While there are many similarities between the old Cold War with the Soviet Union and the new cold war with China, there is at least one major difference: The United States never had a significant economic relationship with the U.S.S.R. China, by contrast, was America’s third-largest market for exports and its largest source of imports in 2020. A single factory in China makes roughly half the world’s iPhones, and concerns this week about China’s growth slowing because of pandemic lockdowns and the wave of protests there led to a precipitous fall in U.S. stock markets.
Therefore, Washington has to walk a fine line in dealing with Beijing: We need to ensure that our technology does not power the Chinese military and that we have secure supply chains for vital parts such as semiconductors. But we can’t simply build a metaphorical wall between our two economies. Even at a time of rising U.S.-China tensions, trade must go on.
Figuring out the right balance between confrontation and cooperation in dealing with China is a lot more difficult than pursuing a containment policy with the Soviet Union. The Biden administration is struggling to find the right approach. It’s gotten two major things right — and one major thing wrong.
The smartest move Congress has made to compete with China was the passage in August of the Chips and Science Act, which will commit $280 billion over the next 10 years to increase U.S. technological competitiveness. One of the legislation’s goals is to boost domestic production of semiconductors; the United States makes only 12 percent of the world’s microchips compared with 37 percent in the 1990s. That should help the United States weather a potential crisis over Taiwan, the world’s largest semiconductor manufacturer.
There are still risks involved in any industrial policy — for example, what if the government backs the wrong companies or technologies? But in this case, the United States has no other choice to ensure its economic security.
The export regulations issued by the Biden administration in October, which ban exports of cutting edge U.S. chip-making technology to China, represent a bigger gamble. The impetus for this move is concern about high-end U.S. technology winding up in Chinese weapons systems, yet it applies across the board because there is no way to prevent civilian technology from being utilized for military purposes. Singapore’s foreign minister described this executive order as “all but a declaration of a technology war,” and so far it’s a unilateral war.
The administration had hoped to announce an international alliance to limit China’s access to the most advanced chips, but key players in the industry, including the Netherlands and Japan, have serious reservations about the U.S. approach. U.S. sanctions could backfire if they lead to tensions not only with China but also with America’s allies. China could develop its own advanced microchip manufacturing capability much faster if it receives help from foreign firms. To get allies to go along with the U.S. restrictions, President Biden must do more to convince them that he is intent only on limiting China’s military threat — not its economic rise.
On balance, the export controls still make sense. The same cannot be said of the Biden administration’s approach to other trade issues with China. In 2018, President Donald Trump imposed tariffs of up to 25 percent on roughly two-thirds of U.S. imports from China, amounting to $335 billion. Those tariffs have failed in every way imaginable. They raised prices (and therefore inflation) for American consumers, slashed agricultural exports, failed to increase U.S. manufacturing employment, and had little impact on the U.S. trade deficit with China. One study estimates they cost 245,000 U.S. jobs. Yet Biden refuses to revoke the Trump tariffs, presumably because he wants to be seen as defending “the middle class” and doesn’t want to be seen as soft on China.
Biden’s embrace of protectionism has also kept him from rejoining the Trans-Pacific Partnership, an important trade agreement among 12 Asia-Pacific nations negotiated by the Obama-Biden administration that Trump foolishly left. Instead, Biden has launched an ineffectual knockoff called the Indo-Pacific Economic Framework that is doomed to fail because it does not offer any expanded access to the U.S. market.
Meanwhile, Biden just signed a protectionist bill that alienates the very allies that we need to marshal against China. The Inflation Reduction Act provides a $7,500 tax credit to buy electric vehicles assembled in North America. South Korean, Japanese and German automakers are irate that they will lose sales as a result.
The United States has no real counter to the Regional Comprehensive Economic Partnership that China concluded in 2020 with 14 other countries, including close U.S. allies South Korea, Japan and Australia. In the battle for trade expansion, we are engaged in unilateral disarmament. There is, in fact, precious little difference between Trump and Biden on these issues.
A bipartisan consensus has developed in Washington that free trade, particularly with China, costs U.S. jobs. But that consensus rests on a shaky empirical foundation. As summarized in the Harvard Business Review, the economic literature shows “that some U.S. regions lost manufacturing jobs as a result of trade with China in the early 2000s, but that trend has ended.” Moreover, even in the early 2000s, there is evidence that trade with China boosted total U.S. employment by creating new service-sector jobs.
Biden is right to support U.S. technology development and to limit cutting-edge chip exports to China, but he is making a major mistake by turning his back on free trade. China is looking to expand its international trade; we should be doing the same rather than crouching in a MAGA bunker. If we are going to be locked in economic competition with China, we need to play offense as well as defense.