How to Win the U.S.-China Economic War

It is dawning on the United States that China is not just a military adversary but an economic one. The two countries are at war for primacy in both innovation and production capacity as much of Beijing’s economic gain in advanced industries comes at Washington’s loss—and vice versa. This trend is likely to continue. Chinese President Xi Jinping acknowledged as much last year when he stated, “Technological innovation has become the main battleground of the global playing field, and competition for tech dominance will grow unprecedentedly fierce.”

Economic war is distinct from economic competition. Canada and the United States, for example, compete economically, but both nations understand that trade is conducted on the basis of a mutually beneficial comparative advantage. By contrast, China has launched massive frontal assaults on U.S. technology and industry capabilities. Beijing’s 2006 National Medium- and Long-Term Plan for the Development of Science and Technology can be considered an initial strike in this conflict, followed in 2015 by Xi’s “Made in China 2025” strategy. Both identified key technologies in which China sought to achieve self-sufficiency, and both are backed by restrictions on foreign firms’ market access in key industries, widespread intellectual property theft, forced technology transfers, enormous subsidies for Chinese firms, and much more. The latter document also added numerical targets for China’s market share in leading industries.

Economic war is not unprecedented. From 1900 to 1945, Germany used a wide array of unfair trade practices to gain economic and political power globally, ultimately in service of its military power. But Beijing has taken economic war to another level. China’s long-standing and increasing attacks are designed to crush its competitors—and make the United States an economic vassal state.

Former U.S. President Donald Trump’s trade war was a response—albeit a poorly formulated one—to China’s long assaults on U.S. industrial and technological capabilities. At the time, most experts in Washington ascribed this to Trump’s protectionist proclivities rather than a recognition that the United States was in a full-scale economic war. It is only in the last few years that the intent and extent of China’s economic aggression has become more widely understood. U.S. President Joe Biden’s new export ban on advanced chips and semiconductor equipment to China is evidence that he and some people in his administration have caught on.

Despite Biden’s ban, the United States remains largely unprepared for a protracted economic war with China. Beijing’s innovation-mercantilist practices—which seek to gain a large share of advanced industry output by using tactics considered illegal by the World Trade Organization—go far beyond the industrial policies of other nations. Ignoring them and believing that China will change course—or assuming that China can’t succeed because it is not a democratic, free market country or has an aging population, as many U.S. policymakers do—is akin to putting its head in the sand and hoping for the best. The stakes are high: Winning the war will boost domestic wages, competitiveness, and economic and national security. Losing will do the opposite.

Such a system is largely absent for economic warfare. There is no planning. No assessment. No strategy. No economic security system. At best, there are individual programs and initiatives that fail to constitute a whole-of-government strategy or system. Absent an invasion of Taiwan, it seems there is no Chinese economic attack that could awaken Washington from its slumbers.

Most of Washington does not—at least yet—see economic relations with Beijing in win-lose terms. Although policymakers understand that foreign adversaries can and do attack vital U.S. national security interests, they are less willing to acknowledge that the same can be true when it comes to vital U.S. economic interests. Indeed, most economic advisors still proffer the notion of comparative advantage, where trade is a mutually beneficial win-win. The United States, they say, might be good at producing passenger jets, whereas China is good at producing 5G equipment.

But China’s massive subsidies and other unfair practices used to build up advanced domestic industries—in telecommunications equipment, high-speed rails, construction equipment, aerospace, semiconductors, biotechnology, clean energy, automobiles, computing, artificial intelligence, and more—have nothing to do with comparative advantage. They reflect a desire for dominance through industrial predation: boosting their own firms while crushing foreign competitors’ ability to compete. This is why there is a strong negative correlation between the change in the respective shares of global output that China and the United States held in advanced industries from 1995 to 2018. In other words, China gained shares in the industries the United States lost.

Washington also persists in holding on to the free market doctrine that firms maximize economic welfare when they act in their own interests without government aid or strategic direction. Yet even the most devoted follower of economists Adam Smith or Friedrich Hayek believes that market forces alone will not generate a nation’s needed military capabilities. That’s why governments must intervene and plan. But too many experts in Washington don’t extend that logic to capabilities for economic war.

To be sure, economic war and military war are different; there are few, if any, direct casualties from economic war, and battles take place over a much longer period of time. But both ultimately threaten the ability of the state to exist autonomously.

The question, then, is how to develop and operationalize such a strategy. To date, the federal government has failed to generate a real U.S. economic competitiveness strategy. Rather, to the extent that U.S. administrations produce anything on this topic, it is usually lists of accomplishments, favored policies, or future policy intentions. This is seen in the recently launched White House bioeconomy initiative, which proposed how to grow the U.S. biotech industry but is not grounded in competitive industry analysis. The program is also narrow, led by the Office of Science and Technology Policy. Any effective biotech industry strategy—especially vis-à-vis China—needs to incorporate trade policy, tax policy, regulatory policy, and much more.

One key reason there has not been a coherent U.S. industrial strategy is that there is no entity whose job it is to craft one and ensure all government agencies fall in line. Such a strategy needs to be centralized and backed by the power of the president so it can enlist a whole-of-government approach. And it needs to be funded properly: Just as defenders of the republic rightly call for increased military defense spending, the United States also needs increased economic defense spending.

If Washington decides an economic war strategy is needed, it must first decide who should guide it. The Pentagon leads military strategy because it is the one fighting military wars. But the U.S. Commerce Department cannot unilaterally lead economic security strategy because economic warfare is multipronged.

Effective coordination between U.S. government agencies on this front can’t be expected to be automatic. There is still no consensus that winning the economic war with China should be the United States’ No. 1 international economic policy goal, and different agencies often act to advance their own narrow—and sometimes—conflicting interests. It’s common, for example, for Treasury and State to oppose tougher actions toward China with Commerce and Defense supporting them, usually resulting in a stalemate. Treasury and State seek international comity and global financial harmony, whereas Commerce and Defense want to weaken China and boost U.S. businesses.

As such, Congress should establish a White House National Economic Security Council to manage economic competition with adversaries, especially China. This is similar to the idea for a Technology Competitiveness Council proposed by the National Security Commission on Artificial Intelligence, which has been introduced in Congress by a bipartisan group of lawmakers. The council’s role would be to establish and coordinate an all-of-government strategy for how the United States can beat China economically, ensuring that all major U.S. activities are aligned in service of this goal. Congress should also establish a Joint Economic Competitiveness Committee to help give coherence to its own disparate efforts in the U.S.-China economic war, which are currently embedded in a wide variety of committees and subcommittees but not at all coordinated.

Any economic war strategy, just like a military war strategy, must embrace two key tasks: running faster than the adversary—in this case, through domestic policies to boost U.S. competitiveness in key industries—and slowing down the adversary, China, by limiting the economic inputs it gets from the United States and stymying access to U.S. markets by Chinese firms that benefit from unfair trade practices.

This means reviewing and revising policies in many areas—including tax, trade, antitrust, foreign affairs and aid, intelligence, science and technology, and manufacturing, among numerous others. In other words, virtually all parts of U.S. economic and foreign policy need to be aligned to win the economic war with China. To be sure, agencies have different priorities. It will be the president’s job to coordinate them.

For example, U.S. foreign aid would be explicitly linked to whether receiving nations are siding with China. The Treasury would push to lower the value of the dollar against the yuan. Tax policy would focus on reducing taxes on traded sectors, especially those in advanced industries. Trade policy would prioritize the fair treatment of the United States’ advanced industries. Antitrust regulators would abandon their quest to break up big companies. Science policy would focus on applied research. The State Department would take the lead in organizing a NATO for trade, which I have previously advocated for, to coordinate actions against Chinese economic aggression. And the intelligence and domestic law enforcement communities would prioritize commercial intelligence and counterintelligence.

To do this, Washington needs talent. Most civil servants and political appointees in the defense, intelligence, and foreign-policy establishments attended leading universities specializing in these areas. But no U.S. universities currently teach economic war fighting; in fact, they teach that it’s bad to fight. Washington needs to fund university and career training programs focused on this emerging field. It also needs to build vastly improved analytical capabilities to assess U.S. and Chinese advanced industrial strengths, weaknesses, opportunities, and threats along the lines of an Office of Global Competition Analysis, proposed a bipartisan group of senators.

Finally, political divisions must be overcome. To the limited extent the federal government has mobilized for economic war thus far, each party has prioritized different weapons. Democrats spend money, whereas Republicans cut taxes and regulations. Imagine if U.S. military policy was so bifurcated: one party favoring the Navy and the other the Air Force. Yet, that’s what the United States has when it comes to economic war fighting. That needs to end, with Republicans and Democrats setting aside their differences and embracing the same goal: keeping the United States ahead of China.