Washington Is Still in Denial About China’s Techno-Economic Challenge

Compared with a decade ago, Washington is significantly more focused on the techno-economic and trade challenge from China. That’s the good news.

The bad news is twofold.

First, little has been done beyond passing the CHIPS and Science Act, establishing the House Select Committee on the Strategic Competition Between the U.S. and the CCP, implementing some export controls, and making various minor policy and legislative tweaks.

Second, and more important, Washington is still not afraid. It should heed the warning: “Be afraid. Be very afraid.” Yet few within the establishment—including pundits, academics, government officials, journalists, and lobbyists—believe China is poised to dominate advanced and emerging industries. Consequently, they fail to appreciate the fundamental shift in global power that would occur if the PRC succeeds.

I have made this case many times. If you don’t believe the threat is real, that’s fine. But if the threat is real, what explains the widespread equanimity? The reasons are many. Here are a few I hear regularly.

“U.S. companies earn high profits; Chinese companies earn low profits. Therefore, we are stronger.” True, but beside the point. For Chinese firms backed by government subsidies, accepting low profits is a deliberate strategy to gain market share. Following the classic pattern of low-end disruption identified by Clayton Christensen, Chinese firms attack markets from the bottom, where profit margins are lower, entrench themselves, and then gradually work their way up into higher-value segments.

“The United States leads in AI and has Silicon Valley.” To listen to the Washington debate, one might think the U.S. economy starts and ends in Northern California, and that generative AI is the only important technology. Both are wrong. We cannot compete with China through Silicon Valley and AI alone. Many other industries are critical to reducing U.S. dependence on China and maintaining a strong defense industrial base. Most U.S. regions also must play key roles as innovation and production hubs.

“U.S. firms are leaders.” They are. But, as ITIF has shown, Chinese firms are gaining ground, at least as measured by R&D spending and scientific publications. Moreover, even after almost a decade of encouraging U.S. companies to leave China or at least develop alternative sources, many leading advanced U.S. companies still have a significant presence in China, helping strengthen the Chinese economy.

“We are the most innovative.” This is a nice bedtime story, but two things are wrong with it. First, innovation is only part of the equation; scaling and production are what really matter. Many cases—electric vehicles, solar panels, and batteries, to name a few—show how U.S. innovation helped develop technologies, only for China to capture much of the global market through scaled, low-cost production. Second, China is becoming increasingly innovative.

“We will innovate in areas China can’t.” This narrative holds that it may not be good that we lost to China in established industries like electric vehicles, steel, electronics, and the like, but it’s okay because we will innovate and build new industries. There are three things wrong with this. First, we cannot afford to give China a monopoly in existing advanced industries. Second, there is not enough room at the top. Even if the United States captured the most innovative emerging sectors, such as AI, fusion, synthetic biology, and quantum, these sectors are unlikely to be large enough, on their own, to produce the exports needed to balance U.S. trade. Finally, this is hubris: It ignores just how innovative China has become and continues to become.

“Communists can’t innovate.” Related to the two preceding rationales is the myth that communists can’t innovate. If that is the case, how has China reached the global forefront of the EV and EV battery industries, become the world’s leading proponent of nuclear energy, and come to lead the world by volume in both robotics production and use—all while advancing rapidly in many other areas? A Gosplan-style economy like the Soviet Union struggled to generate broad-based commercial innovation, but China does not have such an economy. It is a state-directed and state-assisted capitalist economy in which firms and entrepreneurs retain considerable commercial latitude while receiving substantial state support.

“We have long been number one, so we are in good shape.” Who cares? History is rife with examples of nations that led the world economically only to fall by the wayside. There is nothing inevitable about U.S. leadership.

“U.S. manufacturing has not declined, and job loss is due to productivity, not China.” This is widely repeated, and if true, it would suggest that the China challenge is not really a challenge. But as ITIF and others have shown, it is simply wrong. Growth in manufacturing labor productivity was slower in the 2000s than in the 1990s, even as job losses were much greater.

“Why don’t we see Chinese products in the United States? Things must be okay.” One challenge in developing a clear-eyed understanding of the China challenge is that most people, including elites, tend to extrapolate from what they see and experience. A typical member of Congress uses an iPhone from an American company, U.S.-developed AI tools, and U.S. e-commerce platforms. They don’t see the areas where China leads. In part, this is because many of China’s strengths lie in intermediate goods, like steel, chemicals, and electronic components, rather than final goods. But Chinese companies also sell here under brands whose ownership or origins may not be obvious to most Americans, including EGO outdoor power equipment and SKIL power tools (both owned by China’s Chervon), GE Appliances (owned by Haier), Volvo Cars (majority-owned by China’s Geely Holding), Hisense televisions, and Motorola Mobility (owned by Lenovo). China’s presence in U.S. markets can therefore be larger than brand recognition alone suggests.

“China has macroeconomic problems, so all is well.” People point to China’s real estate bust, zombie companies propped up by state-owned banks, high youth unemployment, slower growth, and, of course, its low birth rate. These are real weaknesses, but none guarantees that China will lose the techno-economic competition. China’s growth rate remains far below its historical peak, but it continues to exceed the U.S. rate. More importantly, even that comparison misses the point. The CCP does not prioritize economic growth and productivity above all else; it also pursues global techno-economic power by building enormous capacity across key industries. Finally, even with its declining birth rate, China is projected to have vastly more people than the United States in 30 years. If the U.S. and the West don’t respond effectively by then, it’s game over for the techno-economic competition.

“China wastes money, so the United States is better.” Of course China wastes money, and the CCP appears willing to tolerate it. As long as enough of it sticks in the form of globally successful companies taking market share from the West, the CCP does not care.

“Even if China is a problem, we have the WTO.” Many elites are still wedded to the so-called international order and believe that, to the extent China is a problem, international organizations like the WTO can deal with it. In this view, it’s just not “cricket” for the United States to take unilateral action to restrict China’s techno-economic aggression. This is fantasy.

“China is just another Asian tiger trying to develop, so we shouldn’t worry or try to hold it back.” Yes, the CCP is following a familiar East Asian development playbook. But there are two main differences. The U.S.-aligned economies that used versions of that playbook were not strategic adversaries seeking dominance across every advanced industry. And the unfair Chinese playbook—including IP theft and massive subsidies—is in a different league from the approaches taken by Japan, South Korea, and Taiwan.

“If China destroys U.S. production, the solution is to help the workers it hurts.” Setting aside the fact that such losses could be reduced dramatically with the right policies, this ignores the importance of certain industries to national power and strategic autonomy.

But the arguments above are not so much reasons as rationalizations for more fundamental positions. People look for data and arguments to support their preconceived views and values. That is the real problem. Each side—conservative and liberal—has other fish to fry, while taking China seriously requires a new agenda, just as the rise of the Soviet threat after World War II required an agenda that neither the right nor the left fully embraced.

Acknowledging China’s success means accepting that we need a more active state. If the China challenge is real, we need a national techno-industrial policy. For free-market advocates, this is the worst possible sin. We don’t want to become like China. Even if we end up with a hollowed-out, Jeffersonian economy, at least we will be free. Perhaps—but not free from China calling the global shots.

For a large share of the left, climate and social justice goals are the top priorities. If the China challenge is taken seriously as an existential threat, then business tax cuts and deregulation would be in order, and any available government revenues would need to be devoted to this cause, not to redistribution.

Finally, for the foreign policy and trade establishment that still cannot give up on its goal of a globalized economy, admitting that China is strong and poses a threat bolsters the case for either the autarkists (like many in the MAGA movement) or the dualists (like ITIF, which supports limiting Western trade and investment with China). Even the latter position is a painful pill to swallow.

Given this refusal to see reality and embrace the challenge, the outlook for timely action by Washington is bleak. Without strong action, the competition could effectively be over in 15 to 20 years. Too many forces remain in denial or opposition.

Against this backdrop, four scenarios are possible:

1. Continued incrementalism and continued decline in American techno-economic power.
2. The election of a president who makes the challenge his or her top policy priority. President Trump certainly elevated the China challenge in his first term but has relegated it in his second term. This issue will be almost impossible to address without visionary and bold leadership from the White House.
3. A major Chinese act of aggression that wakes America up. An attack on Taiwan might spur that response, but even that might not. People may simply say, Munich-style, “Let China have Taiwan, and we can all go back to normal.”
4. The overthrow of the CCP and emergence of a democracy. That appears unlikely, at least anytime soon.

So, I expect the United States to retain enough strength in some areas to preserve critical production capabilities, even as China captures a growing share of global advanced industry markets. The likely result is that more countries will have to kowtow to Beijing.