Note to Biden: Forget Trade, the Real War With China Is Over Tech
Just like Trump, Biden is stuck in the last century if he believes globalization is about trade and rust-belt manufacturing jobs.
New administration, same old trade policy? There is a world of difference between outgoing U.S. President Donald Trump and President-elect Joe Biden, but when it comes to trade—especially with China—Biden has promised to out-protect even the exiting arch-protectionist. Not only did Biden, as a candidate, pledge to take even more “aggressive trade enforcement actions against China,” but he also proposed to rewrite global procurement rules to accommodate his $400 billion “buy American” plan for government purchases. Japan and the European Union might have something to say about that.
If Biden really is the “last, best hope for globalists,” as the Financial Times made him out to be in April, the globalists should worry. “Deglobalization” was the word of the year even before the coronavirus pandemic set country against country in the mad scramble for masks and ventilators. And indeed, both U.S. imports and exports are down this year compared to the first nine months of 2019. That’s after running flat for a decade.
But anyone who thinks globalization is still all about trade—as both Trump and Biden do—must have missed the 2010s entirely. Today it’s technology that ties the world together, not the container ship. To be effective in leading the United States in the 21st century, Biden will have to learn that dominance in technological networks is the key to success. There’s no harm in trying to reshore some manufacturing, as he talked about during the campaign, but it’s not going to shift the geoeconomic balance of power in the Indo-Pacific. If Biden really intends to get tough with China, he’ll have to double down on the U.S.-Chinese tech war that has seen Huawei crippled, Chinese semiconductor foundries put under severe pressure, and TikTok brought to the edge of divestment.
Contrary to media portrayals of Trump’s trade war as an abject failure, it has actually succeeded in driving down U.S. imports from China. The seemingly inexorable long-term trend of increasing dependence on China has been reversed. But the reduction in imports from China has had essentially no effect on the overall U.S. merchandise trade deficit, since supply chains have merely been redirected from China to other East Asian countries, particularly Taiwan and Vietnam. Whatever that may mean for manufacturing towns in U.S. swing states, it’s bad news for China. The massive shift in trans-Pacific supply chains is likely what prompted Chinese President Xi Jinping to announce his dual circulation strategy encouraging Chinese companies to buy fewer materials abroad, and source them at home instead.
Both Biden’s buy-American and Xi’s dual-circulation strategies signal a shift toward autarky. Neither stands much chance of success. China has been trying to boost domestic demand for years, but has consistently been stymied by high inequality and a weak social safety net—problems the ruling Communist Party is in no hurry to solve. And despite U.S. presidential candidates’ rhetoric in the rust-belt states, the United States is too rich to ever again become a manufacturing powerhouse. Advanced manufacturing countries like Germany and Japan have levels of national income per capita on a par with the poorest U.S. states. As Bruce Springsteen sang back in 1984, “These jobs are going, boys, and they ain’t coming back.”
Manufacturing jobs are even less likely to come back if Biden really is as committed to working with allies as he constantly claims to be. In the first three years of the Trump presidency, the U.S. merchandise trade deficit with the European Union boomed (though it seems to have settled back in the first nine months of 2020). The Europeans won’t want to give up those gains. More importantly, the EU has embarked on an aggressive program of regulation to hobble U.S. technology giants such as Amazon, Apple, Facebook, Google, and Microsoft. European Competition Commissioner Margrethe Vestager has expressed alarm that the coronavirus pandemic “showed how dependent we are on U.S. corporations.”
Biden will have a tough time building “a united front of U.S. allies and partners to confront China” when European countries and even Australia are lining up to regulate and fine the companies of some of Biden’s most committed campaign donors. Even America’s closest security partner, the United Kingdom, had to be dragged kicking and screaming into banning Huawei from the country’s 5G networks. Biden is right when he says that “China can’t afford to ignore more than half the global economy,” represented by the world’s liberal democracies if they present a united front on “everything from the environment to labor, trade, technology, and transparency.” But it is little more than wishful thinking to believe that a Western world without Trump’s forcefulness on China will present a united front on these issues.
If Biden does decide to end the trade war with China, it will probably have little effect on shifting trans-Pacific supply chains, because China’s increasing domestic repression, hostility toward foreigners, and general unpredictability will be enough to keep companies away. When one of the country’s most loyal technology titans, Jack Ma, can have the $300 billion initial public offering of Ant Group (the fintech giant he founded) canceled at the last minute on Xi’s personal orders, foreign investors have to know that they don’t stand a chance. The listing of Ant Group on the Shanghai and Hong Kong stock exchanges was supposed to demonstrate the continuing strength of Chinese financial markets. Instead it showed the world that even Chinese national champions can’t risk offending the Communist Party.
Such a febrile environment is ripe for disruption by the United States. Trump’s tech war on China is only about six months old, but it is already forcing decisive changes in Asian technology networks. South Korean and Taiwanese firms have fallen into line with U.S. policy and have begun cutting some of their cords to China, and Huawei is on the verge of collapse. China’s long-term strategy to build a domestic semiconductor industry is in shambles. Follow-on effects are likely in related industries such as artificial intelligence, cloud computing, and self-driving vehicles. China, which has long forced foreign firms to transfer technology as the price of entry into its domestic market, now faces the prospect that foreign firms will pass on the Chinese market in order to maintain access to the United States—and consequently keep their technologies to themselves.
It may be political anathema to admit it, but the United States doesn’t need a return of manufacturing jobs from China. It is much more important for the country to preserve its technology lead over China. Unlike his import tariffs with their flimsy legal basis, Trump’s China tech war was based on export licensing powers unambiguously vested in the executive branch by Congressional legislation. The president can add companies to the Entity List maintained by the Department of Commerce whenever it serves U.S. national security and foreign policy objectives. That’s all the authority Biden needs to keep the pressure on China. It might be nice if U.S. allies joined the effort, but it won’t be necessary. For all his internationalist rhetoric, Biden may ultimately discover that it’s easier to go it alone.