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Speed Up America, Slow Down China, or Both? The Key Strategic Question for the 21st Century

Speed Up America, Slow Down China, or Both? The Key Strategic Question for the 21st Century

August 28, 2023

As Congress and the Biden administration consider how to address China’s drive for techno-economic dominance, there is no more important question for U.S. policymakers to resolve than the degree to which America’s response should be to speed up the pace of innovation and growth here, or slow both down in China. The Washington consensus holds that “slowing China down” is a bit unprincipled—perhaps because Trump tried it. Whereas “speeding us up” is as American as apple pie. But policymakers have never fully debated the question, which has resulted in a troubling policy drift. The reality is that if America does not do both—speed itself up, and slow China down—then it will likely lose the techno-economic race in the advanced, traded-sector industries that are most strategically important for the country’s dual-use industrial base and national security.

Make no mistake: That is where the current trend lines point. For example, U.S. performance has been weak and declining in four out of seven advanced industries that the Information Technology and Innovation Foundation (ITIF) examined in a global industry-concentration analysis covering the period from 1995 through 2018, the most recent year for which OECD data are available. The industries range from computers and electronics to motor vehicles, and America has been losing ground both in terms of absolute market share and relative to the global average industry-concentration level, a standardized ratio known as “location quotient.” The big winner in that period has been China, which enjoyed phenomenal growth—from less than 4 percent of global output in advanced industries in 1995 to 21.5 percent in 2018.

If the United States does not want to follow Great Britain’s path—with atrophied advanced-industry capabilities and increased dependency on Chinese imports for most advanced products—then the federal government need to get this question right. Instead, in the absence of a fulsome debate, reflexive responses fill the void, as when Larry Summers warned: “If we change our focus from building ourselves up to tearing China down, I think we will be making a very risky and very unfortunate choice.”

Problems With the Default Case for Just “Speeding Us Up”

The “speed us up” camp believes there is little America can or should do about China’s state-orchestrated campaign of “innovation mercantilism”—its concerted effort to leap forward and seize global market share in advanced industries by flouting global trade rules on everything from subsidies to intellectual property theft—other than perhaps bringing a few more WTO cases. Moreover, the thinking often goes, who are we to hold back the development of a country whose per-capita living standards are still low? So, the “speed us up” camp eschews win-lose thinking on the theory that if U.S. industry faces a technology challenge, then let’s just let’s fix it here; our deficiencies are mostly our own fault, anyway. And of course, according to this thinking, if we embrace the dual mandate of speeding up America and slowing down China, it could lead to broad-based protectionism, which is not what we need.

So, we are left with: “Washington should focus on boosting U.S. competitiveness.” Which is underwhelming progress—because, of course it should. It should have been doing so for the last couple of decades, not just the last couple of years. But with the CHIPS and Science Act, better late than never.

Yet, while a robust competitiveness agenda is needed, it will not be enough. The reason is that, even enabled by better domestic policies, it will be very hard for American companies, especially in advanced industries, to compete against Chinese firms that are backed to the hilt by the Chinese government. China’s innovation mercantilism playbook is to steal or coerce the transfer of technologies its firms and industries need to succeed, then back an array of national champions with massive subsidies while squeezing foreign competitors out of the Chinese market. From that assured base of growth, Chinese firms then “go out” and attack the global market share of U.S. firms.

China is seeking to advance its own foundational and emerging industries, in part by inflicting damage, or death on their American competitors.

This strategy is particularly dangerous in innovation-based industries because they often have relatively high fixed costs and low marginal costs, so added sales are key to earning enough to invest in the next round of innovation. Once that scale is eroded, there can be a tipping point at which a challenger gains a decisive advantage and effectively crushes its competitor. We need only look at the telecom equipment industry to see this process at work, with the rise of Huawei, the fall of Western Electric and Nortel, and the decline of Ericsson and Nokia. Huawei didn’t take over the global telecom equipment industry because its equipment was the best and most innovative; it won because its equipment was good enough but came with a massive price advantage due to Chinese mercantilism. Once it gained market share, it eroded earnings and R&D of the leaders while boosting its own. Without limiting these predatory state-based attacks, domestica competitiveness policies will not suffice.

But that has not dissuaded the “speed us up” proponents, who make five major arguments for their position. First, they assert that fundamentally the performance of U.S. industries is about us, not them (China). In other words, if America can just get its industrial act together—which involves a long litany of steps, depending on one’s political affiliation—more trade agreements, more immigration, lower taxes, less regulation, more science spending, better education, another “CHIPS” Act, etc.—then all will be well. But the reality is that China is seeking to advance its own foundational and emerging industries, in part by inflicting damage, or death on their American competitors. There are several reasons it may be able to succeed—the massive subsidies it showers on its national champions, allowing them to underprice American competitors; China’s closed domestic market, which protects Chinese firms’ revenues; the sanctioned thefts or forced transfers of intellectual property; and a host of other government-provided advantages. Just look at how China decimated U.S. industries ranging from solar panels to drones, telecom equipment, drug ingredients, rare earths, and fabricated metals.

Moreover, it’s unlikely that Congress and the White House will put in place a comprehensive advanced-industry competitiveness policy. There is neither political consensus nor room in the federal budget. Indeed, while funds have been appropriated for the “chips” components of last year’s CHIPS and Science Act, most of the relatively limited money that has been authorized for the “science” component is unlikely to be appropriated. In all likelihood, the Act will represent the high-water mark for U.S. industrial policy. Meanwhile, there appears to be little appetite to spur innovation by boosting America’s anemic R&D tax credit, which ranks 32nd of 34 OECD and BRIC countries in tax generosity. The Inflation Reduction Act is targeted toward clean energy, which is good, but the United States needs to compete and win in many more industries than just clean energy.

Unfortunately, politics stands in the way: The progressive left opposes industrial policy geared toward helping corporations win the techno-economic war with China in favor of a green-equity industrial policy that subsidizes clean energy and social services. Meanwhile, most on the right still long for the resurrection of 1980’s free-market fundamentalism. Just cut taxes and regulations, they tell us, and all will be well. Neither of those agendas even remotely address the new challenge China poses for America’s leadership in the advanced industries that are most crucial for economic and national security.

As important as they are, basic policy foundations are not enough of a defensive shield to protect U.S. industries from Chinese techno-economic attacks.

The second argument “speed us up” proponents make is that America needs to build on what made it successful throughout its history. In other words, stay the course; don’t copy China and become an interventionist, statist economy. Leaving aside the fact that an interventionist Hamiltonianism has shaped U.S. economic policy for most of the nation’s 250 years, the speed-uppers want to preserve and strengthen such factors as the rule of law, open immigration, respect for intellectual property, a limited and smart regulatory system, sound monetary policy, and open trade. Except for some on the anticorporate left, no one is proposing throwing these policy foundations overboard. The real issue is whether they are enough to address the new China challenge? The fact that America has lost global market share to China in a host of advanced industries and is now less specialized in these industries as the rest of the world suggests the answer is no; as important as they are, those basic policy foundations are not enough of a defensive shield to protect U.S. industries from Chinese techno-economic attacks.

Third, many “speed us up” proponents argue that we just need to focus on the next “new thing.” As long as America moves faster to develop new breakthrough technologies in biotech, semiconductors, quantum computing, AI, and others, all will be well. This is wishful thinking. For one thing, it’s not clear that America will win in all these new technologies, given how much money China is investing and how much IP it is stealing. For another, focusing on the next new technologies without maintaining strength in existing ones will not be enough to sustain a robust U.S. advanced-technology economy. If China captures all legacy chip production, electric vehicles, electronics, robotics, machine tools, chemicals, aerospace, and biopharma production, and America has only new cutting-edge products, then America’s overall advanced-industry capabilities will be significantly degraded, which will give China enormous leverage over us.

Take chips, for example. There is a wide array of potential computer technologies, such as photonics, superconducting circuits, spintronic computing, and neuromorphic architectures. America should lead in their development. But China doesn’t need them to dominate the current semiconductor market, which will still be around for decades to come. Moreover, there is no assurance that these technologies, even if developed in America, would not ultimately be produced in China, including through IP theft. Finally, as in so many advanced technologies, companies finance these investments with profits from sales of existing products. If China cuts into those revenues by “dumping” its competing products to drive down prices, few U.S. companies will be able to invest adequately in the “next new thing.”

The global battle for innovation occurs between mid-sized and large corporations where engineering capabilities are often decisive, and China enjoys considerable strengths on that score.

Fourth, “speed us up” proponents argue there is no need to slow China down because state-directed economies can’t innovate, so they are already slowing themselves down. As evidence, proponents point to the Soviet Union, which was an innovation failure. But the situation in the Soviet Union was fundamentally different than it is in China. The West decoupled from the Soviets entirely, making it almost impossible for them to gain technological capabilities other than their own. In contrast, the West has aggressively coupled with China. The Soviet economy was a state-controlled economy in which markets were secondary. In contrast, Deng Xiaoping’s market opening efforts in China—reflected by his statement “no matter if it is a white cat or a black cat; as long as it can catch mice, it is a good cat”—resulted in virtually all Chinese companies, including SOEs, being subject to market pressures to perform. To be sure, under Xi Jinping companies have slightly less maneuvering room, but most of those strictures relate to politics, not economics. In addition, China has always been more entrepreneurial than Russia and its satellites; China had more companies on the top 10 list of the Global Unicorn Index last year than any other nation. Finally, the prevailing narrative in Washington envisions innovation as something that happens in a Silicon Valley garage. In fact, the global battle for innovation occurs between mid-sized and large corporations where engineering capabilities are often decisive, and China enjoys considerable strengths on that score (although it also has produced thousands of success stories that have started in the proverbial garage).

Fifth, many argue that slowing down China will backfire by slowing down America, too. This concern has some merit, but only in a few areas, such as export controls, which all too often limit U.S. advanced exports without preventing China from obtaining technologies through indigenous efforts or exports from other advanced nations. When this happens, U.S. techno-economic fortunes are diminished, but China’s are not. But as discussed below, there are many tools to slow China down that do not hurt the United States.

Why and How the United States Should Walk and Chew Gum

None of the flaws in the case against slowing down China mean that U.S. policy should not also focus on speeding us up. However, the merits do suggest we need to give adequate weight to slowing China down, especially when it comes to the profits China derives from its wide array of innovation mercantilist practices that contravene the established rules and norms of global trade. These two views are not mutually exclusive. America can and should bolster its industrial competitiveness while also employing countermeasures to thwart China’s economic aggression.

Until recently, most in the “slow down China” camp believed that the United States should pressure the Chinese government to roll back its predatory trade and economic policies. But while such a strategy might have worked 15 years ago, China is now too powerful to be swayed by any actions the U.S. government can take, as evidenced by the limited results the Trump administration’s efforts produced. China’s leaders have made up their minds to double down on the strategic vision they articulated in their official “Made in China: 2025” plan, which enumerated precisely which industries they intend to dominate.

Meanwhile, a multilateral approach is no longer possible, either, not only because the World Trade Organization is impotent, but also because many U.S. allies, particularly in Europe, see China as an economic opportunity too important to rebuff, and fear that Beijing will retaliate economically if they do. Instead, they have been happy to stand aside and let the United States challenge China while they reap the economic rewards.

The United States needs a “slowing down” agenda that starts with limiting China’s ability to profit from industrial predation—the techno-economic equivalent of a missile defense system.

Recognizing there is little America can do to make China roll back its innovation mercantilist regime, the Biden administration has settled on the more limited goal of using export controls, especially on semiconductors and equipment, to limit Chinese military capabilities. But while those measures may succeed in limiting China’s ability to produce some weapons systems, and perhaps slow its progress in some technologies like large language AI models, they do little to protect American from the rest of the techno-economic sorties China launches.

In this context, many advocate “derisking”: identifying products and technologies where the United States is vulnerable to foreign suppliers and strengthening their production capacity. But where U.S. policy is beginning to focus on derisking, Chinese policy is already focused on destroying. In other words, China’s goal is to not just attain self-sufficiency in most advanced and emerging industries and technologies, it is to take market share from the global leaders, as it has done previously in industries like steel, telecom equipment, solar panels, and high-speed rail. Strengthening production capacity will do little to protect America’s core industries from that type of Chinese techno-economic aggression.

So, the United States needs a “slowing down” agenda that starts with limiting China’s ability to profit from industrial predation—the techno-economic equivalent of a missile defense system. To start, Congress should amend Section 337 of the U.S. International Trade Commission’s statute to make it easier to exclude goods and services from companies that benefit systemically from their governments’ unfair trade practices the way Chinese firms do. Even though the statute was originally envisioned to help address unfair foreign trade practices, Section 337 has evolved into a secondary patent “court” in which multinationals from allied countries often bring patent cases against each other. It needs to be reformed to mitigate the damage from China’s unfair trade practices by giving the USITC the power it needs to make them less profitable.

There are a host of other steps the U.S. government (and allies) should take to slow down China. These include:

preventing Chinese firms from listing on U.S. stock markets;

limiting Wall Street and other financial investment into China;

imposing selective tariffs on Chinese product dumping (such as on rare earth minerals from China) to enable market-based firms to survive;

limiting China’s access to America’s research capabilities by increasing commercial espionage investigations, prosecutions, and penalties for IP theft;

stopping most scientific and technology collaboration with China;

withholding federal funds to state and local governments that provide economic development funding of Chinese firms;

exempting U.S. firms from foreign bribery laws when they create a competitive disadvantage versus Chinese firms that pay them;

expanding the Export-Import Bank’s capabilities to help U.S. firms win deals when they compete against Chinese firms in third-country markets;

providing firms with antitrust exemptions allowing them to collaborate to avoid sharing technology with China;

banning U.S. government procurement of Chinese goods and services;

broadening CFIUS review, including to Chinese venture funding of American startups;

imposing reciprocity on Chinese investments into the United States, (if the Chinese market is not open to U.S. firms in the same industry, the U.S. market should not open);

requiring any college or university to disclose any Chinese funding they receive;

require U.S. companies to disclose technologies they share with Chinese organizations;

creating a list of Chinese firms that have benefited from coercive IP transfers;

passing the Defending American Courts Act that would penalize any party that seeks to encroach on the sovereignty of American courts using a foreign anti-suit injunction; and

establishing a joint program with U.S. allies making it harder for firms to transfer advanced technology to China.

One step that should not be on the table is full economic decoupling from China, for the same reasons the U.S. government should be cautious about export controls: Decoupling would hurt us as well as China. Keeping U.S. companies from selling non-sensitive goods to China would cede the Chinese market to U.S. competitors, reducing U.S. companies’ revenues and increasing Chinese companies’ revenues. For example, because Google does not sell its services in China, Baidu and other Chinese Internet companies are stronger—not only in China but in many other nations as well—while Google, U.S. workers, and the U.S. tech economy as a whole are weaker that they could be. Similarly, if Hollywood were to walk away from China, as decouplers demand, then more foreign and Chinese movies will be shown there, and there will be significantly fewer jobs and export earnings for America. Industry by industry, the same pattern would repeat itself: For U.S. companies, there would be less R&D and investment, and lower U.S. global market share. For Chinese companies, the opposite would be true, because they would step into the vacuum.

The reality is that unless the United States takes effective action to “throw sand in the gears” of China’s innovation and production system, even the most effective domestic policy actions will not be enough to avert serious erosion of America’s competitive position in advanced industries. Time is on China’s side because it is making faster progress than the United States and because of the nature of innovation industries, where increased competitive advantage can lead to decisive tipping points. Adding a regime to limit the foreign gains China makes from unfair trade practices will be critical to keeping key allied industries from tipping into rapid decline or extinction.

While domestic competitiveness policies can help, they would only be adequate if we were facing an adversary that played by the rules. We are not. So, policymakers must walk and chew gum at the same time: America can implement additional “speed us up” tactics and policies while also implementing “slow China down” tactics and policies. If we don’t do both, then America is likely to lose its techno-economic lead.

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