The New Cold War
America, China, and the Echoes of History
The verdict is in on U.S. President Donald Trump’s trade war with China. Regardless of whether U.S. negotiators soon reach a deal with Beijing, the administration’s initial gambit has run aground. After wreaking havoc on portions of the U.S. economy with his trade policies, the president is now angling to freeze or roll back tariffs on Chinese products in exchange for almost nothing. Deal or no deal in the coming days, it is clear that the United States needs a fundamentally different approach to economic competition with China—one that bolsters U.S. technological and financial power while countering Beijing’s malign activities directly.
Tariff hikes haven’t forced Beijing to capitulate. Chinese negotiators are reportedly making only vague commitments to assuage U.S. concerns about currency manipulation and intellectual property theft. They have refused outright to accept a much-needed enforcement mechanism on international trade practices or to make structural reforms to promote economic competition at home and abroad. At best, Beijing will restore agricultural purchases to pre–trade war levels, offering as its biggest concession something it wants to do anyway: let in more U.S. capital to balance China’s checkbook and reenergize sluggish growth.
Part of the Trump administration’s problem is that it is divided over what exactly it is trying to achieve with the trade war. One camp sees higher tariffs as leverage to compel Beijing to abandon industrial policies that harm the United States. Such an approach might have worked better if the tariffs had been implemented by allies as well as the United States. But leaders in Beijing haven’t budged on unwinding their state-led economic model. To the contrary, the country’s chief negotiator, Vice Premier Liu He, announced recently that China aims to make its public sector “stronger, better and bigger.”
Another camp within the Trump administration champions tariffs as part of a comprehensive “decoupling” of the world’s two largest economies. Yet while the United States certainly needs to recalibrate its economic relationship with China, an abrupt separation would incur enormous and unnecessary costs. Decoupling—particularly if unilateral and without requisite investments at home—is more likely to isolate the United States than China, engendering a world in which Beijing has control over leading technologies, data, and standards and sets global trade and investment rules in its favor. Fortunately, such an outcome is readily avoidable, but only if Washington focuses on outpacing China with a more competitive strategy.
Such a strategy should begin with ambitious U.S. investments in scientific, technological, and financial innovation, supercharging research and development (R&D) in critical areas where China has gained or is gaining a competitive edge. But it must go beyond that, sustaining ties with China where commercial exchange benefits the U.S. economy while at the same time developing more powerful safeguards to protect and advance vital U.S. technological advantages. This should include, among other things, building a coalition of allies to design and create new rules and institutions for trade, technology, and investment that level the playing field and erode Beijing’s ability to profit from anticompetitive practices.
An effective strategy for competing with China should start with innovation at home. The United States should boost U.S. R&D spending, nurture and recruit talent, and provide public goods to support U.S. research. China is on track to surpass the United States in total R&D spending as early as 2019. To sustain its technological advantage, the United States should increase federal R&D spending from 0.7 percent of GDP last year to 1.2 percent of GDP and strive to bring combined public and private spending to four percent of GDP by 2030.
In addition to investing in education, the United States should take steps to attract the best and brightest from around the world, such as expanding high-skilled visa programs. The federal government should further invest in leading-edge public goods, including data sets for researchers and better computing resources for universities, to help unlock innovation in critical areas such as artificial intelligence. When it comes to other strategic technologies such as 5G wireless networks, the U.S. government can help American companies compete with China’s state-backed “national champions” by combining R&D spending, tax incentives, and government buying power to encourage markets toward more diverse and competitive ecosystems.
But investing in innovation isn’t enough. China continues to prey on American openness and to exploit U.S. technology for malign purposes. The United States should therefore adopt more powerful measures to counter systematic intellectual property theft and forced technology transfer. The U.S. government has already stepped up screening of foreign investments and increased counterespionage investigations. But the State Department, Federal Bureau of Investigation, and intelligence community should work together to develop enhanced visa-screening criteria to identify espionage risks. The FBI should also increase its collaboration with universities in order to combat academic espionage, while seeking wherever possible to preserve academic and research exchanges that enable “brain gain” for the United States. To that end, the FBI should bring back the National Security Higher Education Advisory Board, which facilitated communication between universities and the national security community on counterintelligence threats, among other issues, until the FBI dissolved it in 2018.
China continues to prey on American openness and to exploit U.S. technology for malign purposes.
The United States also needs stronger guardrails to prevent the transfer of U.S. technology to China for illicit or repressive purposes. In October, the Trump administration took an important initial step by placing eight Chinese tech firms responsible for human rights abuses on the Commerce Department’s Entity List, which generally bars companies in the United States from exporting to designated entities. The administration should add to the Entity List organizations linked to the People’s Liberation Army and prohibit work and study visas for individuals who are employed, funded, or sponsored by the PLA. The Commerce Department should also expand export controls based on end use, thereby requiring U.S. companies to conduct greater due diligence to ensure that their products don’t enable activities that run counter to U.S. values and interests, including human rights abuses, repressive surveillance, cyber-espionage, or use by China’s military and security services.
With these protections in place, U.S. companies could more securely engage with China on many dual-use emerging technologies. But stricter export controls are still necessary for certain critical technologies. To protect its competitive edge in artificial intelligence, Washington should coordinate with allies such as Japan and the Netherlands to prohibit the export to China of semiconductor manufacturing equipment and design tools. At the same time, the United States should diversify and secure its own sources of key technology inputs, including those related to semiconductor manufacturing and rare earth minerals, to mitigate the risk of disruption to U.S. supply chains.
Similar competitive measures are needed in the world of finance, where China is increasingly challenging the United States as well. Alongside technological advantages, financial power is among the United States’ greatest sources of international influence. It generates enormous U.S. wealth, provides the basis for sanctions authority, and allows the United States to set rules and norms on investment, state subsidies, market distortions, and trading practices. To sustain this power, the United States must ensure that its financial system remains a transparent, stable, and attractive market for the world to create and store wealth. China does its best to exploit what opacity exists in the system and to further muddy the waters when doing so serves its interests. Congress should therefore legislate an end to anonymous corporations and shed light on shell games and illicit operations by requiring those who control companies to declare themselves. Congress should also require foreign companies—including Chinese ones—that list securities on U.S. exchanges to comply with the same audit and disclosure requirements that apply to U.S. firms. This will help investors assess risk and support market stability.
China has launched its own payments facility and seeks opportunities to internationalize its currency to erode the dominance of the U.S. dollar.
At the same time, the United States should discourage the development of alternative, foreign payments or clearing mechanisms that seek to evade U.S. jurisdiction. China has launched its own payments facility and seeks opportunities to internationalize its currency—both fiat and virtual—to erode the dominance of the U.S. dollar. The United States should work to beat out foreign cross-border payment mechanisms by promoting U.S.-based or U.S.-linked alternatives that improve efficiency, lower costs, offer privacy, and have full digital functionality. The United States should also encourage European payment mechanisms for humanitarian trade with Iran or other sanctioned countries so long as they do not violate U.S. sanctions. This will diminish growing sanctions-busting sentiment abroad.
With China making aggressive investments in financial technology, the U.S. administration should support a regulatory posture that provides more active support, flexibility, and guidance to U.S. developers. Through such an approach, regulators can help U.S. firms better compete against foreign firms, including Chinese ones. In particular, the United States should look to support financial technology development for domestic and cross-border insurance, lending, payments, settlement, clearing, and tokenized assets applications, all of which will help make the U.S. financial sector more competitive, efficient, and reliable. Leading the field in these areas will also help U.S. firms beat out the competition to capture billions of new financial sector entrants across Asia, Africa, and Latin America.
The U.S. government should also do more to promote the development of blockchain technology, which will be critical for increasing the efficiency, sophistication, automation, and cost-effectiveness of financial applications, supply chains, and contracting—all of which will make the U.S. economy stronger. U.S. policymakers should leverage federal research grants and procurement, as well as regulatory and licensing support, to encourage the development of blockchain-based financial and supply chain applications. This should include open-source software that can be used by multiple developers, elevates principles of privacy and reliability, and discourages illegitimate surveillance in service provision. As U.S. blockchain developers become more sophisticated and competitive, they will put American firms in a stronger position to serve the U.S. market and compete for underbanked populations globally.
When it comes to countering China, Washington’s approach to coordinating with allies has been ad hoc at best. A more structured framework for multilateral cooperation, particularly on technology policy, is needed. The United States should work with advanced democratic allies to develop a new intergovernmental body to promote collaboration and coordination on R&D spending, supply chain security, standards setting, export controls, foreign investment screening, and norms for sensitive technology use. In some key areas, such as 5G and semiconductor manufacturing, the United States should work with allies to build consortia of trusted and secure vendors. U.S. officials should also engage more proactively in international technology standards setting, especially in 5G, where China has aggressively pursued international standards that would advantage its national champions.
Additionally, the United States should pursue new multilateral agreements with Asia-Pacific and European nations that set high standards for trade and investment. These agreements will grow the U.S. economy while also helping U.S. partners reduce their economic dependence on China. They will also expand the portion of the global economy committed to free and fair trade rules on labor, the environment, currency, and intellectual property. For similar reasons, the U.S. trade representative should articulate conditions under which the United States would join the successor agreement to the Trans-Pacific Partnership and work toward a digital trade agreement with the European Union and other close security partners and advanced economies.
China is a formidable challenger, but the United States can still compete favorably against it. Doing so will require a fundamental rethink of U.S. strategy. Having observed the dramatic shortcomings of the tariff war, Washington should move quickly to renew American competitiveness by bolstering innovation, advancing technological and financial power, and countering China’s harmful activities with the help of allies and partners.