The Case Against Allowing Chinese Factories in America

Changes in Washington policy are pretty predictable if you know how to read the tea leaves. People bring up new ideas at conferences, offering what they believe to be a bold intervention. Think tanks start writing, arguing that “now is the time for big change.” And influencers, on the hunt for ever more clicks, offer up the idea on their platforms as if they have just discovered the cure for cancer.

We are unfortunately approaching that point with the idea that it is time to let Chinese companies, especially EV and battery makers, have tariff-free access to the U.S. market if they produce their products here. Let’s be clear: This would be the final nail in the coffin of U.S. manufacturing.

The current iteration of the idea is to encourage Chinese EV and battery makers to build factories in America, following the model of many Taiwanese, Japanese, Korean, and European firms that already operate facilities here across a range of industries. Proponents believe that this would reduce the massive trade deficit and create manufacturing jobs.

But this is an idea that needs to be smothered in its intellectual cradle.

To be sure, if the choice is between importing Chinese goods and having them made in the United States, the latter is more tolerable. But that should not be the choice. That framing ignores the fact that other options exist and that some are already in place.

For example, in the case of Chinese EVs, why not just continue with the 100 percent tariffs? Allowing BYD or another Chinese automaker to open a factory in the United States wouldn’t create any net new American manufacturing jobs (vehicle demand is finite). It would simply shift vehicle-manufacturing jobs to Chinese-owned companies. The same is true for most Chinese imports, especially products already made in the United States, such as semiconductors, pharmaceuticals, and machine tools.

Doing so would mean reduced domestic firm capabilities. To use the auto example, letting Chinese firms produce here could very well lead to the bankruptcy of one of the Big Three. If not bankruptcy, then at minimum mass layoffs across all three companies.

Predictably, globalists will argue that tariffs are bad, especially on planet-saving products like EVs and batteries. I agree: Tariffs on most of our allies—at least ones that are higher than what they impose on U.S. exports—are not good. But China is a whole different kettle of fish.

China is the kryptonite of the global trading order and the WTO. Massive subsidies, closed domestic markets, standards manipulation, and IP theft are hallmarks of the CCP’s system. Why should the West reward such predatory practices with market access?

But okay, set all that aside. What if policymakers ignore these transgressions and, in the name of free trade and international comity—"it is critical that Trump and Xi cooperate”—remove the tariffs, or at least lower them to the so-called Liberation Day base rate of 10 percent? Then the choice does become one between imports from China and Chinese production in America.

At first glance, having the Chinese producer here might seem better, assuming the Chinese share of the U.S. market remains the same under imports versus domestic production. But that assumption is unlikely to hold true. Producing here could very well give Chinese firms a larger share of the American market, given their ability to gain tacit, ground-level knowledge of U.S. industries and consumer behavior.

But even if market share were identical under imports versus domestic production, there are still good reasons to oppose the latter. Unlike American-produced cars and some of those made by foreign automakers, a substantial share of the value added in vehicles is generated in the United States (or at least in North America). That would likely not be the case with Chinese companies, whether in autos, batteries, or other advanced-tech industries.

Much of the highest value-added work, including R&D, engineering, and the most complex production processes, would likely remain in China. Reducing the market share of U.S. firms would therefore mean fewer design, R&D, and advanced engineering jobs, as well as reduced innovation output, in the United States.

In addition, even assuming all cyber risks could be fully addressed—no remote shutdowns or CCP-directed tracking—China would still gain greater control over the U.S. economy. Unlike any other country in the world, the CCP can tell its firms to jump, and they ask, “How high?”

It is one thing to encourage our allies to build factories on American soil; that is far better than continued imports. For decades, international automakers like Toyota, Honda, and BMW have invested in U.S. operations, building full-scale production factories—and that’s a good thing. Foreign firms in other advanced industries, such as Samsung and TSMC, are expanding their manufacturing footprints in the United States, building cutting-edge facilities—and that, too, is a good thing.

But that is fundamentally different from allowing China to do the same. Our allies, including Korea, Japan, Germany, and others, are well-established allies. To be sure, President Trump’s protectionist actions have unsettled some allied leaders, and recent rhetoric at Davos has exposed real friction within the Western alliance. But these countries remain durable market democracies with long-term interests more closely aligned with the United States than with the CCP. Their strength still reinforces overall allied techno-industrial power vis-à-vis Beijing.

Allowing Chinese factories in the United States would largely displace American firms’ market share, hollow out domestic capabilities, and create new strategic dependencies—if not all three at once.

Even more troubling, however, is what this new, increasingly fashionable idea says about the overall state of U.S. techno-economic development. There is a long tradition in regional economics and economic geography focused on the spatial organization of production. Originally put forth in 1960 by economist Raymond Vernon and refined nearly 20 years later by economic geographers John Rees and R.D. Norton, this framework holds that advanced regions and nations specialize in early-stage product-cycle activities, such as R&D, engineering, and prototype production, coupled with continuous innovation. Lagging regions and nations, by contrast, depend largely on attracting commodity-production branch plants after products and production processes have reached some level of maturity.

For example, when personal computers were first being introduced in the 1980s and early 1990s, more of them were made in the United States, in part because designs were constantly changing and required close interaction among design, engineering, and production. But as PC technology matured—still evolving, but more incrementally, with process technology relatively stable—production could be moved offshore with relatively little impact on innovation.

This core-periphery distinction, based on production-cycle stage, characterized state and local economic development strategy in the United States from the 1930s through the 1990s. Higher-cost Northeast and Midwest states were home to most advanced production activities, while lower-cost Southern, Southwestern, and Mountain states specialized in recruiting manufacturing factories from established industrial cores: a practice called “smokestack chasing.”

That dynamic began to change fundamentally with NAFTA in 1994 and then accelerated with permanent normal trade relations (PNTR) with China in 2000. U.S. companies increasingly moved routinized production not to the Southeast United States, but to Southeast Asia and just south of the U.S. border. At one level, this might have been fine if two conditions had held: (1) the United States ran roughly balanced trade, replacing lost factories with new advanced, export-oriented production at home; and (2) it continued to move up the value chain, capturing the lion’s share of innovation-based production activity.

Needless to say, that failed to happen. China, Mexico, and other low-cost competitors contributed to a sharp decline in U.S. manufacturing and a widening trade deficit. Worse still, China has made substantial gains in advanced industries, to the detriment of the United States as a whole. Of course, a few regions—Silicon Valley, Boston, Seattle, and San Diego—retain strong innovation ecosystems, but much of the country has weakened. The “Rust Belt” effectively became a “Rust Nation.”

The reason for this background is simple. With today’s renewed push, including by the Trump administration, to induce other countries to build in the United States, it appears the country has come full circle.

Once the world’s leading industrial core for early-stage product-cycle innovation and advanced technology generation, the United States now risks sliding into the periphery. Instead of behaving as the U.S. Northeast and Midwest once did, it risks behaving as the Southern, Southwestern, and Mountain regions did: begging, bribing, and threatening foreign companies to build factories on U.S. soil.

In their defense, advocates of allowing Chinese factories across America argue that this is necessary, claiming that such exposure will shock U.S. companies out of their lethargy, “forcing them to compete.” Blogger Noah Smith makes this case by citing a study by Bloom et al.; as Smith summarizes it, while the “First China Shock hurt European profits and workers alike, it also increased innovation and productivity among European producers.”

First, having recently spoken at the Society of Automotive Engineers’ annual conference, I can say with confidence that the American auto industry, including foreign transplants, is already scared witless of Chinese firms. They are not sitting back thinking, “Oh, this is great. Let’s take a nap because the Chinese ain’t selling here.” To believe that is just silly. Competition among existing firms is already intense.

Second, had Smith bothered to review the literature fully, rather than cherry-picking a study that supported his fashionable new idea, he would have found that the Bloom study was subsequently and firmly rebutted. A 2019 scholarly journal study by Campbell and Mau found the opposite result, consistent with most research on impacts on firms in the United States. Campbell and Mau concluded:

[T]he apparent positive impact of Chinese competition on European patenting [that Bloom et al. found] disappears once one controls for richer sectoral trends, the lagged level of patents, or switches to Chinese import penetration instead of the Chinese share of imports … Thus, we believe we have partially solved the puzzle of why the rise of China ostensibly had a negative impact on patents in the US (or, others have found no impact on R&D for the US), but a positive impact in Europe—the latter results appear to be spurious.

Indeed, they found that “when controlling for lagged patents and outsourcing, and using Chinese penetration, one is more likely to get negative and significant coefficients.”

Smith’s claim is a bit like arguing that the New England Patriots need to play not only the Seattle Seahawks to stay motivated (the equivalent of today’s already intense competitive environment in most industries), but also a team whose players are on mega steroids, wield brass knuckles, and never get called for holding.

In summary, some foreign greenfield investment can strengthen U.S. techno-economic power. But it cannot substitute for domestic firm creation, expansion, or innovation. As such, what the United States needs is a robust, sophisticated national techno-industrial strategy, one that restores America as a global core region for innovation and advanced production, rather than a peripheral region dependent on investment decisions made in Beijing or elsewhere.

ITIF’s Hamilton Center on Industrial Strategy is producing a special research series examining China’s predatory industrial strategies, their impact on U.S. technological leadership, and the policy framework needed to strengthen America’s “national power industries”—advanced, traded-sector industries critical to economic strength and national security. ITIF will publish new reports in this series throughout 2026, many focused on concrete policy reforms across areas such as business financing, STEM research, budget policy, and regulation, aimed at rebuilding U.S. techno-economic strength and competing effectively with China.