America should rethink its economic war on China

NEW HAVEN  —  Just days before the White House released the United States’ new National Security Strategy in October, President Joe Biden’s administration announced sweeping export restrictions aimed at stopping China from advancing technologically. “The world is changing,” the National Security Strategy observes, and the US is evidently responding by all but declaring economic war on China, using trade as its primary weapon.

Yet, this development received scant mainstream media coverage. As Edward Luce of The Financial Times notes, “a superpower declared war on a great power and nobody noticed”. This is perhaps not surprising, given the fickleness of the news cycle and the competing spectacles of Twitter layoffs and cryptocurrency meltdowns. But the new US policy toward China will be far more consequential than either of those stories.

Consider US National Security Adviser Jake Sullivan’s rather sobering suggestion, in September, that it is no longer enough for the world’s largest economy simply to outcompete its economic rivals through technological innovation. The implication is that America must do whatever it can to hold those rivals back, and to inflict as much economic pain on them as possible. Yet, this outlook clearly signals weakness. It is an admission that policies aimed at increasing America’s own economic competitiveness may have only limited success.

To be sure, the new export restrictions are being justified in the name of national security, to address the military-civilian fusion that China practices and the growing significance of “dual-use goods” (technologies that are designed for commercial purposes but have military applications). National security is always an appealing rationale, which is probably why the new US economic policies vis-à-vis China have met with bipartisan approval. Nonetheless, the strategy is deeply problematic.

First, while the national-security argument is easy to make, it is difficult to verify. Precisely such arguments led to a long and costly war in Iraq, which continued well after the war’s stated rationale, the alleged threat of Iraqi weapons of mass destruction, had been proven to be baseless. While China has certainly changed over the past ten years, it is not Russia. It is excessive to impose severe economic sanctions now out of fear of what China might do in Taiwan or the South China Sea. Worse, sanctioning China now could backfire, by inducing its leaders to adopt a more aggressive stance than they would have otherwise.

Second, the concept of dual-use goods is misguided, considering that every good has the potential for both civilian and military use. Soldiers need to be fed and clothed, so should food and clothing also be restricted as dual-use goods? Technology developed for commercial use is often used for military purposes, and the military has always been one of the main clients for modern technologies. It is unfortunate that war has driven so much technological progress. But if national security is really the concern, the US should stop all trade with unfriendly countries, not just trade in technologically advanced products. The US may already be moving in that direction with the idea of “friend-shoring”. But history shows that our friends today may not be our friends tomorrow.

In fact, America’s moves against China are less about national security and more about economic domination. If it continues (a big “if”), the impressive progress that China has made over the last three decades could indeed make it the world’s most important economy. But it is wrong to presume that global welfare is a zero-sum game, and that China’s ascent implies America’s decline.

Moreover, it remains to be seen how effective the new sanctions will be, given that the US imposed them unilaterally without consulting its allies. Export restrictions, in particular, call for close coordination, and there is already reason to doubt that some countries will go along with the US policy. The recent visit to China by German Chancellor Olaf Scholz and a high-level German business delegation came just days after Germany approved a controversial deal to let the Chinese shipping giant COSCO acquire a 25 per cent stake in the Port of Hamburg.

Similarly, ever since the Trump administration’s original announcement of export restrictions targeting ZTE and then Huawei, US authorities have struggled to minimise the adverse impact of such restrictions on US companies, and to eliminate channels allowing participants in global value chains to evade sanctions. Global industry tends to stay one step ahead of US enforcement efforts.

Most importantly, even if the export restrictions prove effective, they will not stop China from developing homegrown technologies eventually. In the “best” case, new sanctions would buy the US a few extra years of economic dominance, at the cost of a peaceful economic relationship that has served both countries well for three decades.

Disruptions to complex global value chains will both increase prices for consumers and hamper technological progress. Cooperation on crucial issues such as climate change will suffer. And workers in the US still will not see the return of long-gone manufacturing industries. The biggest beneficiaries will be the consultants and lawyers who are paid to help companies figure out how to cope with the intricate regulations and new licensing requirements.

The US and many other advanced economies seem to have forgotten how much they benefitted from China’s opening over the past three decades. Certainly, the process was not perfect: foreign companies did not gain the market access they had hoped for in China, and US workers and regions directly affected by import competition from China paid a heavy price. Governments never followed up with sufficient complementary policies to compensate those adversely affected by China’s entry into the world trading system. But “choking” China’s economy by trying to stop its technological and economic development is no solution to these problems.

One hopes the more conciliatory tone struck by US President Joe Biden and Chinese President Xi Jinping at the G20 summit this month will prove fruitful. The US and China have managed to coexist peacefully and prosper in the past, despite vast differences in cultures and political regimes. At best, an economic war would give the US a Pyrrhic victory. At worst, it could start a new cold war and bring us one step closer to a military confrontation. Either way, it is in no one’s interest.

Pinelopi Koujianou Goldberg, a former World Bank Group chief economist and editor-in-chief of the American Economic Review, is professor of Economics at Yale University. Copyright: Project Syndicate, 2022. 

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