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

Clark Packard

Economics, Americas

Tarrifs harm American consumers and fighting the WTO (rather than using it) also undermines America's advantages.

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 Second, tariffs are an outdated tool that are totally self-defeating—woefully inadequate for today’s challenges.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.

To diversify supply chains outside of China in the region, the United States should quickly rejoin the Trans-Pacific Partnership (TPP). After the Trump administration unwisely abandoned TPP, the remaining countries moved forward with the agreement. American exporters now face discriminatory treatment in growing Asian markets. More importantly, TPP was designed to serve as a bulwark against China in the region—giving countries in Beijing’s orbit an alternative, rules-based market system. TPP can still be an important tool to challenge countries in the region, including non-TPP members like China, to raise its commercial standards while improving U.S. competitiveness.

To the extent trade restrictions are necessary, they should be narrowly tailored. For example, the United States could restrict technology exports to China with military applications. Likewise, the new investment review process under the Committee on Foreign Investment in the United States should be used judiciously and in a transparent manner when blocking foreign investment by Chinese firms in domestic firms in order to ensure that trade secrets and sensitive technologies are not transmitted to the government in Beijing.

To enhance our competitiveness, the United States should be encouraging more immigration. By next year, legal immigration will have declined by about 50% since the beginning of the Trump administration, according to a brand new study. The same study found that “the enrollment of new international students in the Fall 2020-21 academic year is projected to decline 63% to 98% from the 2018-2019 level.”

Restrictions on immigration may fire up the nationalist base of the Republican Party, but we will pay dearly for it over the long run. The data are crystal clear: immigration is a huge benefit to the U.S. economy and restrictionism will be a drag on growth and future competitiveness, leading to a less dynamic economy. For example, a 2010 study found that skilled immigrants are about twice as likely to be granted patents as non-immigrants because they “disproportionately [hold] science and engineering degrees.” Indeed, some of America’s most innovative and profitable companies—Google and eBay, for example—were founded by immigrants. If the United States wants to maintain its superiority in technology and innovation, we need more people coming to the country.

Likewise, now that China has effectively nullified the “one country, two systems” pledge it made to Hong Kong, Washington policymakers should send a powerful message to Beijing by granting every citizen in Hong Kong who wants to come to the United States a visa and a pathway to citizenship. Such a move would punish China for its lawlessness and benefit the United States’ economy in the long term.

With its retrograde trade and immigration policies, the Trump administration has proven itself to be fundamentally unserious about the challenges posed by Beijing. For the decades to come, the relationship between the United States and China will be front and center in the high stakes game of geopolitics. There will be inevitable frictions between the two superpowers as they compete for power and influence. Smarter trade and immigration policies can help give Washington a leg up.

Clark Packard is a resident fellow and trade policy counsel at the R Street Institute.

Image: Reuters