China Economic Growth Poses Challenge for American Policy

March 31, 2018
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REUTERS/Thomas Peter/File Photo

For decades, the United States has operated under the assumption that Chinese growth was a win-win situation. US strategy focused on engagement to help China open its economy and deepen its integration with the world. But many in the policy community today have deep doubts. The most recent national security strategy calls China a "strategic competitor," and Chinese investments in the United States are increasingly being blocked on national security grounds.

One reason for this shift is a growing sense that China is not becoming more democratic, contrary to what many hoped. But a more important reason is insecurity about the relative decline of the US capacity to compete with China, which requires investment at home and a shift away from unilateral actions internationally.

Defying repeated predictions of impending doom, such as Gordon Chang's 2001 book The Coming Collapse of China, the Chinese economy since 1978 has maintained the longest continuous growth spurt in human history. It effectively managed a banking crisis in the late 1990s and a collapse in exports after the Great Recession. On a purchasing power parity basis, it boasts a gross domestic product larger than the United States today.

Initially, this growth came from labor-intensive, low value-added light manufactures and textiles, but rising wages and massive investment have both forced and allowed China to rise up the value chain, making cities like Shenzhen some of the world's most advanced manufacturing hubs. China is also narrowing its gap with the United States in spending on research and development. It has risen to the forefront of innovation in areas like artificial intelligence and financial technology. Talented innovators who only a few years ago would have started companies in Silicon Valley are increasingly moving to China to try their hand at entrepreneurship.

Meanwhile, despite an enormous inherited advantage, the United States has failed to make important long-term investments. The American Society of Civil Engineers gives its infrastructure a D+. The education system, despite bright spots especially in the university sector, remains middling in international rankings. Its economic policy is focused increasingly on protecting old industries like steel instead of concentrating on those of the future. Internationally, the United States has cut its funding of international institutions, delayed reform in them, and bullied other countries with tariff threats.

Perhaps the starkest demonstration of China's relative rise and the relative decline of the United States on the world stage came in 2015. Frustrated by the small scale of resources and its limited influence in existing international institutions founded by the United States and its allies at the end of World War II, China gathered dozens of countries to create a new international financial institution, the Asian Infrastructure Investment Bank. The United States not only refused to join, it told its allies not to. Yet one by one, they defied Washington to join Beijing.

This is not to say that China faces an easy path to world supremacy. Domestically, its working age population is shrinking, rocketing debt levels drag down growth, corruption remains rampant, and much investment has been wasted. Internationally, neighbors view it with suspicion, its soft power is weak, and Chinese brands have struggled to become big names abroad.

Yet even if China stumbles, its sustained rise and that of other emerging markets suggests that the United States must adjust to a multipolar world in which it has less influence. At home, it must revamp crumbling infrastructure, invest in better education, and focus on staying open as the world's leading hub for ideas and innovators. Increasingly, these ideas and innovators will come from China. The United States faces a choice, as being closed to them would surely prove costly for little benefit. The United States must continue to engage and use its advantages to build upon ideas from China or risk falling behind.

But China also poses an unprecedented challenge, necessitating new tools and adaptation of institutions to fit its enormous scale and unique development model into the global rules-based system. Much of its technology investment abroad and at home is driven by government policy rather than market forces and is undertaken by state or quasi-state entities with official backing. Concerns of economic security as a component of national security may be justified in these cases. But tools like Section 301 investigations and even an expanded Committee on Foreign Investment in the United States (CFIUS) are a poor fit to tackle these global issues.

The United States lacks sufficient bargaining power on its own to get China to change policies like forced technology transfer and subsidization of state owned companies. Rather than trying unilaterally to "contain" China by throwing weight around and retreating from engagement, the United States should use its influence judiciously. It should build a coalition to develop new multilateral tools designed to grapple with global grievances about Chinese practices. If not, its efforts are likely to backfire even more spectacularly than they did with the Asian Infrastructure Investment Bank.

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