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People look at a TV screen showing news of U.S. President Joe Biden after his inauguration, in Hong Kong, China January 21, 2021. REUTERS/Tyrone Siu
Report

Getting the China challenge right

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Editor's Note:

This brief is part of the Brookings Blueprints for American Renewal & Prosperity project. Aspects of this paper are drawn from the authors’ contributions to the monograph, “The future of US policy toward China: Recommendations for the Biden administration.”

Blueprint

Contents


Summary

The Trump administration had an incoherent and inconsistent policy toward China that failed to deliver on its promises. An alternative response to the China challenge would require taking four critical steps. First, the United States must strengthen its own economy through reforms and investments that are beyond the scope of this paper but are detailed elsewhere in Brookings’s Blueprints for American Renewal & Prosperity. Second, the U.S. should work with allies in Asia and Europe to push China to continue opening its economy and developing 21st century rules for new aspects of trade. Chinese trade is more important to our allies than it is to the American economy. So while it will be tempting to try to decouple from China, decoupling is a losing strategy down the road since America’s partners would not follow suit, and the U.S. would end up isolated. Third, the U.S. needs to counter China’s assertiveness with its neighbors through a strong military presence and call out China for its undermining and violations of international rules and norms. Fourth, the U.S. needs to work with China on issues where there is common interest, especially on climate change, global public health, support to poor countries, and nuclear nonproliferation. What makes the relationship especially complicated is the need to work closely with China on some issues while countering it in other domains. For the United States, China is a partner, competitor, and challenger all at the same time.

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Challenge

America’s relationship with China will be the most complex and important aspect of foreign policy for the next generation. China is the largest trading nation, the second largest economy, and with a population four times larger than that of the United States, it only has to grow moderately to surpass U.S. GDP by 2035 or 2040. Much of the Chinese economy is open and competitive, providing trading and investment opportunities for American firms as well as for partners in Asia and Europe. But of the major global economies, it is also the most statist, with a large state-enterprise sector and extensive government intervention in the form of protections and subsidies. Together with economic prowess, China has developed a military that, though still not as advanced as the U.S. military, is clearly second in the world, and increasingly capable of concentrating forces in ways that would strain America’s ability to respond directly to contingencies along its periphery. With that rising military might has come growing Chinese assertiveness in disputes with neighbors (Japan, Taiwan, the Philippines, Malaysia, Vietnam, and India).

While China’s economic reforms and opening have achieved impressive results, the country’s political openness has not advanced in tandem, and, in fact, has reversed trajectory under President Xi Jinping. Aside from clamping down on domestic opposition in general, China has curtailed freedoms in Hong Kong and pursued a campaign of brutal suppression in Xinjiang that has forced an estimated one million (and possibly more) Uyghurs into involuntary detention.

Finally, given the size of the country’s population and GDP, China is necessarily at the heart of multilateral efforts surrounding global public goods like climate change, pandemic response, and economic development. It is overwhelmingly the largest emitter of carbon, and is financing coal-fired power plants throughout the developing world. The virus that causes COVID-19 emerged from China, as did SARS years earlier, and a more effective global regime for addressing future pandemics would require close collaboration with China. The country is also the largest official creditor to the developing world. In the wake of the COVID-19 recession, many poor countries face the challenge of financing public services and servicing debt. Multilateral efforts to support poor countries will require a significant contribution from China.

China is not purely a partner, competitor, or challenger: it is all of them at once. Effective management of this complex relationship will require policymakers to move beyond the simplistic thinking of China solely as a rival or enemy.

This, then, is the China challenge. China is not purely a partner, competitor, or challenger: it is all of them at once. Effective management of this complex relationship will require policymakers to move beyond the simplistic thinking of China solely as a rival or enemy. They will need to abandon notions of collapsing China’s governance structure or impeding its rise with unilateral American pressure. Instead, policymakers will need to craft approaches tailored to the China that exists today and the challenges it poses to America’s interests and values going forward.

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Limits of existing policies

Lack of coherent policy process. The Trump administration largely disbanded the institutional architecture it inherited for setting governmental priorities and executing a coherent national strategy on China. In its place, they adopted a more improvisational approach. Whereas key voices within the Trump administration such as Vice President Mike Pence and Secretary of State Mike Pompeo projected consistently hardline views on China, President Donald Trump’s tenor often vacillated between anger and conciliation depending upon how China’s actions related to his top priorities — whether on North Korea, trade negotiations, stock market fluctuations, China’s role in the global spread of the COVID-19 pandemic, or his reelection prospects.

Supporters of the Trump administration’s approach have hailed the effort as useful in keeping China off-balance. They have also argued that Trump has been clever at maintaining a direct channel to Xi while members of his administration take a more publicly confrontational posture on China, in effect playing a good cop/bad cop game. In this telling, Trump can be excused for reportedly giving Xi a pass on abuses in Xinjiang or the trampling of Hong Kong’s separate system, because members of his administration simultaneously were making clear through public pronouncements that the United States opposed such actions.

In reality, the United States does not have the luxury of maintaining two separate policies on China, one for the president and another for the rest of the government. The U.S. only has one set of policies on China, and in China’s top-down Leninist political system, the messages conveyed between top leaders carry paramount significance. As such, U.S. policy articulated by Trump was remarkably conciliatory from 2017 to 2019, and then swung to the other extreme in 2020 after Trump realized the scale of challenges that COVID-19 would pose for his reelection. In February 2020, following the completion of the “Phase One” trade deal, the onset of the pandemic, and the economic repercussions that followed, Trump cut off communication with Xi and empowered his administration to punish China.

In the intervening period, the administration undertook a series of actions to sever the financial, social, academic, scientific, and technological links built up across the Pacific over 40 years of deepening integration. While Trump has articulated a series of grievances about China’s behavior and blamed China for the global spread of the coronavirus, members of his administration have made it clear that they see China, or more specifically the Chinese Communist Party (CCP), as America’s premier threat. Members of the Trump administration have warned darkly that unless China is stopped from achieving its ambitions, Beijing will impose its vision and values on the international system. Such framing of the nature of the China challenge leaves no room for compromise or diplomatic management of differences. It suggests there will be a winner and a loser, and the United States must do whatever it takes to come out on top.

Populist unilateralism. The twin shocks of a demographic transition and a fourth industrial revolution have provided fertile ground for populism and nationalism to sprout in the United States. More and more Americans are falling further into debt they will not be able to repay, face a changing country that does not fit their perceptions of America, and react by clinging to reminders of American strength and cultural homogeneity. During this period, many Americans have come to look warily upon China, with disapproval ratings of the country steadily climbing in recent years and reaching record highs in 2020.

Trump spoke to these fears and frustrations when he ran for president in 2016. He promised to be strong on China where others before him had been weak. He sold a story of bringing China to heel through determination and raw exercise of national power. The president and his key advisors held an outdated notion of China as an export-dependent economy that relied upon trade with the U.S. to sustain rapid economic growth that helps preserve the CCP’s performance legitimacy. In this analysis, the U.S. did not need to coordinate closely with allies and partners on China, both because it was not necessary, and because doing so would slow down the U.S. and risk diluting the sharpness of the pressure it wanted to exert on China to abandon its statist economic model.

A populist unilateralist approach for dealing with China also resided comfortably within Trump’s worldview. For decades, Trump has been accusing American leaders of being “suckers” for protecting countries that do not demonstrate their appreciation by providing the U.S. with economic rewards in return. Trump viewed alliances as areas of unrealized profit potential.

Recognizing the risks of alienating partners while confronting China, some members of the Trump administration sought to tamp down tensions with allies in service of broader strategic goals. They pushed NATO members to meet previous spending targets and reached agreements with Japan and the EU on the need for new disciplines on industrial subsidies. Pompeo and others also regularized interactions between the “Quad” members (Japan, India, Australia, and the United States). On the whole, though, Trump’s impulses toward populist unilateralism guided America’s overall approach toward China.

To date, this strategy has not resulted in significant progress on the Chinese economic reforms prioritized and sought by the U.S., has not compelled Beijing to moderate its actions at home or abroad, nor has it elicited more or better cooperation with China on any of Washington’s foreign policy priorities. On the contrary, areas of U.S.-China confrontation have intensified, areas of cooperation have vanished, and the capacity of both sides to manage areas of competition has atrophied.

Phase One trade deal. The United States’ main problem with China on the economic front is a set of trade and investment practices that are outside the norms of advanced economies: extensive non-tariff barriers such as arbitrary and changeable standards; restrictions on foreign investment in some sectors; poor IPR protection; forced technology transfer through various coercive means; an outsized role of state-owned enterprises in the economy with favorable access to land and credit; and subsidies to develop specific technologies. These policies effectively limit the exports coming from American firms both to China and to third countries. Bringing China up to standard would open new trading opportunities and raise American incomes.

In the mid-2000s, China was also out of step — it had an undervalued exchange rate and a large overall trade surplus. But China’s currency has appreciated 35% on a trade-weighted basis since 2007, and its current account surplus fell from above 10% of GDP to less than 1%. This macroeconomic success makes the exchange rate and the trade balance less of an issue than in the past.

Within the category of IPR protection and forced technology transfers, a special concern is theft of technologies with military applications. The Trump administration’s efforts to protect U.S. security by sanctioning China’s high-tech companies were on the right track. However, the approach overall has been inconsistent, with details of restrictions and sanctions continually changing, leaving American businesses uncertain on the law.

Inked in January 2020, the Phase One trade deal required that China’s imports from the U.S. increase by 40% that year and an additional 40% in 2021. These planned purchases were spread across agriculture, manufactured goods, energy, and services. As of mid-2020, China is only buying about half of what would be required to meet the targets, in part because of the COVID-19 pandemic, but also because of the failure of managed trade with China.

The Trump administration’s trade policy has centered on a 25% tariff on most Chinese imports, a tax paid by American consumers and firms. This approach succeeded in bringing China to the table, but the administration overestimated U.S. importance to China as a trading partner — indeed, China trades more with the countries of Association of Southeast Asian Nations (ASEAN) than with the U.S. As a result, while China did agree to purchase more from the U.S., it was not willing to make sweeping structural reforms, and the specific targets in the Phase One deal proved to be unrealistic.

Furthermore, the tariffs revealed a lack of understanding by the U.S. administration of how global value chains work. Faced with the U.S. tariffs, China shifted final assembly operations to countries like Indonesia and Vietnam. But because Chinese exports of machinery and components to those countries increased, its total exports did not go down. The U.S. in turn imported more from Southeast Asia, and overall exported less. The higher cost of imported inputs made U.S. firms less competitive, and retaliatory tariffs closed off overseas opportunities. So, American consumers paid more but trade patterns did not change in any fundamental way. American farmers were severely impacted by the loss of the Chinese market due to Chinese retaliatory tariffs; the U.S. agricultural sector has been kept afloat by $28 billion in U.S. government subsidies to compensate for the losses. Most important, the main targets of the U.S. policy were not met: the overall U.S. trade deficit went up; China ceased serving as a reliable agricultural export market; and the U.S. lost manufacturing jobs because of Trump’s trade protectionism.

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Policy recommendations

Restoring a coherent policy process. Future U.S. administrations will need to revive an integrated whole-of-government approach toward China, with the president on the same page as the rest of the administration. The White House should return to serving as the central node within the government for setting priorities, coordinating policy, and maintaining message management on China across departments and agencies.

The more that U.S. China policy reflects the views of the American public and aligns with the approaches of America’s allies, the harder it is for Beijing to wait out pressure and avoid adjustments to its own behavior.

Chinese leaders measure the seriousness of American policy in part based upon whether it appears enduring or transitory. The more that U.S. China policy reflects the views of the American public and aligns with the approaches of America’s allies, the harder it is for Beijing to wait out pressure and avoid adjustments to its own behavior.

Rather than aiming at unrealistic targets like containment, decoupling, or regime change that are incapable of solidifying domestic U.S. support or attracting international buy-in, the United States needs to craft a strategy that can be the basis for broad and lasting support. Recent polling suggests that elements of such an approach would include strengthening American economic competitiveness, protecting the credibility of American security commitments to allies and partners, and defending U.S. values.

Setting priorities along these lines would have a disciplining effect on the policy process. A coherent policy process would identify realistic objectives and form plans to achieve them. This process could involve both defensive and offensive efforts, for example, by working with allies to limit the adoption of Huawei into 5G systems around the world, as well as coordinating international pressure on China to adopt disciplines on state subsidies. It also could involve joint efforts with European allies to nudge China toward tightening pressure on Iran to return to the nuclear negotiating table, and coordination with Japan and South Korea to push China to increase the cost for North Korea of continuing to pursue its nuclear and missile programs.

At its core, though, a coherent policy process would be grounded in a focus on America’s main challenges and opportunities in the world, and an awareness of how China relates to them. Great power competition would be viewed as a means to an end and not as an end in itself. There will be areas where America’s goals will be in direct tension with those of China, such as on Taiwan and the sustainment of America’s alliance network in Asia. There will also be areas where the U.S. and China will have overlapping interests, for example on promoting sustainable global economic growth and curbing the proliferation of weapons of mass destruction. A sober policy process would be able to discriminate between the two areas in order to manage friction while taking advantage of opportunities to enlist China’s contributions to challenges the U.S. cannot solve on its own.

Security issues. The United States will not be able to impose its will on China at acceptable risk or cost. Neither country is capable of achieving absolute security over the other. Neither will be able to assert unchallenged military primacy in Asia. Both will be forced to coexist in a mutually unsatisfying environment of strategic contestation.

This does not mean that the U.S. can or should acquiesce to Chinese preferences for ordering the strategic environment in Asia or elsewhere. Washington cannot countenance Chinese efforts to undermine American security alliances, diminish American influence, or extol a civilizational view of the Asian security order, where there are “Asian solutions to Asian problems” without involvement of the U.S. or others. U.S. forces must remain active, visible and in frequent interaction with security partners throughout Asia to protect the credibility of America’s alliance commitments, prevent China from imposing an exclusive sphere of influence in Asia, and preserve America’s access to the world’s most dynamic region.

Achieving these objectives does not require defeating China’s military, though. The focus of American security strategy in Asia must shift from dominance to denial. There is no feasible mix of investments in defensive capabilities the U.S. could make that would deliver a restoration of unalloyed American military dominance in the western Pacific. The prospect of a major U.S. defense budget increase is unlikely, all the more so following the hole that COVID-19 and its related costs have blown in the U.S. government’s already overextended budget.

The good news, though, is that the U.S. does not need to defeat China to defend its interests. It needs to be able to preserve its access and protect the credibility of its security commitments, including by credibly deterring China from using force to achieve its political objectives.

This is an objective the U.S. shares with every other country in the region. No country in Asia aspires to a subservient role under China in a hierarchical architecture. Every country seeks to pursue its interests as it defines them. The challenge for American security strategy is to protect opportunities for them to do so.

A focus of American strategy should be to develop a web of integrated security partnerships with and among American partners throughout Asia. The more that regional navies and coast guards become interoperable with each other, the less space China will have to exert control over contested waters or airspace. Part of this effort will involve the U.S. exercising convening power and creating opportunities for regional security forces to build muscle memory operating alongside each other. A second part will involve making enhanced capabilities such as drones, fast-attack missile boats, and mobile air defenses available to security partners. Such weapons systems are inherently defensive; none of them are cost prohibitive. Alongside this effort, American leaders must have forthright discussions with their Chinese counterparts about actions that could instigate U.S.-China conflict.

For example, any Chinese attempts to close international waters or airspace to lawful passage and/or coerce American allies and security partners, including Taiwan, could invite a sharp military collision. Given China’s reliance on inputs from the rest of the world and on energy flows from the Middle East, any action to close international waters or airspace would be an act of self-harm. China is unlikely to take such a step absent an already-ongoing state of hostilities. Even though geography works heavily to China’s advantage on Taiwan and maritime contingencies, China remains limited in its capability to defend against geographically asymmetric operations.

The U.S. will need to maintain the capacity to remind China of its vulnerabilities. Deterring China from taking actions that could precipitate conflict will require the United States to maintain its forward-deployed force presence in the western Pacific, the Indian Ocean, and the Persian Gulf. Given the immense destructive capabilities that both countries possess, though, the true test of each countries’ national capabilities likely will not be measured on the battlefield.

The United States is locked into a long-term systems competition with China. The military will play an important role, but likely not the central role in measuring progress in this competition. Rather, the competition will turn on the question of which governance system is most capable of improving the lives of its citizens and addressing key challenges the world confronts.

Economic issues. The issues of concern to the U.S. and its partners are structural policies around market access, investment restrictions, IPR protection, state enterprises, and subsidies. The U.S. should be willing to negotiate away the aforementioned import tariffs in exchange for a Phase Two agreement that addresses these structural concerns. The U.S. will have to be realistic; China is not going to completely change overnight, and the U.S. has overestimated its leverage. But there are reformers in China who would seek significant changes to non-tariff barriers, investment restrictions, IPR protection, state enterprises, and subsidies, because they believe these reforms are necessary for China’s sustained growth. In this climate, significant advance is possible.

The managed-trade approach failed in the Phase One deal due to unrealistic purchase targets that will not be met. Nevertheless, the U.S. should send a strong message at the presidential level that actual export flows will be more closely monitored. Given China’s rapid growth, increasingly open economy, and growing demand for services that the United States can provide, American exports should be increasing rapidly now in contrast to the decline over the last few years. The U.S. should consider establishing an indicative range for expected growth of U.S. exports but discard product-by-product targets.

The U.S. should also maintain focus on structural reform in the Chinese economy and downplay talk about the bilateral trade balance and exchange rate, which at the moment are not a problem. It also makes sense to coordinate our economic policies toward China with our allies. This will involve dialogue with the EU, as well as with Japan and South Korea, in an effort to identify common priorities for specific Chinese reforms. Ideally, the U.S. will join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), perhaps negotiating some changes in that deal to strengthen provisions on labor and environmental protections. Joining the CPTTP is critical to preserving an open global trading system centered on the U.S. The direct effect on the American economy will be modest, but it is important for America’s allies. The U.S. should also push hard for new members: South Korea, big ASEAN countries, and even the U.K. come to mind. China would have to meet the standards of this agreement or risk being left out. At the moment, it is the U.S. that risks being left out in the Asia-Pacific region as new trade agreements proceed without American involvement.

Finally, in the national security sphere, the U.S. must craft more rational and consistent policy. Slowing China’s growth or killing Huawei are not realistic national security objectives. Huawei has been set back by the policies aimed at it, but the company will redouble its efforts and survive with fewer technology inputs from the U.S. Clearly, policymakers need to protect technologies with national security implications through export and investment controls. But if the parts of the economy affected are defined too widely, then important dynamism will be cut off. The notion that offshore manufacturing production is going to come back to the U.S. as a result of protectionism is naïve. The Trump tariffs had no impact in this direction; the net impact of the tariffs was to reduce manufacturing employment. To rejuvenate the U.S. economy, including manufacturing, requires policies outside of the trade arena, including large investments in infrastructure, reformed immigration policies, strengthening of education from pre-K through university, and tax reform to eliminate the incentives for production to move overseas.

Most of the economy should be open to trade, investment, joint research, and student exchanges. The U.S. has enormous strengths in its labor force, universities, IPR protection, deep capital markets, and flow of immigrants. If there is a level playing field, American firms and workers can be expected to do very well and benefit from trade and investment with China.

Coordination on global public goods. One of the clear distinctions between Joe Biden and Donald Trump’s respective foreign policy visions is Biden’s support for working multilaterally, rather than unilaterally, on a host of global issues. A Biden administration is likely to rejoin (1) the Paris Accord and fight for faster global carbon reduction; (2) the World Health Organization to finally control spread of the virus that causes COVID-19 and prepare for future pandemics; and (3) an updated U.N.-Iran deal to prevent nuclear proliferation. Working on these and other global issues such as developing country debt levels or limits on government-directed cyber operations, e.g., prohibitions against attacks on critical infrastructure, will inevitably require the U.S. to work closely with China. Cooperation will be possible in these areas because of common interests.

When such cooperation is driven by common interests, it need not be viewed as a drain on American leverage in the overall relationship. Such cooperation should not be reflexively foregone. Limited cooperation that is driven by common interests will not alter the competitive nature of the overall relationship or impede America’s ability to push back against Chinese actions of concern.

One of the most immediate global issues is addressing the crisis in poor countries resulting from the pandemic and recession. Developing countries are having trouble meeting their public health needs, providing other public services, and servicing their debts. China is relevant here as it is the largest official creditor to the developing world. China teamed with other G-20 member nations to provide debt service suspension in 2020, which was a good, if small, first step. Many countries will need International Monetary Fund (IMF) programs and debt restructuring. The U.S. and China will have to work together as the U.S. is the controlling shareholder in the IMF, and China will be the key to debt relief for many countries. Aside from the immediate crisis, an important longer-term issue is that China’s Belt and Road Initiative (BRI) has lent large amounts of money to developing countries at quasi-commercial interest rates with a lack of transparency and adherence to standards. Even close allies of the U.S. borrow from China for infrastructure projects, because traditional Western donors have almost completely gotten out of infrastructure and private sector finance is exorbitantly expensive. Instead of exhorting countries to not borrow from China, it would be more effective to build capacity so that developing countries can get more benefit from these projects, and to simultaneously push China to operate more multilaterally.

This would require the United States to negotiate with China over its role in international economic institutions. For example, the U.S. should welcome a greater weight for China in the IMF, reflecting its growing role in global economics and finance, but also urge it to join the Paris Club, which takes the lead in debt restructuring among official creditors. Similarly, China deserves greater weight in the World Bank, but should also join the Development Assistance Committee and make its BRI more transparent and concessional. China is already the sixth donor to the concessional window at the World Bank, and it is realistic to expect it will move quickly to the second spot. The U.S. joining the Asian Infrastructure Investment Bank (AIIB) could be another incentive for China to do more through multilateral fora than bilaterally. If the U.S. wants Chinese behavior on international lending and debt to change, it must be willing to anchor China in commensurate roles in international institutions.

Human rights and democracy. One of the most difficult areas to get right is the U.S. response to issues of human rights and democracy, both in China and on China’s activities abroad. It is tempting to create a club of democracies as a new foundation for promoting global governance, but the problem with this approach is that challenges such as climate change, developing country debt, and nuclear proliferation require democracies and authoritarian governments to work together. (Also, while it is easy rhetorically to divide the world into democracies and authoritarians, there are in fact numerous countries situated in the middle with weak democracies.) Hence, the U.S. should take a multi-pronged approach: First and most important is to win the soft power battle by demonstrating that American democracy is once again functioning well, continually improving social justice, and raising living standards. Second, leaders should speak out about human rights abuses in Xinjiang, Tibet, Hong Kong, and elsewhere from the presidential level down. Third, policymakers should use economic sanctions only in concert with allies, recognizing that unilateral sanctions have been ineffective. Rejoining the U.N. Human Rights Council and halting the disdain for international norms would also strengthen the United States’ hold on the moral high ground. Fourth, funding bodies should increase foreign aid to help strengthen democracies in the developing world, including both direct support to democratic institutions as well as economic assistance to allow poor democracies to thrive.

We do not see China as deliberately exporting its authoritarian model, or any prospect that future attempts to do so would be positively received anywhere in the world, foremost in largely ethnic Chinese societies like Taiwan and Singapore that have the greatest awareness of what the “China model” entails. Even so, there are many developing countries where China is the main trading and investment partner while the U.S. is simply not present. This contributes to a sense that the U.S. is in decline and withdrawing from the world, while China is on the rise. All of our recommendations together would reverse this perceived American decline.

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Acknowledgments:

Claire Harrison and Ted Reinert edited this paper, and James Haynes and Kevin Dong provided research support.

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