How to Compete With China by Relying on America’s Strengths

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byClark Packard

With the coronavirus, China effectively annexing Hong Kong through the new national security law, a blistering speech from the U.S. Secretary of State and the closing of consulates in Houston and Chengdu, tensions between the world’s two largest economies are reaching a fevered pitch. Politicians and pundits are now routinely referring to the deteriorating relationship as a new “cold war.” The analogy is flawed, but China does pose serious challenges to the global economic order. And it is well past time to confront those challenges in a thoughtful, responsible manner, one that relies on America’s traditional strengths instead of erecting walls to trade and immigration.

For starters, the United States has legitimate complaints about China’s economic model. Though imperfect and lacking some nuance, the U.S. Trade Representative’s 2018 report on China’s commercial practices formed the basis of the Trump administration’s trade war with Beijing. The litany of grievances includes forced technology transfer from American firms to domestic firms as a condition of doing business in China, cyber intrusions into commercial networks, theft of trade secrets, massive subsidies to state-owned enterprises and intellectual property abuses. The new Beltway consensus is that the United States is too dependent on China for critical or strategic products like medical equipment, pharmaceuticals and certain technologies like semiconductors.

So how should the United States respond to China’s economic challenges?

As a preliminary matter, policymakers must accept two hard truths. First, they should understand that there is no silver bullet with respect to fundamentally transforming China’s economic model. The problems are multidimensional and patience is required. Change will be largely driven by Beijing, not by Washington. That’s not to say Washington is helpless, but recognizing the limits of economic statecraft is important. Second, tariffs are an outdated tool that are totally self-defeating—woefully inadequate for today’s challenges. Countless studies have shown that American consumers, not Chinese exporters, are paying for those the tariffs. Likewise, the tariffs have triggered retaliation as American farmers and ranchers well know. Meanwhile, China hasn’t made significant reforms to its economic model and is, in fact, more reliant on state-owned enterprises to meet the purchase targets contained in the “Phase One” agreement. Weakening ourselves with sclerotic protectionism will not help contain troublesome commercial practices in Beijing.

Next, instead of waging a war of attrition on the World Trade Organization’s (WTO) Appellate Body as it has done over the last several years and thereby undermined the dispute settlement system more broadly, the United States should form a large coalition of WTO members who share our concerns about China’s economic practices and file a large, aggressive dispute against Beijing. Despite misleading rhetoric from the Trump administration, the WTO can be an effective tool to discipline some of China’s protectionist trade practices. While far from perfect, China has a decent record of complying with adverse WTO decisions.