National Interest May 23, 2024 U.S.-China Economic Competition Is Headed Down A Dangerous Path by Mathew Burrows

 

National Interest

May 23, 2024  

U.S.-China Economic Competition Is Headed Down A Dangerous Path

The Biden administration’s new tariffs will neither save American manufacturing nor reduce dependence on Chinese green technology. 

by Mathew Burrows 

Follow @matburrows on TwitterL Josef Braml Follow @Josef_Braml on TwitterL

As Biden and Trump compete over who can raise tariffs on China the most to win blue-collar votes, both ignore the disadvantages of protectionism and “derisking” from China. Specifically, the United States risks global leadership, economic growth, and progress against climate change as it turns away from China and imposes high tariffs.

This story is no longer told; the United States benefitted more than any other country from economic interdependence. There were undoubtedly labor losses during globalization, but the United States has been steadily losing manufacturing jobs since the 1980s, well before China became an economic powerhouse. Technological innovation and automation, more than outsourcing, were and remain a more significant threat to eliminating the demand for workers. The China Shock displaced an estimated 130,000 workers per year between 2000 and 2015, a “sliver” of the annual 60 million job separations. 

If there was a failure, it was a political one. Retraining programs have largely failed to deliver, while U.S. high schoolers’ educational attainments have dropped behind students from other nations. Understanding the actual cause of the U.S. middle-class distress is important if we don’t make the same mistake a second time. A recent Pew Research Center study found that nearly 60 percent of U.S. jobs had “varying levels of exposure to AI,” with almost a fifth the most exposed to AI. Many of the most exposed are well-paying middle-class jobs. Businesses are already suffering from a lack of skilled tech workers, and this will only worsen unless the U.S. educational system improves its skills training.

The Consequences of Disengaging

While tariffs are widely seen as protecting U.S. jobs, they are not a long-term answer. The Rhodium Group calculated in 2021 that if 25 percent tariffs were levied on all two-way U.S.-China trade, the United States would shed $190 billion in GDP annually by 2025. In the investment channel, if decoupling leads to the sale of half of the U.S. foreign direct investment (FDI) stock in China, U.S. investors would lose $25 billion per year in capital gains and one-time GDP losses of up to $500 billion. 

Walling yourself off economically from the rest of the world has unfortunate implications for U.S. global influence. In 2000, the United States was at the helm of global trade, with over 80 percent of countries trading with it more than China. By 2018, that number had dropped sharply to just 30 percent, as China had taken the top position in 128 of 190 countries. With China’s economy slowing, the United States could be in an advantageous position to expand and reinforce its influence capacity. However, its success will be conditioned on additional economic outreach, especially liberal trade agreements and further incorporation of the Global South into global decision-making. 

National Security Advisor Jake Sullivan promised that the Biden administration’s new strategy of protectionist measures against China and the new industrial policy would “build a fairer, more durable global economic order, for the benefit of ourselves and for people everywhere.” Ironically, by securing ourselves with protectionist barriers, we are only further ceding the ground to China, which has been a top provider of economic development assistance in addition to top trader. Economic growth alone won’t solve the problems of the poorest countries, but it’s an essential ingredient in tackling them. 

Decoupling Increases the Threat of Planetary Disaster and War

For some time, Beijing has been injecting capital into green technologies, borrowing innovations from elsewhere but producing at scale. With Biden’s IRA and CHIPS legislation, the United States is trying to outsmart China. However, realizing Biden’s ambitious climate goals without buying from China will require alternate sources of rare earth minerals and batteries necessary for a clean energy economy. 

The tariffs that Biden announced and Trump promised to heighten further will increase costs for U.S. consumers and likely prolong the global green transition. All the needed ingredients from critical minerals and their processing, as well as the manufacturing of green tech, are Chinese-dominated. China builds battery factories at practically half the price of those built in the United States or Europe due to lower labor and capital costs.

Some promising initiatives are underway to diversify battery supplies, but it will take some years to develop at scale. The Biden administration wants to break U.S. dependence on China, but full decoupling would slow down the progress made on decreasing the American carbon footprint. Despite the sizeable Western investment, it could take a decade or more for the United States and the West to catch up. Moreover, many of the costs of U.S. green energy relate to the difficulty of getting planning permits for renewable power projects or power grid expansions, obstacles that are not dealt with through any form of tariff policy. 

The risk is that the U.S. tariffs will become a crutch, not a breathing spell, for green-tech companies looking to catch up with their Chinese competitors. By contrast, European tariffs are expected to be more modest. Unfortunately, the message being sent by Washington not only to China but also to allies is that the latest tariffs set a precedent, and their trade could also be penalized, particularly under a Trump presidency. 

Ironically, the new higher tariff on “legacy” chips deals with a problem that the Biden administration helped create with its restrictions on advanced chips. With those earlier measures, Washington supercharged Beijing’s interest in its own chips industry and not just at the higher end. Legacy chips are defined as built on 28nm or larger process nodes, not leading-edge chips built on 16/14nm or below process. Legacy chips are ubiquitous and necessary for “the production of most automobiles, aircraft, home appliances, broadband, consumer electronics, factory automation systems, military systems, and medical devices.”

There is already worry among U.S. producers about the loss of access to the Chinese market. Washington intends to raise the urgency of derisking in critical sectors at the June G7 summit. In essence, Jake Sullivan’s “small yard” keeps growing despite efforts to avoid decoupling and reduced business for U.S. companies. The U.S. Chamber of Commerce in China estimates the loss of access to the Chinese market will result in decreased sales of $83 billion annually and a loss of 124,000 jobs for U.S. companies. Additionally, the Rhodium Group believes the costs to U.S. semiconductor manufacturing companies would range between $1.4 and $3 billion in annualized sales.

Will high tariffs deter China from attacking Taiwan? Or is it fueling resentment and hyper-nationalism that increases the risk of a Sino-U.S. war? The Chinese—who have themselves escalated tensions—are said to think a Cuban Missile-like crisis may be needed for both sides to recognize the dangerous game they are playing. Even if we are lucky in such a crisis and a hot war is avoided, the lack of cooperation risks squandering any chances to prevent our planet from disastrous warming. 

Is There A Better Way? 

Turning back the clock to globalization is impossible. Obsessed with competing with China, the U.S.’s moral leadership risks being tarnished if a good portion of those who rose and joined a fledging global middle class find themselves now re-impoverished from shortsighted trade policies. In Africa and other developing countries, democracy is losing out, and authoritarianism is gaining. The World Bank is asking for $120 billion from rich countries for development assistance and climate change aid for struggling nations.

Climate change must take precedence over competition with China. While it is up to U.S. voters whether they agree with the tariffs and higher costs, discouraging the rest of the world from buying Chinese green tech would be bad for the planet. Washington is reportedly worried about Chinese green tech swamping Latin America. The focus should be on scaling up green tech as fast as possible everywhere to help developing countries transition to renewables. 

The United States should expand its list of Inflation Reduction Act (IRA)-compliant trading partners in the developing world. Several Washington think tanks have called on Congress to extend and reauthorize AGOA as an FTA, enabling African economies to benefit from the IRA’s tax credits, for which membership in such an agreement is a prerequisite. African-produced minerals could strengthen broader U.S. efforts to reduce risks in supply chains for critical minerals and downstream products like semiconductors and electric vehicles. This would mean having to overlook Chinese involvement in the African minerals sector, which, given the stakes in the planet’s health, would seem justified. 

During the Cold War, the United States, with the Soviet Union and ten other countries from the Eastern and Western blocs, established in 1972 the Vienna-based International Institute for Applied Systems Analysis (IIASA) that used “scientific cooperation to build bridges across the Cold War divide and to confront growing global problems on an international scale.” Together, different states, including the United States, China, and others, could support “long-shot” civilian projects that are almost impossible for commercial companies to do. This would also mean allowing U.S. and Chinese scientists to work together. This could open new channels where Washington, Beijing, and others can cooperate and initiate joint endeavors that help us stem the tide toward conflict.

We live in dangerous times. More than a generation has passed since the benefits of internationalism and cooperation were “glaringly obvious,” as the historian Bear Braumoeller has noted. There are few inhibitions across the U.S. government toward seeing China as the enemy, while some strategists openly contemplate war. Trade is not a cure for war, but it keeps open channels of communication and increases the costs of belligerence. To the rest of the world, the United States appears merely as a “status quo power,” looking after its narrow interests. This is not the nation envisioned by Ronald Reagan as “a tall, proud city built on rocks stronger than oceans...a city with free ports that hummed with commerce and creativity.”