In this episode of the Trade War Podcast from the Information Technology and Innovation Foundation (ITIF), host Stan McCoy is joined by Michael Wessel, a senior advisor at the Alliance for American Manufacturing, and Stephen Ezell, vice president of global innovation policy at ITIF. The discussion centers on the possibility that China has already won the trade war, examining China's strategic and state-directed approach in crucial tech sectors like AI, EVs, semiconductors, and more.

Mentioned

• Robert D. Atkinson and Ian Tufts. “The Hamilton Index, 2023: China Is Running Away With Strategic Industries,” (ITIF, December 2023).
• “The Future of Industrialization,” (United Nations Industrial Development Organization, November 2024).
• China Innovation Series, (ITIF, March 2024 to September 2024).
• Liza Lin. “China Intensifies Push to ‘Delete America’ From Its Technology,” (Wall Street Journal, March 2024).
• Robert E. Scott, Valerie Wilson, Jori Kandra, and Daniel Perez. “Botched policy responses to globalization have decimated manufacturing employment,” (Economic Policy Institute, January 2022).
• Robert D. Atkinson. “China Is Rapidly Becoming a Leading Innovator in Advanced Industries,” (ITIF, September 2024).

Auto-Transcript

Stan McCoy: Hello, and welcome to another episode of the trade war podcast from the information technology and innovation foundation. you're joining us on the 21st of February as we're recording this. So keep in mind that some things might have changed by the time that you see this. I'm your host, Stan McCoy.

I'm a non resident senior fellow at the ITIF and a former U. S. trade official. And I'm honored to be joined by two outstanding guests today to discuss the provocative question, has China already won? Michael Wessel is the owner of the Wessel Group Incorporated, a senior advisor to the Alliance for American Manufacturing and most relevant to today's topic, he served for 23 years as a commissioner on the congressionally appointed U S China. Economic and security review commission. So he has been studying this question intently for decades. Also joining us today is another expert on China's role in global trade. Steven Ezell, who's a vice president of global innovation policy at the ITIF and importantly for today's discussion, he has been at the cutting edge of the foundation's work to study China's innovation capacity across key sectors, such as AI, robotics, EVs, semiconductors, and many more. Michael, Stephen, I'm really honored to be joined by both of you today. Thank you for joining us and for sharing the insights that you've gained from your, intense focus on this topic, the years.

Michael Wessel: I deeply appreciate the, invitation, a provocative, title, and, look forward to a discussion, with, both of you.

Stephen Ezell: Stan and Mike, a pleasure to be here.

Stan McCoy: let me lay out the premise for today's discussion. we're all talking about. Global trade war these days as if it's a new thing, but I think history might just recount that the real trade war already happened over the course of the past two decades as China executed a very well organized, state-directed campaign to dominate the global economy in key sectors by 2025. And here we sit today, it's 2025 and work by ITIF in my reading suggests that Chinese companies, many of them, state owned are at or near a leading position in a majority of key tech sectors, and they're moving fast.

And guess what? That was the real trade war, and China already won. So there's my premise. What do you think, Michael? You've had a front row seat to this on the U. S. China Economic and Security Review Commission. am I wrong,

Michael Wessel: No, look, I think you're right, in that China has been preparing, it has had, a directed approach over the last two and a half decades, if not longer. all of which has essentially been, put out there in public through, five year plans, through various industrial policies, identifying that they want to have indigenous innovation and, make sure that they can meet their own needs, their own, capabilities, and with Programs like Made in China 2025, they want to dominate these technology, and these sectors going forward. so they've been planning and preparing for war, for decades. and the result is they are, in peer competitor, or have exceeded our capacities, in a number of areas. And that's deeply troubling.

Stan McCoy: Stephen? There's a Chinese Communist Party slogan that exhorts us to, seek truth from facts, sometimes ironic in the Chinese context. But, what do the facts say, pro and con, on whether China has already won, from your perspective?

Stephen Ezell: Well, listen, in 2023, ITIF released a report called the Hamilton Index. China is running away with strategic industries. What this report did is for 40 countries, I looked at their market share and the location quotients for 10 advanced technology industries sectors such as aerospace, pharmaceuticals, motor vehicles, electronics, I. T. services, metals and what we found is that across these 10 industries. In 1995, China commanded a 5 percent share of the global marketplace. By 2020, China commanded a 25 percent share collectively in these sectors, and in some, such as fabricated or basic metals, their shares were over 50%. And, you know, that was data from 2020, just a couple of weeks ago, the United Nations Industrial Development Organization, UNIDO, came out with a new report titled, The Future of Global Industrialization. It found that China currently accounts for 26 to 30 percent of global manufacturing value added. And if current trends persist through the end of this decade, China's percentage will grow to 45 percent of global manufacturing value added by 2030, while America's share sinks to just 11%. Now, separately, over the past two years, ITIF did a whole nother different set of reports asking the question, how innovative is China?

In a dozen advanced technology industries. So we looked at nuclear power, EVs, AI, quantum, pharmaceuticals, robotics, chemicals, and what we generally found, is that yes, while China's national innovation system has some challenges, their strengths in advanced Innovation industries are far greater, far stronger than it's generally assumed. And in sectors like nuclear technology, they're now 10 to 15 years ahead of the United States. In places like electric vehicles and solar panels. They're probably ahead, at worst, at par with global leaders. the competition from China in advanced technology industries is very real. And I've been in Washington now, well, since the 1990s. I've been, in meetings with folks from my Congressional Research Service who would say China can't innovate. That might have been true 20 years ago. It is not true in 2025.

Stan McCoy: Wow. you know, taking what you just said, Stephen, and Michael, looking back, 25 years to the debate over China's entry into the WTO. There was tremendous optimism at that time that maybe looks naive today and a retrospect that this was going to propel China along a path of economic and ultimately political liberalization.

And that was supposed to be win-win for the global economy. Here we sit. A quarter of a century later and we're talking about trade as a zero sum game with winners and losers, which is not the way they taught it in school. And I wonder what happened from your perspective to bring us to this place?

Michael Wessel: Well, you know, I'd go back farther, than, PNTR and the WTO debate because I think we saw in the mid 80s when I started going to China, through the Tiananmen Square, massacre, and post that during the annual MFN debate during the 90s, there were, two largely divergent, views, one the deeply skeptical view, which I held and continue to hold, in terms of what China's long term plans are, and, what I would say is that those who are hopeful were probably genuine in their view, but there was certainly a, large mercenary, component to this, with, at that point, 1. 2 billion consumers, the view that, we would be able to serve the Chinese market that it would also supply the, low cost labor to be able to, offshore certain production of lower value items. At that point, you know, people are talking about toys and textiles, not technology, robotics and, today's products that we're dealing in. but, you know, I think the honeymoon period, lasted for four or five years, at which point, the sheen wore off, and then the real problems evident in the U. S. China relationship, intellectual property theft, preferential performance requirements, and the desire of China to, Dominate across a variety of sectors, from, high tech to, critical minerals, basic materials like steel, aluminum, et cetera, all began to, escalate, The hopefulness and rigidity of some of our legal systems, precluded us from dealing with a non market economy and really, trying to address the challenge.

Stan McCoy: Stephen, you know, speaking of the attitude of the Chinese government, you pointed me to an article by former National Security Advisor, General H. R. McMaster, where he recounts, being on the state visit in 2017 and sitting in the Great Hall of the people and being lectured by a very senior Chinese official, who, in, McMaster's recounting dismissed us concerns over unfair trade and economic practices, indicating that the U S role in the future global economy would merely be to provide China with raw materials, agricultural products, and energy to fuel its production of the world's cutting edge industrial and consumer products.

That sounds pretty hostile in terms of the overall attitude and objectives of the Chinese government.

Stephen Ezell: Yeah, so I think China's vision for us is to be hewers of wood and drawers of water and maybe contributors of raw materials, scrap metal, and agricultural products to their manufacturing machine. My favorite quote of all time is, from, Goethe, and he said that few people have the imagination for reality, and I think what many have missed is that China is a power trader. They're a power trader, just like Germany was a power trader in the early 1900s. Power traders, fundamentally reject the vision of neoclassical economics that we were taught in school, that trade is win-win. Power traders pursue forms of economic mercantilism that are intentionally designed to advance their own national power while demuting that of others. there's a proverb, a saying I've heard in China that, when they say win win, it means that they win twice. And that's what power trade's about. It's about we win and you lose. And I think it, has taken too long for many in Washington to wake up to that fact. it's unfortunate, because I think the vision that we laid out in the post World War II era of a liberal International economic order can and does in fact produce when when results when faithfully pursued by members of the international system but at least in our view at ITIF, China is a brazen and unrepentant mercantilist and they fundamentally do not buy into The system we set up which was private-enterprise, market-based, rules-govern trade in accordance with the foundational WTO principles of reciprocity, national treatment, and non discrimination. That is not the game China is playing.

Stan McCoy: Yeah. And my own experience, working in, USTR during part of that time was, you know, as we were looking around at the WTO rules and trying to use them to constrain some of the worst aspects of China's economic. Behavior. What we were finding again, and again, is that the WTO rules, get at sort of the surface of laws and regulations that might be relevant to governing the economy in, in many other countries, be it, Japan or, Europe or North America, but they didn't get at the real, tools of control that the Chinese government uses, be it the economic control that the Chinese Communist Party has through, 150, 000 state owned enterprises, or be it the machinery of social control that it's able to exercise through the party and, arms of the government.

And, I wonder if you think that that's part of what's going on here that we've brought a knife to a gunfight, so to speak, the rules just are not well adapted to dealing with a player like China.

Michael Wessel: Well, I actually, I saw a cartoon a couple of days ago where, at the bottom it says, you brought Robert Groves to a knife fight. so, you know, we are, you know, legally, not bound, but, we view the laws and terminology as guiding the debate. when we talk about National security, as being separate from economic security.

That's an alien term to the Chinese the two are you know, are intricately intertwined there. So a lot of this is about terminology. What's fair? What's not fair? what is economic? What is national security? China has a very different view. We have failed to appreciate, their writings, their intent, which have been all too evident. and, the fact is, I think, you know, that that reality is now caught up to us.

Stan McCoy: I want to think about both inbound and outbound trade with China, but in terms of the promise of, access to the Chinese market for, firms from the U S or Europe or other parts of the world in your experience, sitting on the commission, hearing from a lot of, companies, Michael, and your experience as well, Steven,

How has China denied those foreign traders full access to the market? And some have done better than others. I'm interested in your perspective on that.

Michael Wessel: Well, actually, you know, I think China has done a marvelous job of learning from those foreign companies that have invested there. And in too many areas they have, harvested the gains and now they are, diminishing the returns for those companies. when I first went to China, I went to Beijing Jeep in the mid eighties, and the cars were being pushed from station to station on furniture dollies. Um, you know, now you go to a, auto plan and it's high tech. It matches, if not exceed some of the capabilities of our own, firms here in the West, GM, which went there and taught them how to, meet ISO 9000, 9001 and other international standards, help them learn, platform integration, supply chain integration, and the ability to ensure the quality and performance of the products. Once they did that, they started, reducing the scope of foreign firms ability to access the Chinese market. we're seeing now fewer and fewer returns, there are still consumer product companies and others that are performing well. but I think in terms of high tech and elsewhere, they have, harnessed the gains and, are now, reducing, the returns.

Stan McCoy: Stephen, what examples stand out to you of that phenomenon?

Stephen Ezell: The WTO might have been strong enough if all of the countries in the WTO were playing with the same basic economic philosophy. But, you know, the reality is that the system we set up with Bretton Woods and, you know, post World War Two was dominated by neoclassical economic thinking. The free market is always going to be right. Industrial policy always leads to deadweight loss. Governments fail at industrial policy. So we were unable to even conceptualize the way that China would try to compete as a power trader. So we didn't even construct a set of rules within the WTO that could even allow us to conceptually deal with those challenges. Things like Article 19 of China's company law, which mandates that a member of the CCP sits on the board of every single Chinese company, SOE or not. Never even thought about that. The way China has pursued overcapacity, overcapacity to an extent that they are not pursuing their strategy for a market-based rate of return. They are pursuing their economic strategy as a power trader to gain global market share in strategic industries and not other companies, other countries out of the competition. And a great example here: solar panels.

Michael Wessel: Let's take back to 2008. China manufactured less than 6 percent of the world's solar panels. By 2016 they manufactured over 75 percent of the world's solar panels, massive industrial subsidization, 42 billion of subsidies to that industry from 2012 to 2013 alone. Over that eight year period, they knocked out over 500 Western companies that were trying to develop innovative solar panels. Overcapacity designed to capture global market share, knock out foreign competitors, dominate global markets. EVs. Roll the tape back to 1985. In 1985, China manufactured a grand total of 5, 200 passenger vehicles. Last year, they made 27 million and by the end of this decade, they'll make a third of the world's vehicles. ICE, you know, internal combustion or EVs combined. Massive overcapacity, massive subsidies, $230 billion. And we're already seeing, they're starting to knock Western companies, out of this marketplace. It's also failures on our part. I mean, you know, look, we talk about rare earths and critical minerals. Now in 1996, CFIUS approved the sale of our major rare earth production company, Magnequench to the Chinese with the requirement that they keep the production equipment here in the U S.

2002, China takes the production equipment, back to China and there's no action. But we've sold other things, genomic research firms. GE did a, joint venture with AVIC about avionics that has now, accelerated the ability of China to get into the, international aerospace market. They have had plans, and they've executed well on them.

They now have accelerated these time frames, which is what has helped them, in things like 5G, etc. They have had the majority of the personnel at the standard setting bodies knowing that the standards would help drive the results for their own company. Huawei, for example, they have, China standards 2035, which was designed, is designed, to dominate that, sector.

We're still playing catch up. We still, at a governmental level, haven't responded well to China's, ━━ mercantilist non-market policies in a strategic way.

Stan McCoy: So let's start to talk about what a better response looks like in your view, because we've reached a point now where clearly the administration that's in power now is not inclined to play by Marquess of Queensberry rules when it comes to trade. but is seemingly very focused on, some trading partners in the Western Hemisphere on, imposing tariffs, lots of complaints, across the Atlantic towards Europe, haven't really seen a big focus on China yet in terms of the moves other than the 10 percent tariff, that's been imposed on, Chinese exports. What needs to happen in your view to, more effectively, counter the threat?

Michael Wessel: There needs to be better alignment. First, there needs to be a, strategy that people understand and, understand its durability. You know, we have trillions of dollars of capital that's sitting on the sidelines right now, corporate capital, wondering where to invest.

Part of that is, of course, because of the disruption of tariffs. Part of it is because they don't know what the markets are going to look like. companies don't invest just for the next quarter. they're investing for, you know, over a five, seven year timeframe for returns on, capital, et cetera. so we need to give, give them some certainty about where we're going to go. you know, right now, tariffs are not being backed up by the kind of policy that will ensure success. tariffs on their own, you know, create speed bumps and hurdles. but unless they are integrated with the policy to make sure the investment follows. they'll be limited in their impact. they are certainly disrupting markets right now and creating chaos. But I think in many ways it's just causing capital to sit on the sidelines. So many of the policies the Biden administration put in place, IRA and others, I think, are the kind of things that, the administration needs to do, and in some areas do it with our allies and partners.

our allies and partners have been slow to respond. we saw that with Huawei, during the first Trump administration, trying to get the EU and others to understand the threat and cooperate in terms of a unified response was slow and still sporadic. we're seeing it in other sectors as well.

I know Stephen can talk, you know, on a number of technologies where there are different levels, and different engagements, that, our allies are doing, there needs to be a Western approach. WTO is failing because it's not unified, because some of the rules are not advanced well enough. And we were slow to use them. I think you know from your time in government, WTO has a requirement that countries identify their subsidies. 12 years after China's entry into the WTO, USTR actually published a counter notification list to say China, here's what we see you doing. it couldn't take 12 years. We got to be responding to unfair trade and predatory practices immediately, giving again market based players the confidence that their capital can be invested in returns.

Stephen Ezell: I mentioned the 500 solar panels that were knocked out and there were all kinds of cases going on at the U. S. International Trade Commission, trying to contest Chinese dumping in these industries, but by, the time the cases winded their way through eight years, these companies were makeup.

It was a coroner's inquest. So some things we need to do is like reform Section 337 of our trade law to essentially reverse the presumption of harm, you have to prove harm from the policies. If it's a country of concern, like China, harm should be presumed. And then the onus would be on the Chinese firm not to show that they caused harm as opposed to, the Western firm to show that harm occurred to them. But if I could stand to step back and hold on Michael because I think you asked, how did we get here? What happened? My interpretation on that question is here's what happened. China's economic and perhaps national security strategy fundamentally changed with the arrival of Xi Jinping in the mid 2010s. But in our view, what happened in the 1980s, yeah, had an attraction policy. Comm, manufacturing, China. The China price 30 percent less, lot sizes of a million, become the manufacturing hub. All right. They pursued that strategy effectively over a decade and a half. They have agglomeration effects, concentration effects. So by the time we get to the 2010s and Xi Jinping comes in, he can move China from an attraction to a compulsion strategy. Now we can say you have to manufacture here to sell here. You have to transfer your technology or your IP to be able to sell here. China called that trading technology for market. So that's where we saw Green Dam, Made in China 2025, these more compulsory policies, but now we're reaching a state of expulsion. So now that China has more and more credible domestic firms in high tech sectors, now they're kicking the Western companies out. And if you're not familiar with document 79, you should be because document 79 recently introduced requires SOEs and finance, energy, and other sectors to comprehensively replace all foreign software in their IT systems by 2027. Another example of this was when China's Ministry of Industry Information Technology recently instructed Chinese EV companies to quote, avoid foreign semiconductors if at all possible and get them out of your supply chains. The point is. And we just, all we have to do is look at Mainland China 25, because they say it. They want import substitution and autarky. They want American semiconductor firms, or Western foreign firms share of their semiconductor industry to be 0%. They want Boeing's share to be 0 percent of the airplane market. And so the fundamental question is when our semiconductor companies depend on China for 36 percent of their sales, but China is openly saying, we want that to be 0 percent and we're doing all we can to make that happen. How do we help our companies get out of that box? And the only way we can do so is by intentionally re architecting the global economic system. To the advantage of free democratic countries that we governments, likeminded governments, work with companies to create a world where we can say in 10 years, "Oh, only 10 percent of our semiconductor sales have to go to China." Because we're building the world's laptops and mobile phones and mouses and tablets in India or Africa or South America. It is going to have to be on that level of grand strategy if we're going to make a serious dent in trying to deal with this challenge over the next decade.

Stan McCoy: I feel like there's, there must be some parallel universe where 10 years ago there was a unified response from the US, Europe, Canada, the other countries who are the victims of, the Chinese, victory in the trade war that I'm hypothesizing, but why didn't that happen?

Where is that a lie? It doesn't seem to be on the horizon and indeed in many ways, we're undermining relations with those partners who we need to stand shoulder to shoulder with in the China threat in your telling of it.

Stephen Ezell: Well, I would just comment that this is the point of the podcast has China already won, but I think it's incumbent on policymakers to recognize that our range of motion becomes more constrained every day. If we'd recognize these challenges 10 years ago, we'd have been in a much more effective place to deal with them. there's a fight for every factory in the world. There's a fight for every manufacturing job in the world. We're late to awaken to that fact and we're losing the fight. What we've seen is that we have allowed the fabric of the post world war order we created to degrade, to the point, that increasingly we're seeing populist leaders coming in around the world, not just the United States, but India, you know, elsewhere, and they're saying that this system doesn't appear to work.

China's goal is directly to drive a wedge between the United States and Europe. That's their grand strategy. And we're not wise enough to recognize that they're winning because they're, we're letting them do exactly what they want to us. And we're not smart enough to realize that we got this back against us.

Michael Wessel: We're still competing over crumbs rather than, you know, unifying in a Western response, and having an integrated strategy. Again, 5g was a perfect example. We've seen it in a lot of other areas, and we do need to come together. We still are waiting for Europe to catch up on inbound and outbound investment screening, and an understanding of the tools that are needed,

unless we have a all of Western government approach, there's going to be leakage, there's going to be abuse, and China's going to be able to drive the wedges that Steven just talked about. we need to come together. You know, here we have in the US, I think, a understanding that started with Trump's activism in Trump one and was carried over in the Biden administration. now I think it's going to accelerate, but it needs to accelerate in a way that's integrated, durable, and also brings our allies in.

Stan McCoy: Mike, one of Stephen's comments about the impact on manufacturing jobs made me think of the close ties that you've had with the labor movement in the U. S. Can you bring them into the story and sort of talk about what their perspective has been on China trade?

Michael Wessel: they've seen the erosion, from the 1990s on and, labor, I think, was unified in opposition to the granting of permanent normal trade relations in 2000 and, China's entry into the WTO, and certainly since then, has, fought battle after battle about various industries.

Right now we are fighting the battle on shipbuilding. two years ago, China produced 1000 ocean going ships. The U. S. Produced 10. our last dry docks for the Navy were all purchased from China because we've lost capacity. this administration is following the actions of the Biden administration to respond. That needs to be expanded to aerospace and so many other sectors we did it and steven can talk more deeply on what is happening in chips but it's not enough. It's not happening at a pace that's quick enough we still are, reliant on first generation tsmc and other producers Which are potentially at risk in a taiwan contingency we were sitting back doing the design but shipping the manufacturing capabilities, offshore.

Stan McCoy: We have to have an integrated approach. Stephen, you're nodding.

Stephen Ezell: Well, some of the studies have shown that, the impact of China's entry to the WTO, have contributed to the loss of two to five million American factory jobs since 2000, which are traceable to low cost imports. that's how the study is. E. P. I. Had one, pegging, China manufacturing competition is responsible for the loss of 3. 7 million U. S. Jobs, including 1. 7 million jobs lost since 2000 and eight, David Otter and his colleagues at M. I. T. Have looked at the study. economic dislocation cost of these lost jobs. So you know how much we have to spend for unemployment compensation or workforce retraining. And what they found was that fully three quarters of the economic value from cheaper trade with China, cheaper hammers, cheaper chaskis, luggage, whatever that three quarters of that gets lost in the social dislocation costs. we have not done a, Good job of balancing the interest of American producers versus American consumers. And that has shown up in, very significant manufacturing job loss across the U. S. economy, which has changed our internal political dynamics, which I think is another part of China's grand strategy.

Michael Wessel: Let me add, the results of the last election, were in part, attributable to the China challenge and its impact on industrial, workers across this country. And, that's not just in the heartland and, Ohio. Pennsylvania, but all through the south and on the coast, we're seeing, synthetic biology facing problems, in the west and the east coast. and, a host of other sectors, all that are under pressure. Those manufacturing jobs, once they are lost, Do not come back. and as Stephen just said, we see the dislocation the Economic pain, there have been studies that show when a worker is retrained Generally, they are getting a two thirds of their former salary back And we're seeing the, impact of USMCA and NAFTA, where China is making massive investments.

So as we address the bilateral talent China challenge, we're seeing them shift production to Vietnam, Mexico, and elsewhere to continue to have the outlets for their product. That is continuing to degrade our manufacturing capability, and workforce here in the U. S.

Stan McCoy: Yeah, you know, it's very interesting. Last week I was speaking with Everett Eisenstadt and Kate Kalukowicz, who worked in the first Trump administration. And I was asking them, if China is so much of the problem, why are we focused on Canada and Mexico and acting like they're the problem? And they both responded to that, I think quite astutely and saying that the problems with Canada and Mexico are kind of derivative of the problems with, China.

Part of this is, you know, Chinese firms have taken advantage of USMCA and our relationships with, Canada and Mexico to use that as a backdoor into the U S. And that being, a big part of what, the, second Trump administration is hoping to address, under USMCA, would you agree with that?

Michael Wessel: I'd agree completely with that, but I'd also expand and say, look, we're not looking at, Africa and Latin America more broadly, the global south, and China's challenge in those markets. It's, you know, it started 20 years ago as a resource extractive approach where China was looking. For the energy and critical minerals that needed to expand its industrial base. but they've expanded in terms of sales and dominating those sectors while we sit back and largely let them do it. So, if Mexico, Canada, so many other markets, but it is big portion of the globe that we are just not focused on.

Stan McCoy: Well, and indeed pulling the plug on USAID, was so far from being focused on it, and pulling back focus from it.

Michael Wessel: It is a short sighted approach, we've seen China, in the Indo Pacific, with the Outer Islands, Marshalls, and many others, focusing their attention, Indonesia, etc. we need to look at this as a trade war. But a larger global challenge to Western norms and ideals,

and to treat it more seriously than we are.

Stephen Ezell: I was at an event yesterday. somebody said, Oh, well, we just canceled the DFC, the Development Finance Corporation contract from mine in Cambodia. the point was, one week later, China was in there and they had taken over the deal. And every, every place we vacate, we create the vacuum that China comes right in.

Stan McCoy: Yeah. it's very troubling. let's talk about intellectual property a little bit. It's a topic near and dear to my heart, and it's been a big part of the story here. And, back when I was, working on IP issues at USTR, kind of the silver lining of Massive scale IP theft in China was that the story we were telling ourselves was that it was kind of symptomatic of China's lack of, self innovation capacity and China almost, followed that line itself is when it was emphasizing indigenous innovation, it was Partly telling its firms, stop copying and start innovating.

And clearly from Steven's work, that's been the focus of, Chinese government policy. So what is the significance of intellectual property, as it stands today in relation to China trade?

Michael Wessel: Well, I would say, and Stephen can, jump in with specific, industry assessments, but China has become a near Peer competitor, or in some ways, advanced in certain sectors. they're putting massive amounts of capital into, areas like quantum computing, biotechnology and others. they were for 20 or more years looking at the acquisition of IP, through licit and illicit means, through integrated strategies like the development of a thousand talents program to attract, Western, scientists, and experts to help them expand their capabilities. The investments through their, science and technology funds, have really borne fruit.

so in a lot of areas like, AI that we just saw, everyone was surprised at Chinese capabilities. they're doing pretty significant work in some areas more advanced than the U. S. and the West. they're gonna have indigenous capabilities and advances, that exceed those of the West.

Steven,

Stephen Ezell: All right, I'm going to try and connect a couple thoughts here. Over the past two decades, China has accumulated a 7 trillion trade surplus with the United States. Last year, China accumulated a 1 trillion trade surplus with the gold. Now, if we roll the tape back to 1990, China possessed a grand total of 212 million of foreign currency reserves. Last year, that number stood at 3. 2 trillion. Now, for many years, China was content to just plow that money back into treasury bills, earn a stable return. But Xi Jinping comes in, and he gets smart. He says, why are we just investing these trillions in you know, T bills. Why don't we use that money to go out and acquire foreign technology companies? So china subscribes to an all of the above technology acquisition strategy for the most part They try and get it in from the front door like the trading tech for market. We talked about earlier But what they can't get by foreign companies transferring it to the chinese market They either try and get it through intellectual property theft and we know that Chinese IP theft may cost the U. S. economy as much as 600 billion dollars alone. But if they can't get it through theft, or they can't get it through espionage, what they decided was, let's go try to buy the IP and the technology in global markets. They made a 23 billion dollar bid for Micron that was funded by Chinese SOEs. They were able to extract KUKA and almost got Extron out of Europe.

Before the Europeans wised up, you know, and, strengthen their FDI policies a bit. So, the point where I'm trying to make is they want technology and, like for years to my point, they had to get it from elsewhere, but yes, now they're getting to the point where they're. capable of indigenously producing their own technologies. they now employ more scientific researchers than both America and the entire EU combined. in 2022, they passed the United States in terms of global high impact scientific publications. So in many sectors, they now lead the world in, patents awarded for nuclear fusion technologies, for electric vehicle, propulsion technologies. and, they recognize fundamentally that, IP and technology are the keys to this game.

Stan McCoy: comments about a couple of things, that China's ownership of T bills, China's, buying of the rare earth company and, their strength in rare earths, this points to an underlying reality that if you're in a trade war between the U. S. and China, China has a lot of weapons in that war, holds a lot of leverage over the U. S. economy. Can you talk a little bit about that, Mike, and what you've, what you learned from your perspective at the commission and elsewhere about the leverage China holds in the event of a trade war.

Michael Wessel: well, trade war or a real war I think they have tremendous leverage, we've seen their infiltration of Chinese technologies throughout our critical infrastructure. we have been, inviting them into our logistics systems. the CCP, provides a scheduling, customs clearance program being used at ports like Rotterdam, Antwerp, Hamburg, and South Korea, and Japan that allows the CCP to know every single item in a cargo hold, where its destination is, and what its price is. 80 percent of military cargo travels by commercial vessel, so they now have a integrated system where they can see where, munitions, supplies, etc. are being pre positioned, through their technology and batteries, they are now the world's major producer of industrial strength batteries that are used for grid balancing. The Camp Lejeune, precluded, last year, those batteries from being used on the grid supporting the base. Because they're essentially pre placed munitions. I would say that, this is a trade war that has economic impacts and economic consequences, but it's really also a full scale, military pre positioning and preparation strategy, to disable the capabilities of the West. in time of conflict, or bring us to our knees without that conflict by letting us know what our vulnerabilities are. this is, to use the term again, and all of the above strategy, military and economic security for the Chinese is intertwined and they are hitting us on every front.

Stan McCoy: Wow.

Stephen Ezell: I concur with everything Michael said. and just sector after sector, you talked a bit about critical minerals. China mines 70 percent of the world's critical minerals and now controls 90 percent of the processing capacity. that is a critical short point for them. if you look at, medicines, active pharmaceutical ingredients, China accounts for 95 percent of our supply of ibuprofen, 91 percent of hydrocortisone, protecting, America's public health in the event of a conflict, becomes of major vulnerability should China decide to shut that down. and one more point here, and now this is a stat from 2020, but as of 2020, when you looked at who was studying, Electrical engineering and computer science at the master's or Ph. D. level at U. S. four year universities. Eighty one percent were foreign born. Seventy percent between India and China. As much as we may have outsourced our manufacturing base to China, we have manufactured, we have outsourced our STEM talent pipeline. And I think that lack of a domestic science and engineering base is actually America's greatest national security vulnerability right now.

Stan McCoy: So this kind of speaks to The need for a more conscious industrial policy on the part of the U. S. government, and it's something that ITIF has written a lot about, and that both of you have, spoken about in the past. I guess my question to you, my challenge to you is, is the United States any good at industrial policy?

We don't have a fantastic track record of that.

Stephen Ezell: Go ahead, Mike.

Michael Wessel: I would actually say we have a, great track record when we're focused, and know what the, the goal is. World War II is the best example of that, with freedoms forge and the ability to unite our supply chains with surge capacity, etc. The threat vectors have expanded, so it's no longer sort of, you know, Ground vehicles or battleships, you know, we are looking at every domain, as a potential, threat space, electronic spectrum, et cetera. So we need to prepare for all of it. I have great faith in the American people when they are led and when they are focused on what their, leader tell them they need to do and give them plans, our ability to perform. Right now we just don't have those plans. you know as steven talked about pharmaceuticals We've been you know, identifying that issue for years in 2019 the china commission held a hearing On U. S. dependence on China, we had a DOD official come in and talk about the complete offshoring of penicillin and other antibiotics. Antibiotics are the first product that the military needs in a potential war situation. If somebody's shot, injured, they bring them into, a field hospital, et cetera. And, they want to apply antibiotics to, stem any infections, We've offshored that. we've done it with, countless life saving and life maintaining drugs, blood pressure medicines, etc. we need to reclaim that. We need to understand what the real threats are, prioritize meeting those needs. in strengthening our critical infrastructure, our pharmaceutical and medicines, our space capabilities, the ability to maintain communications, water supplies, etc. And, you know, we are woefully deficient.

Stan McCoy: Steven?

Stephen Ezell: I think Mike is exactly right about all that. I mean, the choices between all government or no government when it comes to innovation industrial policy. It's what is the right mechanism for government to play in supporting the innovative capacity of American industries?

Stan McCoy: Well, you seem to take offense at my characterization that we're not good at industrial policy in the U. S.

Stephen Ezell: I mean, what is industrial policy? What is innovation policy? I mean, to me, industrial policy is when we bail out GM, and Stellantis, Chrysler, at the end of the Great Recession. That's industrial policy. Innovation policy would have been How we've been working with those companies to help them develop technologies that would keep them competitive in global markets.

So we don't have to resort to that kind of invasive industrial policy to save them. Industrial policy is when France creates a company called Quero to go out and be the called Google killer. When France creates a firm called Numergy and CloudWatt to compete against Amazon Web Services.

That's industrial policy. A great example, the company YMTC. This is a Chinese memory technology company, computes with micron. It was stood up by the Chinese government with a 24 billion dollar investment. A company brought into existence by a government. That's industrial policy. What we're doing with the CHIPS act that's innovation policy that is helping our companies. You know 13 billion dollars of R&D to create a national semiconductor technology consortium a manufacturing usa institute to support Advanced semiconductor manufacturing. Yeah. Okay. There were some loans and grants in CHIPS act investments other countries put on the table to defray the cost of land electricity, etc I think To Mike's point, you know, go back over time, the canal system, the interstate highway system, the railroads, founding RCA, right? we can do industrial policy, but I think the key point is it's got to be implemented or effectuated as a public private partnership whose intent is to broadly enhance the capabilities of American industrial sectors and where the government and companies are co investing in that outcome.

we're coming to the end of our time here, and I'm left with the uncomfortable conclusion that my premise is more right than wrong on, China having already won. Where are the two of you on that question? Michael?

Michael Wessel: I think China has made major advances and is a peer competitor and threat in too many areas. I still believe that the U. S. and Western systems, can, win any war at this point. command control in China is a very different situation, in terms of the ability, individual companies, and quite frankly in the military for your individual troops to be able to make decisions.

You still have political commissars and others who do things. We have, the, flexibility, the ingenuity, and the capabilities, but they are not being harnessed correctly right now, and if they are not, we certainly will lose.

Stan McCoy: Stephen?

Stephen Ezell: You know, success is never permanent, failure is never final. Certainly, there are many structural challenges that the CCP has erected for itself. certainly the one child policy was a very bad decision at current demographic trends continue. their population may decline to just 600 million people by the end of this decade. certainly they have a massive debt overhang. There is tremendous inefficiency in their economy.

So, you know in my view we should be pushing, on the imbalances in their system. we can't contain China, but we can work to constrain and denude their capabilities. And in my view, we should be doing that to the maximum extent we're able.

Stan McCoy: Well, I think that's a good note to end on. And, for me, an opportunity to say thank you to both of you, Michael and Steven for joining us for a very enlightening discussion, on the theme of has China already won? I really appreciate you being a part of it.

Michael Wessel: Thanks for inviting me.

Stephen Ezell: Thank you, Stan. ​