The Biden Administration Is Right on China and Trade, but Must Aim Higher

May 21, 2023 Topic: China Region: Global Tags: ChinaBeijingTradeUnited StatesWTOEconomy

The Biden Administration Is Right on China and Trade, but Must Aim Higher

The White House’s proposed solutions to address China's economic challenge stops at domestic redistribution and subsidies in a few areas, which won’t alter the grander structural market force to reverse the trend in Beijing’s favor.

Get ready for a China-centered global order. The de-dollarization push, China-centered economic and security pacts along with ongoing efforts to build its sphere of influence, and the geared domestic dominance all indicate the end of Beijing’s traditional policy of “hide and bide.” Global leaders and CEOs flock to China as pilgrims. Macron signed multiple deals with the Middle Kingdom, including some related to deepening military cooperation despite allies’ disappointment and the ongoing war with Russia, China’s strategic partner. Hubristically, the Global Times, a jingoistic state-owned Chinese tabloid, chided South Korean president Yoon Suk Yeol for his U.S.-leaning visit as going “against the trend.”

The trend in question is that of China’s rapid ascent in international affairs through multiple fronts, particularly in the realm of trade and economics. National Security Advisor Jake Sullivan and scholar Hal Brands once sketched out China’s path toward global hegemony through economic power. Clearly, the glaring influence Beijing wields today does not come from its military—studies have long confirmed the notion that strong economic power is influence. Similarly, the Cold War was not simply won by military means, but via economic and ideological strength.

On these fronts, China is winning, rapidly becoming an economic and technological superpower. Just five years ago, the United States was worried about steel overproduction and Huawei. Today, there are concerns over semiconductors, which country is the largest auto exporter (hint: it’s not a Western country), and TikTok, which influences 150 million Americans. The United States increasingly feels passive and defensive in the influence race. The Global South, and regional powers such as Saudi Arabia and Brazil, are increasingly turning to China, praising a country that also happens to be their largest export market.

In fact, as the largest trading partner of over 120 countries, China has become a central hub for global production. Yet the most striking part is, again, the trend. According to the United Nations, in merely twenty years, China has increased its global share in mid-high- and high-technological production (value-added) from a single digit to nearly 40 percent, more than the G7 countries combined, and is poised to reach 50 percent by 2030. Such dominance is accompanied by deprived opportunities for others. Many tradable industries of the United States and others have sharply declined; many of these with economic and security implications. America has also lost its lead in most strategic technologies, according to the top 10 percent cited academic papers. All of this has unfolded ever since China joined the World Trade Organization (WTO).

The result has been a rapid shift in global power distribution in China’s favor, which is a fundamental factor that international relations theorists believe explains global politics and China’s increasing assertiveness and influence. Loss of industries, especially higher-end ones, impacts jobs, fiscal revenue, public goods, technology and innovation, global competitiveness, supply chain security, and economic and political polarization, particularly within civil society at large. The global market, on the other hand, incentivizes Chinese firms to reinvest continuously in technology, quality, and innovation. China is enjoying a breakout in almost every major industry.

The “Leviathan” Created by Global Trade

How did China achieve such power over global production?

The key lies in international trade, which has essentially enabled Beijing to reorganize global production in its favor. New research has pointed out that conventional trade theories based on comparative advantage are quite flawed, since for 90 percent of tradable industries, cost advantage is more applicable. Yet, cost advantage isn’t just low labor prices. As found in the author’s ongoing research, China’s unrivaled cost advantage is actually a “structural competitive advantage,” which arises from its unique economic and political system, gigantic size, and the interactions of all components. These components include state-led mercantilism, massive scale, currency policy, competitive business ecosystems, world-class human capital and infrastructure, technology diffusion and innovation networks, and various institutional and social advantages.

Some scholars have proposed various concepts naming this phenomenon. Terms such as “state capitalism,” “China Inc.,” “predatory trade,” or “brute force trade” have been thrown around. Behind the various terms though, what matters is that “structural competitive advantage” is why few other states, richer or poorer, cannot outcompete China, after it acquires know-how. As an example, the same Tesla electric vehicle models produced in Shanghai with most localized components are 20–30 percent cheaper than those made in Texas or Berlin. Likewise, Apple’s reliance on China has shifted from low labor costs to an unmatched “ecosystem” that can provide product design, components, apps, and more.

More importantly, China’s structural advantage behind its gigantic size of millions of Chinese firms and 900 million increasingly skilled workers is the “invisible hand” and powerful “market force” driving China to dominate most high-value and strategic sectors, with the rapid progress of technology mutually reinforcing each other. This advantage is present regardless of seemingly detrimental issues, such as a slowly aging population or a weak financial system. The resulting organic, competitive Chinese ecosystem can nullify U.S. industrial policies, such as the CHIPS Act, in the longer term. It also extends to advanced fields like artificial intelligence and biotechnology.

As a result of these factors, evaluating trade policy through localized winners and losers—such as a few firms, sectors, or consumers—makes less sense. When viewed as a nation as a whole, the prospect of free trade with China looks grim: it is leading to Beijing’s dominance, given its size, authoritarian nature, and global ambitions, and others’ weakness, dependency, and vulnerability. This reality even contradicts the original conception of free trade: the mutually-beneficial division of labor. Global trade has de facto created an unprecedented leviathan.

American Trade Policy Needs to Aim Big

The worker-centric trade policy of the Biden administration is born of the realization that free trade has failed to deliver for American workers. The United States also has been drawn into a subsidy war in a few “national security” areas whose outcome is uncertain and ignores many important industries—for example, automobiles, machinery, electronics, chemicals, etc. Additionally, Washington pays little attention to how China is deliberately integrating international trade into its grand strategy (e.g., using trade to de-dollarize, support Russia, coerce dissidents, build a new sphere of influence, or rupture the bonds between the United States and its allies).

As in Jake Sullivan indicated in his recent speech at Brookings Institution, the post-World War II free trade regime is unsustainable. This is not only due to the dysfunction of the WTO, but also because its assumptions no longer hold: the major powers are playing mercantilist games. Geopolitical rivalries make interdependence a dimming problem rather than a solution. WTO rules set twenty years ago did not take into account a tightly organized, non-market superpower party-state (hence, “China Inc.”) that also seeks to convert the current order.

Admittedly, the post-World War II economic order has experienced troubles and anomalies. The WTO was supposed to support a greater liberal order by trade. It has notably fallen short. Globalization disproportionately benefits only some, while leaving many behind. Moreover, the order has created an interdependence mess, as illustrated by the effects following Russia's invasion of Ukraine, Western sanctions applied in the aftermath, and Xi Jinping’s party-state securitization in China. To top it all off, the existing order does not, despite what adherents claim, particularly favor democracy, but rather mercantilism and autocracy: the top three trade surplus countries in 2022 were China, Russia, and Saudi Arabia. Free trade has slid from the one envisaged by Adam Smith and David Ricardo, oriented toward natural liberty and division of labor, to a predicament where one authoritarian, non-market superpower advances its own domination.

The Future is Bleak if the Trend is not Reversed

The United States has realized that expecting China to change course is hard—no one is going to change something that is bringing success. China follows its own agenda: realism and authoritarianism are the foundations undergirding CCP's behavior, with power considered essential and liberalism viewed as an existential threat.

Despite Sullivan’s correct diagnoses, his proposed solution stops at domestic redistribution and subsidies in a few areas, which won’t alter the grander structural market force to reverse the trend in China’s favor. The United States needs a larger, more sweeping strategy for China and trade. With China’s growing economic dominance, the world will be reshaped in an illiberal way, as predicted by scholars such as John Mearsheimer and Charles Glaser. Apart from the realms of technology and the military, this includes shaping global norms and rules detrimental to democracies: as with domestic rule, the Communist Party has no interest in an order upholding liberty, democracy, human rights, or transparency. Instead, its top-down model with leading technologies has shown the capability to undermine the existing order and its values.

It’s Not About Promoting, but rather Protecting Democracy

Not only are prosperity and security being undermined by the growing strength and attractiveness of “the China model,” but so are democratic values, a key pillar in both President Joe Biden’s and President Donald Trump’s 2022 and 2017 National Security Strategies. Today, autocrats around the world resurge, unite and crack down unscrupulously. As democracies continue to lose global market share to China, vital to prosperity and security, many problems they face today will not be reversed. Compared to a China model which attains high-value jobs and builds fancy infrastructure, democracy no longer appears to be the path to modernity and can look chaotic, less able to deliver, and less appealing to citizens, resulting in “existential” legitimacy issues. That is why leading expert Rush Doshi expresses concerns about the possibility of the United States becoming a “big Venezuela.”