National Review

Trading with the Dragon

Workers at a production workshop of a chip manufacturing company in Suqian, China, on July 12, 2023. (Costfoto/NurPhoto via Getty Images)
Workers at a production workshop of a chip manufacturing company in Suqian, China, on July 12, 2023. (Costfoto/NurPhoto via Getty Images)

Wars have a way of crystallizing the essential. Fighting in Europe and the Middle East has revealed the downsides of interdependent economies. The pandemic had already exposed the vulnerability of supply chains: A wide swath of the American public learned what the United States could and could not manufacture and started to wonder about the implications for our military readiness.

Geopolitical changes are at the root of these vulnerabilities. The primary shift has been the rise of China as an adversarial state.

The result is a geopolitical awakening that forces us to balance the efficiencies of globalization with national-security requirements.

The United States faces several simultaneous challenges: how to decouple from China to protect U.S. national-security interests; how to restore American manufacturing capabilities in key sectors; and how to ensure that America remains a technologically powerful and innovative nation. All of the problems are intertwined, and all likely require greater government involvement.

The current understanding of decoupling holds that the United States must reduce its dependencies on China. The U.S. relies too heavily on crucial components from China — from critical minerals to magnets, energetic materials to pharmaceuticals. This means that Chinese components are required to produce many U.S. weapon systems as well as things such as armor-piercing bullets and explosives, radars, satellites, and more. In addition, many policy-makers worry that China could weaponize antibiotics and other drugs.

After entering the global trading system, China set in motion its strategic goal of developing its advanced manufacturing sectors so that it could eventually become self-sufficient in areas such as batteries, mineral processing, and advanced materials as well as in foundational technologies including AI, biotech, financial technologies (fintech), robotics, and quantum computing.

China grew dramatically. In the mid 2000s, the World Bank called China’s GDP growth “the fastest sustained expansion by a major economy in history.” The CCP at first deliberately developed stronger links with the United States and Europe, using forced technology transfers, intellectual-property theft, and other unfair trade practices to advance its industries at the expense of others.

The United States had focused on reaping the benefits of globalization’s efficiencies and comparative advantages. So, for example, skilled engineers designed complex microchips in the United States but production was exported to low-cost factories across Asia. The United States embraced its role as a highly skilled service economy whose consumers would reap the benefits of cheaper products made around the world.

This division of labor assumed that democracy was ascendant and that interdependence was mutually beneficial. As former World Bank president Robert Zoellick put it in 2005, the dominant policy view was that China would become a “responsible stakeholder” in the liberal international order. Security considerations had little weight in these decisions because, for a long time, Americans did not view China as a serious national-security threat. The United States was a unipolar power, dominant militarily. Non-state threats such as ISIS were a greater concern. (Europe, while somewhat worried about Russia, was also tied economically to Moscow through energy interdependence.)

But the West’s fundamental assumptions did not pan out. The United States began to decline relative to China and other powers.

Experts began to heed the statements of past Chinese leaders, such as Deng Xiaoping’s mantra “Hide your strength and bide your time.” Two decades later, Xi Jinping would say that “time and momentum are on our side.” China was pursuing, according to one scholar, a “strategy of displacement,” seeking to supersede the United States as the world’s leading state.

By 2015, Beijing had made its goals clear. The CCP’s “Made in China” plan identified ten technology and industrial sectors in which it sought dominance.

The U.S. national-security community has had growing concerns about these ambitions for some time. It watched as China used IP theft — but also sophisticated investment strategies — to siphon off U.S. innovations and technology. A Defense Department report begun in the Obama administration in 2015 and published in the Trump administration explored China’s “multi-decade plan to transfer technology,” particularly through “increasing levels of investment and acquisitions of U.S. companies” that focused on technologies that would be “foundational for future innovations both for commercial and military applications.” By 2017, with the Trump administration’s national-security strategy document having identified China as a strategic competitor, a set of policy shifts began both to protect the U.S. from illicit technology transfers and to augment American advantages.

In particular, Trump advanced the idea of reciprocity: that a country should have market access for trade only if it reciprocates and that when a country injures your interests, you return the favor. As former deputy national-security adviser Matt Pottinger said, “it’s an inherently defensive approach, rooted in notions of fair play and deterrence.” Applied to decoupling, it was the sense that, given China’s unfair trade practices vis-à-vis U.S. companies, we were better off reducing our dependencies. As Trump later put it, “We will make America into the manufacturing superpower of the world and will end our reliance on China once and for all, . . . because we can’t rely on China.”

The Biden administration is now pursuing a “modern industrial and innovation strategy” to decrease American dependence on China. This involves identifying sectors that are foundational to economic growth, strategic for our national security, and lacking sufficient private investment. The administration has sought to contrast this approach, which it describes with the analogy of creating a “small yard, high fence,” with a broader economy-wide decoupling.

By early 2023, even the European Union was expressing a need to protect itself from an increasingly assertive China whose goal was, as national-security adviser Jake Sullivan put it, to install “systemic change of the international order with China at its center.” The European Commission president, Ursula von der Leyen, pointed out that the “imperative for security and control now trumps the logic of free markets and open trade.” She was quite specific about the dangers of working with China, whose companies are “obliged by law to assist state intelligence-gathering operations.” She cited the CCP’s determination to increase dependence on China for critical raw materials such as cobalt. Overall, the EU called for “de-risking” — reducing its exposure to China’s manipulations, particularly in key technology sectors.

The new consensus among policy-makers was that technology was central to the competition over political and economic systems. Technology offered the means by which those systems are changed and was an arena of competition itself. The United States and its allies, therefore, needed to grow key capabilities while slowing China’s growth in certain sectors. The CHIPS Act became the model for this approach, with some $52 billion allocated to grow the American microchip industry. At the same time, the Biden administration imposed export controls to make it harder for China to acquire the materials it needed to manufacture advanced microchips.

These national-security worries aligned with a chorus of concerns about the decline of America’s manufacturing base. In the 2000s, America lost close to 6 million manufacturing jobs, exceeding the rate of loss in the Great Depression.

Scholars such as Oren Cass and public officials including Senator J. D. Vance and the former U.S. trade representative Robert Lighthizer raised concerns about how China’s unfair trade practices had contributed to hollowing out American manufacturing sectors. Lighthizer argued that Americans want a trade policy that supports “the kind of society they want to live in,” one in which most citizens, including those without college educations, could access the middle class through stable, well-compensated jobs — many of which would be in manufacturing.

In addition, prominent scholars began to point out that manufacturing was inextricably linked to the innovation that had long been considered a strength of the American economy, since innovations often arise from what is learned in the manufacturing process.

Despite the growing consensus on the threats posed by China, debates continue over how best to meet them.

The playing field clearly is not level — and hasn’t been for decades. Almost no one is arguing that China has achieved its strength in a free and unfettered market. In the distorted market in which we actually operate, a hands-off U.S. policy has not created optimal national-security outcomes. We no longer produce the leading-edge microchips or have access to the chemical compounds that are critical to advanced weapon systems; we have decided not to process the minerals needed for weapons and other systems; and, despite concerns about China, from 2017 through 2020, Western companies doubled down on their investments in China’s chip sector.

The United States has a long history of economic statecraft and industrial strategy, particularly in the national-security realm. Treasury Secretary Alexander Hamilton proposed the first industrial strategy — including steep tariffs — to encourage growth in manufacturing. He recognized that without manufacturing, the nation would be dependent on European imports, especially for armaments. During World War II, the U.S. adopted policies to encourage technology development when Vannevar Bush, FDR’s science adviser, created the system of federally funded research universities tightly linked with government agencies, industry, and the military. This network is credited with developments — such as nuclear weapons — that won the war. During the Cold War, national-security leaders in Washington developed an industrial strategy to build up technologies required for victory in the space race; they included rockets, satellites, and semiconductors. And even during the 1980s, the heart of the Reagan years, Americans debated industrial policy. A private-sector group, the Council on Competitiveness, hoped for a “new synthesis” in which the federal government would join forces with industry in a national competitive strategy.

We ought to consider four broad approaches to industrial policy that could provide a foundation for a “least worst” approach.

First, reduce barriers to economic activity. We need to end regulatory absurdities and adopt permitting reforms that have been called for by figures such as Senator Joe Manchin and former president Trump. If we are facing national-security imperatives, we must take risks as well. According to the U.S. Chamber of Commerce, regulatory requirements such as those of the National Environmental Policy Act (NEPA) remain a large barrier to the growth of America’s semiconductor ecosystem. Past assessments have shown that, across all federal agencies, the average completion time for environmental-impact studies is close to five years. Similarly, extraneous requirements attached to technology policies only make it harder to achieve national-security goals. For example, as the Commerce Department prepares to spend hundreds of millions to create regional “technology hubs” focused on areas such as AI, advanced materials science, quantum computing, and biotechnology, it is also requiring prospective grantees to explain how they will pursue “net-zero goals,” account for “current and future weather- and climate-related risks,” and address “environmental justice concerns.” Injecting these domestic political agendas into already complex national-security requirements will only lead to greater delays, bloat, and cynicism.

Second, we should consider encouraging more competition among the states — since local governance tends to be more effective (the principle of subsidiarity). While the federal government can provide strategic focus — creating the architecture for tax incentives and more, it is at the state and local levels that facilities will be built, incentives and tax benefits will be directed, and workers will be trained and employed.

Third, demand transparency. Taxpayers, as well as policy officials, have a right to know where funding is going and how projects are coming along. Keep this information accessible, auditable, digestible, and timely. We should not have to depend on myriad internet searches or beg ChatGPT to provide us with information. The CHIPS Act was passed in August 2022, and there has been little information since about the expenditure of its funds. In the fall of 2023, it was reported that Commerce had not given out any money yet and that “the first hints of who might get it aren’t expected until later this year.” This means that it will take many more years to see any concrete benefits from CHIPS. While there are many recent announcements related to openings for grants, the key will be to have data on who gets what and on what the actual outcomes are.

Finally, protect against China’s ongoing efforts to siphon American expertise. Additional funding for R & D may be warranted, but we must in any case prevent adversaries from reaping the benefits of U.S. training and innovation. Derek , a scholar at the American Enterprise Institute, noted that research-security provisions to prevent illicit acquisition of technology have been stripped out of key bills — apparently because of lobbying by universities. Another recent study found, disturbingly, that at least 154 Chinese scientists who worked on government-sponsored research at one of our most important national laboratories had thereafter been recruited to do scientific work in China.

It is not up to the United States to change China — we can’t. But it is up to our leaders to protect our interests as well as they can. These four recommendations would be an excellent start.

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