U.S.'s China Pivot Takes Fuller Form

 

"Tariffs President Biden announced last week aren't economically significant. Symbolically, they are huge.

The U.S. buys almost no electric vehicles, steel or semiconductors -- all targets of the tariffs -- from China. But, by adding to, rather than rescinding, tariffs imposed in 2018 by Donald Trump, it signals that the decoupling of the Chinese and U.S. economies is becoming irreversible.

More important, the tariffs are the final piece of an economic strategy for competing with China.

This strategy is a three-legged stool. The first consists of subsidies to build a viable technology manufacturing sector, from clean energy to semiconductors. The second is tariffs on Chinese imports that threaten those efforts. The third is restrictions on access to money, technology and know-how that could help China compete. A fourth leg, a unified economic front with allies, remains unrealized.

On economic strategy, the U.S. is something of a neophyte. China maps its path to economic dominance in five-year plans. Japan's postwar economic rise was steered by its powerful Ministry of International Trade and Industry.

The U.S. strategy emerged piecemeal. As far back as 2016, Obama administration officials and alumni, including Jake Sullivan, now Biden's national security adviser, had begun questioning the bipartisan consensus favoring free trade and engagement with China.

In 2017, Trump came into office with an economic and national security team determined to break with the status quo. They formally abandoned engagement and designated China a strategic competitor.

Trump's initial execution, though, was haphazard. He aimed his first major tariffs at allies instead of China, to protect steel and aluminum instead of technology. He championed a Foxconn Technology liquid-crystal display factory in Wisconsin that never materialized. He reversed his administration's ban on the sale of sensitive technology to Chinese telecom supplier ZTE.

In 2019, then-candidate Biden tweeted that he'd reverse Trump's "irresponsible tariff war" with China.

It never happened. Internally, Biden's top advisers were divided. Treasury Secretary Janet Yellen championed lower tariffs and engagement with China. Trade ambassador Katherine Tai advocated for tariffs. Others gave priority to climate cooperation and cheap clean-energy equipment. As tensions with China grew, such as over a spy balloon, so did the hurdles to re-engagement.

The strategy that has ultimately emerged is largely the work of Sullivan, according to current and former administration officials. He sees trade, domestic economic policy and security as integrated. And, more than anyone else, he has Biden's confidence, these people said.

Yet the strategy has bipartisan heritage, drawing heavily on initiatives that began under Trump. Last week's tariffs resulted from a review of Trump's own investigation that led to the initial tariffs on China.

In 2020, after prodding by Trump officials, Taiwan Semiconductor Manufacturing Co. said it would build a chip fabrication plant in Arizona. Around that time, a bipartisan bill to subsidize such plants was introduced in the Senate.

Pushed by Biden officials, that bill became law in 2022. This enabled the Commerce Department to announce some $29 billion in subsidies to the world's leading chip makers in recent months.

They include TSMC, which now says it will build three fabs in Arizona by 2030. If TSMC follows through, its customers such as Apple and Nvidia might one day both design and manufacture their chips in the U.S. instead of Asia.

Biden's sweeping restrictions on the sale of advanced chips and chip-making equipment to China are modeled on restrictions Trump officials first used against Huawei Technologies. Biden officials don't like to connect these restrictions, ostensibly aimed solely at security threats, to their broader economic strategy. Yet a connection plainly exists.

The restrictions are a powerful incentive for tech companies to invest in the U.S. or its allies instead of China. The White House, for example, is engaged in an investigation into security risks of "connected cars," which share driver data with the manufacturer. This may provide a pretext to block all Chinese EVs from the U.S.

So the U.S. finally has a strategy for economic competition. Whether it succeeds remains to be seen.

For one thing, it's late. China's dominance in key markets has only grown since 2017. The world is now bracing for a "second China shock" of cheap manufactured exports.

And China's capacity expansion is largely immune to tariffs because it's driven by self-sufficiency, not profit, said Jimmy Goodrich, senior adviser for strategic technology analysis to the Rand Corp.

The economic strategy has also been distracted by politics. Like Trump, Biden is obsessed with steel and its importance to rust-belt swing states. He raised tariffs on the metal even though the U.S. already has plenty of domestic and allied alternatives to China.

He didn't raise tariffs on drones, which increasingly have national security roles, for which the U.S. really does depend on China.

Finally, the U.S. and its allies have struggled to form a united front for competing with China. While Biden officials suspended Trump's tariffs on European Union steel and aluminum, a deal to rescind them altogether failed in part because the EU wouldn't coordinate with the U.S. against Chinese steel.

Such divisions could widen further should Trump return to office and carry through with this threat to hit all imports, including from allies, with tariffs. China finally faces determined economic pushback from the West, but it can take comfort that it isn't unified." [1]

The US is building the Great Wall of China between the US and China. Because China is the world's factory, the US is building a wall between the US and the rest of the world. The U.S. does not have the possibility, personnel, or scientific capabilities to compete with China in the global marketplace. The European Union sees what the US is doing, but it does not want to give up its competition with China, as the US does, it does not want to become a stagnant industrial backwater, as Biden is doing to America for political reasons, in order to strengthen the US Democratic Party, which risks a complete and long-term loss of power.

 1. U.S. News -- Capital Account: U.S.'s China Pivot Takes Fuller Form. Ip, Greg.  Wall Street Journal, Eastern edition; New York, N.Y.. 21 May 2024: A.2.