Distinguishing US economic policy from China’s is important to win hearts and minds

As the U.S. develops a more robust and muscular set of international economic policies related to China, a key challenge for the U.S. government will be to convincingly distinguish greater U.S. government involvement in the economy and its new approach to international economic policy from that of China.

Call it winning hearts and minds, but creating a real and understandable difference is important if the U.S. is going to convince other governments that the U.S. approach is not just self-interest wrapped up in national security garb. The U.S. needs to reassure allies that there are principled limits to the role of the U.S. government in the economy that are consistent with democratic values, leave a key role for markets, and deliver outcomes that benefit both the U.S. and its allies.

The US approach to China

A speech by Treasury Secretary Janet Yellen on April 20 and one by National Security Advisor Jake Sullivan a week later laid out the U.S. approach to China. They touched on how the U.S. will navigate the increasing intertwining of economic policy and national security and how the “modern American industrial strategy” as dubbed by Sullivan will be different from China’s economic policy.

To begin with, Yellen set future expectations about the trajectories of the U.S. and Chinese economies, making the case for the strength of the U.S. economy and outlining the challenges and growing weakness in the Chinese economy. This matters as governments and businesses assess how to navigate U.S.-China tensions based on expectations about the size of each country’s market (and by extension national power) over the coming decade or more. Yellen argued that the U.S. economy is strong, and China’s is likely to falter. In this regard, the claim that India has now surpassed China in terms of population size and recent U.N. estimates about China’s rapid population decline this century are important markers.

Second, Yellen outlined the objectives of the U.S. economic approach to China, namely, securing the U.S. and allies’ national security interests and protecting human rights, fair competition with China so that each side benefits, and cooperation on global challenges such as climate change.

National security for the US and its allies

Yellen’s emphasis on the national security objectives of economic policies such as export controls, investment screening, and a forthcoming executive order on outbound investment sought to make clear that these measures are about security first and foremost and not about obtaining an economic advantage. This is critical given the accusation that Chinese government intervention in its economy is about obtaining unfair economic advantage over foreign competitors. As Yellen made clear, “these national security actions are not designed for us to gain a competitive economic advantage or stifle China’s economic and technological modernization. Even though these policies may have economic impacts, they are driven by straightforward national security considerations.” Sullivan in his speech reiterated this point even more succinctly, noting that “our expert controls will remain narrowly focused on technology that could tilt the military balance.”

Fair competition

Yellen also used her speech to outline a vision of fair competition between the U.S. and China. However, this would take significant Chinese economic reform to achieve. In particular, China would need to abandon economic policies aimed at tilting the playing field in support of Chinese companies at the expense of foreign competition. According to Yellen, the Chinese economic policies the U.S. finds so objectionable are the large-scale subsidies and support for state-owned enterprises (SOEs) and domestic private firms aimed at eliminating foreign competition, combined with barriers to market access, theft of intellectual property (IP) and know-how, and forced technology transfer.

The new American industrial strategy

With the emphasis on national security as the key driver of U.S. economic policy toward China, Yellen and Sullivan made the case for how the so-called new American industrial strategy will be targeted and justified. According to Yellen, government subsidies for industry are justified when addressing a specific market failure. Sullivan expanded on this, stating that American industrial strategy is needed where the private sector can’t on its own make the investments needed to secure U.S. national ambitions—a somewhat broader set of categories than correcting for a specific market failure. Sullivan went on to say that the key element of such a strategy is public investment that unlocks markets and crowds in private sector investment, and not picking winners or losers. Sullivan also emphasized the importance of working with international partners to build capacity.

The success of the Biden administration in building support domestically and globally for the new American industrial strategy will be key when it comes to what will undoubtedly be long-term strategic competition with China.

The success of the Biden administration in building support domestically and globally for the new American industrial strategy will be key when it comes to what will undoubtedly be long-term strategic competition with China. The Chinese government is not going to reform and become a fair competitor to the U.S. along the lines outlined by Yellen. So, how should the U.S. respond when the world’s second largest economy is engaged in behavior that is costly in both economic and security terms? Meeting this challenge will require adjusting economic policies to account for the national security implications as well as sustained cooperation between the U.S. and its allies on a range of economic policy issues. The speeches by Yellen and Sullivan lay the foundation for this type of cooperation. That said, much remains to be done rhetorically as well as in practice to ensure that the way the U.S. competes with China, including the new American industrial strategy, remains bounded and focused on core national security priorities. As important will be finding ways to minimize the economic costs for allies and partners and finding ways to channel and cooperate with other governments so that these U.S. government policies expand opportunities globally. Success here will show that U.S. economic policies, which are driven by national security, need not be zero sum, and will clearly contrast with China’s increasingly protectionist measures and expansive control over its economy.