Getting China Policy Right
Recently, President Biden cautioned China was going to “eat us for lunch” if the U.S. didn’t match China’s investments in “transportation, the environment and a whole range of other things.” He raised concerns about Beijing’s “coercive and unfair economic practices, crackdown in Hong Kong, human rights abuses in Xinjiang, and increasingly assertive actions in the region, including toward Taiwan.” He said he was open to working together with Beijing, but only “when it benefits the American people.”
The President’s comments reflect the challenge of formulating a balanced China policy today, tough where needed, but capable of cooperation and collegiality as well.
China’s large economy and central position in global supply chains make it important for American businesses that create millions of U.S. jobs. Yet many of the policy directions Beijing is taking — including on cyberspace, technology transfer, anticompetitive practices, industrial planning, and many other areas — are not only antithetical to market-based competition but in numerous areas present growing national security risks.
The American China debate is no longer centered simply on “getting the biggest trade deal,” but rather on balancing economic efficiency against systemic and strategic considerations. However, U.S. firms and individuals have invested heavily in engagement with China, and our economies are intertwined. The costs of “decoupling” — even on a selective basis — are therefore significant. Where those costs can be reduced while assuring national security, we are better off for it.
National security is complex: openness can confer security benefits as well as risks. Forcing American firms to shun China without a clear assessment can be self-defeating not just for their bottom lines but also to our security. It is crucial for leaders to consider the interaction of markets and national security carefully as they pursue a “whole of government” response to challenges associated with China, so that we keep America safe without unnecessarily undermining our economic recovery.
The U.S. Chamber of Commerce and the Rhodium Group have worked together to explore the costs associated with a complete decoupling of the U.S. and China to better understand the interconnectedness of our two economies. The conclusion highlights the importance of an informed approach to our China policy: a full decoupling would significantly harm American businesses, our economy, and strategic industries, resulting in hundreds of billions in foregone output and capital gains, while undermining U.S. productivity and innovation. In the semiconductor industry, losing access to Chinese customers would cause $54 billion to $124 billion in lost U.S. output, risking more than 100,000 U.S. jobs, $12 billion in R&D spending, and $13 billion in capital spending. For the U.S. chemicals industry, the potential cost of the imposition of tariffs alone ranges from $10.2 billion in U.S. payroll and output reductions and 26,000 lost jobs, to $38 billion in output losses and nearly 100,000 lost jobs.
Beyond the numbers, we reach four larger conclusions for consideration as we debate the future U.S.-China economic relationship.
First, data analysis is critical to effective policymaking. China policy requires economic impact assessment, cost-benefit analysis, and a process of public debate and discovery.
Second, the costs of unrestrained decoupling are intolerably high. Comparing the price of decoupling with the national security payoff is key to making sound choices. Measures that reduce the costs to the U.S. economy while protecting our security — mitigation, diversification, even simple transparency with Beijing — deserve consideration.
Third, addressing the China challenge requires a broad U.S. policy spectrum. A tough line on China is far from sufficient: vast improvements in public health and infrastructure, investments and promotion of domestic innovation, preservation of rules-based, open market norms and many other elements are also essential if we are to remain a leader. Government has a greater role to play, but one with guardrails that ensures the vitality of market principles.
Finally, Washington must renew its attractiveness to international partners. No market economy can deal with China alone, especially when it comes to technology leadership. Unilateral decoupling erodes U.S. comparative advantage and is perilous for our firms and workers. Working with like-minded economies will be essential to our success.
For half a century, Americans opened their doors wider to trade, investment, travel and technology engagement with China, betting on a shared future and believing in the constructive power of commerce. Beijing’s reversion to state-driven, non-market designs requires us to reassess unlimited engagement, by relying on facts and data. American companies and workers need policies that are less permissive while avoiding gratuitous decoupling that raises costs without bringing benefits.
Charles Freeman is senior vice president of Asia at the U.S. Chamber of Commerce. Daniel Rosen is a founding partner of the Rhodium Group.