The United States needs a strategy for dealing with China as an economic and national security threat, and Donald Trump’s blustery “America First” approach ain’t it. Kamala Harris has a better shot because of her belief in strengthening alliances.
In her acceptance speech at the Democratic National Convention on Thursday, the vice president promised to make sure that “America, not China, wins the competition for the 21st century.” In the same sentence, she hinted at how she intends to make that happen. She promised to “strengthen, not abdicate, our global leadership.”
Trump’s go-it-alone approach can’t work because the United States isn’t powerful enough to take on China alone.
There is a better way. I read about it in an important article in the September-October issue of Foreign Affairs by Aaron Friedberg, a professor of politics and international affairs at Princeton University. Its title is “Stopping the Next China Shock: A Collective Strategy for Countering Beijing’s Mercantilism.”
First, the problem. Friedberg writes that 25 years after a surge in Chinese exports disrupted global trade, Beijing is again flooding the world with a wave of “heavily subsidized manufactured goods and materials.” For Beijing, this serves two purposes. It keeps Chinese workers employed at a time that domestic demand is weak. And it transforms China into “the world’s most productive, innovative and powerful state.”
Western economists and diplomats have argued for years that China could score a win-win by consuming more of what it makes instead of selling so much of it abroad. Boosting domestic consumption — and thus shrinking the trade surplus — would raise the living standards of the Chinese people while relieving pressure on foreign factory workers.
But President Xi Jinping has no intention of taking the economists’ and diplomats’ advice, Friedberg writes. China’s leaders “can best be understood as mercantilist Leninists whose top priority is to acquire and exercise political power,” he writes. Enriching ordinary Chinese is not part of that plan. Making other countries dependent on China for essential goods most certainly is.
Now, Friedberg’s solution. “Only by banding together in a trade defense coalition — an idea I developed with an economist in Asia — can countries with market-based economies protect themselves against China’s predatory practices,” he writes. (He is protecting the identity of the economist who helped him develop the idea, although he declined to say specifically why.)
Forming such a coalition will require giving up on free traders’ dream of unrestricted commerce among all the world’s nations and falling back instead on “a core subsystem of countries” — China not among them — that “are genuinely committed to the concepts of openness, fairness and reciprocity, and are willing to defend and abide by them.”
The trade defense coalition would need to include the United States, the European Union, and “most likely” Australia, Canada, India, Japan, Mexico, South Korea, Turkey and the United Kingdom, according to Friedberg. Argentina and Indonesia would also be potential candidates, “as well as any other nations that seek to industrialize independently of China to safeguard their economic or military security.” Members would agree on a set of uniform tariffs on critical products that are “vulnerable to supply dominance by China.”
China has attempted to circumvent tariffs by the United States and European Union members by shifting parts of production or assembly to other nations. To stop that, coalition members would have to get much better at detecting Chinese-origin content and imposing tariffs based on the percentage of it in a product. Not an easy task.
This open discrimination against Chinese goods would shatter the rules of the World Trade Organization. But Friedberg argues that “China has already warped and distorted the W.T.O.’s principles and now uses the organization’s procedures to shield its own discriminatory practices from scrutiny and avoid compliance.”
Could this really work? Coalition members would have to stick together to resist China’s inevitable riposte, namely to divide and conquer by showering benefits on countries that continued to cooperate with it.
I bounced Friedberg’s argument off several experts who participated in an American Enterprise Institute conference with him this year. Alicia Garcia-Herrero, a senior fellow at Bruegel, a European economic think tank, agreed that “without a coalition, there’s no way the U.S. can contain China on its own.” She said Harris would be better at this than Trump for the reason I gave, which is that “you need an administration that can conceive that a coalition is the way to go about it.” Countries need to act now before China reaches free-trade agreements with countries that might prevent them from joining, she said.
Max Zenglein, the chief economist of the Mercator Institute for China Studies, which is based in Berlin, told me he also generally agreed with Friedberg’s argument. But he said China has become a leader in many technologies, and coalition members could lose access to Chinese innovations. (Example: Cheap Chinese electric vehicles.) Capping, rather than banning, Chinese imports could preserve access to Chinese innovation while making sure that protected domestic companies don’t get lazy, he said.
I emailed with two other experts. Stewart Paterson, a senior fellow at the Singapore-based Hinrich Foundation, supported Friedberg’s idea of alliances and pointed me to an article he wrote for Hinrich along the same lines in 2020.
Daniel Rosen, a co-founder of the Rhodium Group, who leads the research firm’s work in China, wrote that a coalition along the lines of what Friedberg proposes “is a crucial element of a balancing coalition to reduce the dependence of market democracies on autocratic economies.”
He shared with me a note to clients in which he wrote that “there is no doubt in my mind, not the faintest iota of a doubt or second thought, that strategic Beijing strongly desires a Trump 2” over a Harris 1.
“Team Harris will have tweaks” to President Biden’s policies, which have shored up U.S. alliances, “but understands the strategic leaps and bounds that have been achieved,” Rosen wrote in the client note.
In contrast, “Trump ignored the advice of his competent nat-sec advisers to protect U.S. alliances, and would continue to eviscerate America’s global partnerships in a second term,” Rosen wrote. “Nothing could be more valuable to Beijing than such a unilateral withdrawal from the competition. Nothing.”
A potential objection to Friedberg’s trade defense coalition is that it’s overkill — that it would needlessly antagonize China, heightening the risk that a trade war would spill into a shooting war, or at least depriving the world of the benefits of cross-border trade and investment. Another objection is that it simply wouldn’t work: Coalition members would squabble and defect. Countries outside China and its sphere of influence would not have the energy, patience or skill to rebuild production capacity in long-lost industries that have strategic value.
The “overkill” argument has lost force in recent years as Xi has demonstrated that he isn’t interested in allaying Western concerns. The “won’t work” argument is harder to refute. If Harris wins in November and takes the trade defense coalition route, she’ll have a chance to prove the doubters wrong.
Elsewhere: China Seems to Understate Its Surplus
Usually my “Elsewhere” item has nothing to do with the main topic of the newsletter, but today it does. The chart indicates that in the past few years China has been understating the size of the surplus on its current account, which includes trade in goods and services as well as investment income — possibly because it’s aware of how sensitive other nations are that their productive capacity has been hollowed out by Chinese overproduction.
China has a “deeply misleading” new way of calculating the goods surplus in its balance of payments data, Brad Setser, a senior fellow at the Council on Foreign Relations, wrote in a blog post this month. The government puts the current account surplus at just over $200 billion a year. Setser came up with an estimate closer to $700 billion by calculating income flows in a way “that reflects higher global interest rates” and by reverting to China’s pre-2022 method for accounting for insurance and freight in the goods balance, he told me.
Quote of the Day
“It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon. We do not seek or welcome further cooling in labor market conditions.”
— Jerome Powell, chair of the Federal Reserve, in speech in Jackson Hole, Wyo. (Aug. 23)
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