artificial intelligence, advance robotics, new synthetic materials, and next generation integrated circuits. Fortunately, China is either a net importer of relevant technologies and know-how or else relies heavily on joint ventures with foreign firms in many of these sectors. One estimate is that about 80 percent of private-sector R&D money spent in China in the previous decade was by non-Chinese multinationals, mainly headquartered in America.

Washington should scrutinize and restrict capital into China that feeds directly into its MIC2025 and DCP plans. The administration should also consider onerous restrictions or outright bans on some categories of investment into China — or Chinese investment into America — such as computer systems design, biotechnology, and life sciences.

Globalization as we knew it is over, and partial decoupling is inevitable. The question is whether America can decouple on its preferred terms, or the reverse occurs.

Dr. John Lee is a senior fellow at the Hudson Institute in Washington, D.C. From 2016-2018, he was senior national security adviser to the Australian Foreign Minister. His monograph, “Countering China’s Approach to Decoupling from the United States” was launched on Sept. 6, and is available at www.Hudson.org