A Transatlantic G2 Against Chinese Technology Dominance

Editor’s note: This article appeared in the Italian geopolitical magazine Limes.

It has been a century since the U.S. economy surpassed the combined size of France, Germany, and the UK, largely because America was powered by European immigration and mass production factories. Today, China’s economy exceeds the United States in PPP terms and is expected to exceed it in dollar-denominated terms by 2030. China already leads in advanced industry production with its 2020 output in 10 industries 17 percent higher than America’s and 25 percent higher than the EU’s.

The horse is already out of the barn when it comes to China overtaking Europe and America economically and technologically. The key difference is that when America overtook Europe the two were not adversaries. Today China is, with Xi Jinping referring to the need for China to “win the battle” for core technologies. In contrast, too many U.S. and EU officials still cling to the fiction that it’s possible to negotiate with China to achieve fair competition and even cooperation.

While neither the U.S. nor the EU can hope to change China nor outpace its advanced industry growth, they can and should not lose the battle for either advanced industries (e.g., aerospace, high-speed rail, biopharmaceuticals, semiconductors, machinery, software, etc.), and or emerging ones (e.g., AI, quantum computing, synthetic biology). Collectively these are a principal source of geo-economic power and Chinese victory in these sectors would turn the transatlantic partners (the U.S., UK, and European nations) into techno-economic vassal states, dependent on China for key inputs. China has already won steel, shipbuilding, solar panels, and it is gaining high-speed rail, telecom equipment, EV’s, and machine tools.

Not losing this battle is not about figuring out what policies and programs to adopt. There are many reports from think tanks and others laying out such an agenda. Policymakers could easily craft an actionable agenda by inviting experts to a two or three-day brainstorming retreat. The real problem is that policy makers on both sides of the Atlantic do not take the China challenge seriously enough to do so.

As such, the most important task for the transatlantic policy community is to recognize the true nature of the threat and adopt a new conceptual framework. Albert Einstein once stated that “We shall require a substantially new manner of thinking if mankind is to survive.” Today, if the transatlantic community is to survive, elites will need a new manner of thinking. The two most important components are to:

1. Recognize that the EU and U.S. have far more in common than they don’t and that they are collectively in a great-power techno-economic competition with China that is more akin to war than a game of football guided by rules and norms; and

2. Understand that not losing this techno-economic war is the most important non-military task. It is about not losing, rather than winning, because it’s not likely the transatlantic community can gain significant global market share in these industries over China. But it can and should avoid seeing its key sectors slowly decimated by Chinese predatory practices like intellectual property theft, massive subsidies, and closed Chinese markets.

The United States, especially Congress, is further in understanding point 1, in part because since WWII the U.S. has shouldered the global defense of freedom. As such, it’s easier for American policymakers to understand the true nature of adversaries. Many EU policy makers naively cling to the belief that China is a “normal” nation competing for economic competitiveness just like democratic nations do, and that existing rules and institutions (like the World Trade Organization) can effectively address economic conflicts.

Thankfully, as the reality of Chinese innovation mercantilism become clearer, it appears that EU officials are shedding some of their blinders and utopian globalist beliefs. But when EU President Ursula von der Leyen states that: “Global integration and open economies have been a force for good for our businesses, our competitiveness, and our European economy. And that will not change in the future,” it’s clear that the EU has still not caught up to reality. Is it too much to ask for EU policymakers to not lag five years behind the United States in understanding the true nature of the China challenge?

On issue 2, the United States is also ahead, but not by as much. While “Trump” Republicans and many centrist Democrats understand the importance of not losing the techno-economic war to China, many traditional Republicans are worried more about military superiority over China and about maintaining “freedom” and a small government at home. Industrial policy remains anathema to them. For most Democrats, including the Biden administration, competing with China takes a backseat to what they see as the two most important challenges: climate change and racial equity, with the latter requiring significant income redistribution and limits on corporations. Indeed, when President Biden was running for President, he made it very clear that he rejected the notion that China was an economic threat to the United States. In 2019 he stated, “China is going to eat our lunch? Come on, man…. I mean, you know, they’re not bad folks, folks. But guess what? They’re not competition for us.” The administration seems to still believe this as it has done little to confront China’s innovation mercantilism other than its export controls on semiconductors, which it justifies in military terms. If the view is that China does not present a competitive challenge to America, the door is open for hundreds of billions of dollars for domestic spending: building mass transit, insulating houses of low-income Americans, subsidizing costly clean energy, eliminating college debt, and expanding health care. Acknowledging the true nature of the China threat would require way more techno-economic “guns” and way less domestic policy “butter”.

Unfortunately, the dominant views in the EU are even worse, with an almost exclusive focus on clean energy. Winning the solar panel race will not cut it. And when it comes to winning in advanced industries, the EU seems to think winning means designing the most restrictive technology regulations, while at the same time punishing U.S. technology companies.

Sadly, it does not appear that this will change any time soon. Both EU and U.S. officials tell themselves that they can have their green cake and eat it to; that by leading the clean energy transition they can outcompete China. But that is not the case. There are far too many sectors critical to national power that will not be supported by a green industrial policy, including aerospace, semiconductors and advanced computing, machine tools, and biopharmaceuticals. And in the United States the libertarian right and the “equalitarian” left shows no signs of retreat, with the former wanting more military spending and less spending on everything else (including competing with China), and the latter wanting to use regulation and competition policy to tear down large corporations, while ensuring that tax and spending advances social policy goals not competitiveness.

Nonetheless, let’s suppose the ideal happens and conceptual frameworks change that in turn enable real policy innovation. In the United States this would mean that virtually all federal government programs and regulations that affect the economy are restructured and reinvigorated around the goal of not losing to China. To be sure, this is easier said than done. The old “DNA” of federal agencies is deeply entrenched. And powerful special interests resist real change.

Still, one can hope. Let me provide two examples of how change might happen. First, the U.S. science system. The current system dates to after WWII when the academic science community convinced Washington that personal investigator-directed scientific research focused on basic science was the key. Policy makers are told that any changes to this will have dire consequences, not just on the conduct of science but on U.S. technological leadership.

But that system, like so many other U.S. systems, is no longer purpose fit for a world where China is the pacing competitor. In the old model, researchers pick the areas of research. In the new model, the state prioritizes key areas where China is a threat. In the old model, the federal government provided the lion’s share of funding. In the new world, industry funding, incentivized by the federal government, needs to play a key role. In the old world, publications were the key goal. In the new world, transferring knowledge to the domestic private sector is the key goal. In the old world, science was seen as global, so cooperation with Chinese scientists and university students is an unalloyed good. In the new world, science cooperation with China is seen as fraught with risks.

To be sure, Congress is aware of some of these challenges, but unwillingness to see China as an existential threat means that efforts at change have been incremental at best. A case in point is the 2022 CHIPS and Science Act. The Science part created an initiative to fund research in 10 key areas, but because of political pressures and limitations the program was placed in the National Science Foundation (NSF), rather than in an agency more focused on commercial development. And the original industry areas were broadened to include domestic social challenges, like clean water. When it came to funding, the original legislative funding proposals were cut in half, while funding for the traditional NSF science programs doubled. Finally, as NSF implements this program it’s likely that the “working with industry” component will be paid lip service at best.

If Congress took the China challenge truly seriously, it would have done something quite different and far bolder. Congress would have created a National Advanced Industry and Technology Agency dedicated to working closely with industry. It would have appropriated far more money and required that most of the money be spent in university-industry research partnerships to support industries and technologies threatened by China.

We see that same incrementalism regarding the U.S. Export Import Bank (EXIM), an agency established in the 1930s to provide exporters with patient capital. Congress realized that through its massively funded export finance and development banks China was bribing the way for its industries to capture contracts and influence around the world. In response, Congress created within EXIM the China and Transformational Export program, which requires EXIM to invest 25 percent of its lending authority in deals that compete with China in ten designated technologies. Certainly, a useful step.

But if Congress took the China challenge truly seriously it would have picked technologies critical to America’s future (water treatment is not one), provided significantly more lending authority to the Bank, and allowed a loss rate of at least 10 percent (instead of mandating that the Bank earn at least a 2 percent rate of return). It also would have changed the core mission of the Bank from job creation to winning the global battle for advanced industries with China. This would include lowering the domestic content requirements to enable the Bank to fund a greater number of projects that contain less American labor, but that still challenge Chinese expansion.

In other words, U.S. efforts have been incremental. If China is truly seen as the existential threat to the West, we’d see a new approach to not just science and export financing, but to many areas of economic policy. We would see a trade policy that prioritizes market opening for advanced industries (rather than supporting all industries, including agriculture and financial services, equally) and revised and improved trade protection tools to limit market access of unfairly supported Chinese companies. We would see a much more generous R&D tax credit and a new investment tax credit. We would see a regulatory system with two tracks, one for domestic-serving industries and a more-flexible one for sectors competing globally, especially with China. Congress would transform the Small Business Administration into the New (high-growth) Business Administration. We would see a workforce development system focused more on generating skills needed for advanced industries, and less on subsidizing English literature degrees.

The EU is no different. There is no broad-based commitment to outcompete China, even if EU officials naively believe that its green strategy will do the trick. And there is an unwillingness to invest. For example, the new German China strategy states: “we will strive to implement this Strategy at no additional cost to the overall federal budget.” Good luck with that because without significantly increased financial support for German innovation and advanced industry companies, Germany will lose. 

But even if the EU and the U.S. develop a broad-based consensus on the real nature of the China challenge, domestic action alone will not be enough. We need to join forces. And that has to start with real transatlantic cooperation. Unfortunately, Europe thinks it is competing against both the United States and China, and that it needs strategic independence from both. This is music to Beijing’s ears. During the Obama administration I co-chaired its U.S.-China Innovation Experts Group. At a lunch in Beijing with a high-level Chinese government official I asked how the Chinese government would handle increased resistance to Chinese unfair economic and trade policies. The official said they were not worried about individual countries or even the G20. What really worried them is the G2: a strong alliance between the EU and U.S. It was the threat of the G2 “ganging up” on China that kept him awake at night.

Today, he must be sleeping very soundly, for the trade tensions between the EU and the United States are quite high and the EU refuses to name United States a key ally and China a key adversary. To listen to many EU officials, one could easily get the message that the United States is the EU’s key technology adversary.

The reality is that the United States cannot adequately prevent Chinese global technological dominance without full and unstinting cooperation with the EU. Because if China wins in Europe, its companies will be too powerful for American companies to compete with. But this cooperation will not happen until policy makers accept the two key realities discussed above.

While some in the EU seem to be moving in the direction of recognizing that China is not a “normal” country when it comes to trade and globalization, overall, the EU has a long way to go, especially as Germany keeps resisting EU efforts to get tougher with China and as EU officials still maintain the fiction that it is possible to reform the WTO in ways that can stop China’s mercantilism. They even believe that, “China should play a part commensurate with its economic weight to help achieve this objective.” It boggles the mind to believe that China will allow changes to the WTO that would constrain its widespread manipulation of the global trading system.

Likewise, when the Commission states:

That ship has sailed. The only reciprocity, level-playing field, and addressed asymmetries possible is from the transatlantic side; China will not roll their mercantilism back. EU officials appear to be living in a fantasy world where if only they can have enough meetings and “constructive dialogue” China will start playing fair. Germany continues this delusion in its “Strategy on China” which states: “At the same time, China is an essential partner as regards global challenges. No it is not. The CCP’s coverup made the pandemic worse. And there is no need to “partner” with China on climate change. China will cut emissions when CCP officials see it as in their interests to do so and bribing them to do so lets China win.

At the end of the day, the EU needs to decide whose side it’s on. The EU wants it both ways: to be friendly with China and the United States, and to avoid getting involved with the “U.S. trade war” which most in Europe wrongly see as U.S. protectionism. The reality is that America did not start the “trade war” (China did in the 2000s) and it is not being fought solely for the United States; it’s being fought on behalf of all allied nations. It’s time the EU stopped free-riding on U.S. efforts (though doing so appears to be one of Europe’s few comparative advantages.).

Relatedly, the EU needs to significantly dial down trade tensions with the United States. This is not the place to litigate who is more at fault for deteriorating trade relations, although I would argue that most of the blame lies on the eastern side of the Atlantic. When German Chanceller Olaf Scholz states that European sovereignty “means in essence that we grow more autonomous in all fields; that we assume greater responsibility for our own security,” he is playing directly into the hand of Beijing. When EU Commissioner Theirry Bretton talks about the need for the EU to have digital sovereignty from the United States he is playing into the hands of Beijing. The fact that some EU officials appear to believe that the United States would cut off exports to the EU and therefore it needs strategic “derisking” from America boggles the mind.

While efforts like the EU-US Trade and Technology Council try to address some of the trade irritants, it is best a side show. Until the EU decides which path it wants to take, no bilateral efforts like the TTC will bear real fruit. As such, the EU has three choices. It can seek to continue to engage economically with China and hope to maintain acceptable relations with the United States. The problem with this is, as the German think tank MERICS has shown, the negative impacts of the Made in China 2025 plan are likely to be more damaging to the EU than to the United States. As each year goes by, the ability of EU companies to sell in China will deteriorate and the ability of China to sell in Europe will grow; as Europe is now seeing with electric vehicles. Why the EV export surge should have come as a surprise to EU policy makers is truly amazing.

Second, the EU can continue to go down its path of strategic derisking and digital sovereignty, where it sees both China and the United States as equal risks. That path will make joint efforts to limit China’s techno-economic aggression hard if not impossible, and it will result in tens of billions of Euros wasted to prop up industries for which the EU is better off relying on from the United States and other allies (and vice versa).

Third, deeply aligning with the United States (creating a “G2”), is the only course that will be effective in countering China. This means the United States and the EU dialing back recent protectionist actions, including U.S. steel tariffs (for which both the Trump and Biden administrations have been completely in the wrong on) and EU “digital sovereignty” actions that discriminate against U.S. firms. The two regions should however go much further and resurrect and pass a Transatlantic Trade and Investment Partnership that would eliminate all tariffs on products traded between nations and eliminate most if not all regulatory barriers to trade and investment. On top of this, both regions should establish much closer cooperation in areas of science and technology, foreign development assistance, and commercial counterintelligence against China. And most importantly the two regions should create a “demand alliance” focused on advanced technologies or inputs which would insulate markets from unfairly produced Chinese goods. This approach is based on reciprocity: the PRC constantly manipulates its market as a tool of statecraft. Joint policies to support this agenda would include tariffs to impose a price floor on Chinese product dumping—in sectors such as critical minerals—to enable market-based firms to compete, as well as long-term import restrictions on companies that systematically benefit from unfair trade practices, including closed Chinese markets and excessive subsidization.

As much as that is the optimal outcome, its prospects are not good. Too many EU activists are willing to fall on their swords on trivial issues like chlorinated chicken and GMO crops. Will EU leaders have the courage to ignore these radical voices, whose mission is to overthrow market capitalism? Probably not, at least until the threat from Chinese quantum computers becomes clearer than the threat from U.S. chickens.

Even without activists gluing themselves to paintings, close EU-US economic relations have always been stymied by Europe’s chip on its shoulder. Ever since Jean Jacques Servan-Schrieber wrote in his 1968 book The American Challenge, that “The American challenge [U.S. firms like IBM gaining market share and entering Europe] is not ruthless like so many Europe has known in her history, but it may be more dramatic, for it embraces everything” the EU has been in a defensive mode towards America. We see this in Europe’s decade-long campaign to achieve “digital sovereignty” as a remedy to “digital imperialism”. President von der Leyen claimed that “it is not too late to achieve technological sovereignty” in areas including AI, blockchain, and quantum computing. Commissioner for Internal Market and Services Thierry Breton claimed that EU efforts to do this, including limiting access by U.S. firms “is not a protectionist concept, it is simply about having European technological alternatives in vital areas where we are currently dependent.” The EU wants sovereignty, and strangely it sees its democratic ally, the United States, as more of a threat to that sovereignty than the Chinese Communist Party. It is willing to decouple from the United States, but not China.

Maybe there’s a middle way. At one level, who cares if the American farmers can sell chickens to Europe; poultry is not strategic. The real question is can the two regions develop a much more integrated economy in advanced technology industries, like semiconductors, drugs, automobiles, machine tools, digital and others, where they work together to support each other’s advanced industry development while limiting China’s market access and overall techno-economic advance. Only time will tell… But time is running short.