Economic Strategy and Statecraft: From Engagement to Decoupling | A Response from John Hillen

A Response from John Hillen

To have a coherent policy towards China (or anywhere else for that matter), in which all the elements of U.S. grand strategy are in congruence with each other, economic statecraft needs to come in line with American political and military strategy. U.S. economic statecraft vis-à-vis China is a generation behind the geopolitical reality of America’s political and military challenge from China. A strategist reviewing only the economic data about the U.S.-China relationship of the last 30 years could well conclude that the two countries share a geostrategic relationship akin to U.S.-U.K. or the U.S.-Canada.

But, as we know, that is very far from the geopolitical reality of China as an increasingly dangerous rival to the United States in Asia and globally.

Unlike most systems of global order that went before it, the U.S.-led post-war system had the seeds of its own demise—in terms of relative power—built into it. Make no mistake, this was a feature of the software, not a bug. Even the architects of the Marshall Plan accepted that a Western Europe restored to power through American largesse could not be relied upon to have national strategies that always aligned with the United States.

While the absolute power and wealth of the United States grew to unprecedented heights, the system it promulgated and enforced grew the power of both past and future rivals. We hoped that commonality of interest—both economic and human—would temper traditional sources of conflict. But, as our colleague Nadia Schadlow has written, “Widespread political liberalization and the growth of transnational organizations have not tempered rivalries among countries.”

And so, we arrive at the strategic situation that Feith outlines vis-à-vis China, the United States’ greatest rival for influence and an expansionist superpower bent on offering the world entirely different “package of institutions” (in the words of Princeton’s Stephen Kotkin), than those of the Bretton Woods/NATO post-war era.

As Feith, Matt Pottinger and others have pointed out, President Xi has been admirably open about moving past any recognizable variation of capitalism or political pluralism. Oriented always on the control of the CCP, China will focus on its Island Chain strategy for regional domination, The Belt and Road initiative for economic influence, implementing one of history’s fastest military buildups, and refining “socialism with Chinese characteristics”—a sobriquet for a unique Chinese blend of state-controlled economics serving the strategic ambitions of the country and authoritarian surveillance politics.

To support this overall grand strategy, China’s economic strategy has shifted in recent years. It is China’s ambition to move from being the world’s great exporter of manufactured goods (29 percent of global manufactured goods versus the United States at 17 percent)¹ to gaining technological parity with the United States and its allies—and then surpassing them in key areas. The United States must counter without committing economic suicide.

In terms of economic statecraft, while the U.S. federal government has a stable monopoly on the exertion of military and diplomatic policy, American power on economic, cultural, and informational fronts is, by beneficial design, diffuse and non-governmental. China is by far and away the largest supplier of commercial manufactured goods to U.S. companies. Just 35 percent (pre-Covid spending) of U.S. gross domestic product (GDP) is related to government spending, and a sizable chunk of that is state and local spending. Creating and wielding coherent economic statecraft is a more imprecise exercise for U.S. officials than their Chinese counterparts.²

A blueprint exists from American history for an updated economic strategy for the China challenge in the form of the 1983 National Security Decision Directive 75. That document laid out a multi-faceted economic strategy to complement the grand strategy President Reagan adopted to challenge the Soviet Union. It was detailed and combative, but also nuanced - noting that U.S. economic pressure on the Soviet Union needed to be coupled with minimizing the “potential for Soviet exercise of reverse leverage on Western countries based on trade, energy supply, and financial relationships.”³ These are thoughts that would have been useful for continental Europe and its energy dependency in our current time.

The challenge to the United States in updating this for China today stems from the fact that America is infinitely more intertwined economically with China (directly and indirectly) than it ever was with the Soviet Union. The trade between the Soviet Union and the United States in 1958 amounted to only 0.5 percent of total Soviet foreign trade that year and to only about 0.01 percent of total American foreign trade.⁴ In 1979, just before the start of the Soviet-Afghan war, the Soviet Union accounted for 9 percent of global GDP. Today, Russia accounts for around 2 percent of world GDP. China is close to 18 percent.⁵ The global economy is intimately linked with China.

The keys to aligning the economic elements within U.S. grand strategy towards China are threefold: First, they must be targeted. Second, they must not backfire by causing economic damage to the United States or the global economy that is beyond bearing. Third, and to aid the first two principles, they should be accompanied by a national strategy to secure supply chains and reinvigorate some national capabilities that underpin U.S. competitive advantage in the future.

Feith presents a workable outline for threading these needles, and I endorse his ideas. If anything, I would challenge the United States to take those ideas even further. For instance, the United States should consider delisting all Chinese and Hong Kong based companies as under recent CCP rules and actions, none would meet the governance tests of listing on U.S. exchanges.

To advance this overall policy goal, America should not only target key technology, capital flows, and data but also secure supply chains and promote educational initiatives. I conclude with three principles that I think should frame U.S. policy action in these five areas of targeted de-coupling.

• Match negative policy moves with positive policy initiatives. We should not only sanction and deny, but also propel American programs forward as a matter of national policy or government incentives. For instance, the United States should not only limit Chinese access to American universities in key science and engineering areas but should subsidize a quadrupling of American enrollment in the same programs. In the past 20 years, America has gone from enjoying a 5:3 advantage over China in the number of STEM graduates to now seeing China graduate 4 times as many STEM students as the United States and 3 times as many computer scientists.

• Build new tools for a new strategy. The current intelligence and enforcement mechanisms at DoS, Commerce, DoD, and in the intelligence community are not sufficient to safeguard U.S. advances in artificial intelligence, machine learning, semiconductors, 5G wireless, quantum information science, biotechnology, and other key areas.

• Seek to implement these measures multilaterally whenever possible. The United States should make a multilateral initiative of its need to have a new national strategy for secure access to raw materials and supply chains through domestic supply, domestic industry (see the Eric Schmidt/Peter Thiel domestic chip initiative), “friend shoring,” and the like. We should unapologetically bolster this economic strategy with political and military support to close allies. The flag follows (secure) trade. Groups modeled on the Five Eyes alliance could be replicated around key technology areas.⁶

¹ Felix Richter, “Infographic: China Is the World's Manufacturing Superpower,” Statista Infographics, May 4, 2021, https://www.statista.com/chart/20858/top-10-countries-by-share-of-global-manufacturing-output/.

² The US government's Bureau of Economic Analysis for 2019 estimates $7.3 trillion in total government expenditure and $21.4 trillion total GDP which is 34%.

³ Executive Office of the President of the United States, “National Security Decision Directive 75,” Washington DC, 1983, 3. https://irp.fas.org/offdocs/nsdd/nsdd-75.pdf.

⁴ McIntyre, William R. \American-Soviet Trade.\ In Editorial Research Reports 1959, vol. II, 651-70. Washington, DC: CQ Press, 1959. http://library.cqpress.com/cqresearcher/cqresrre1959090200.

⁵ Felix Richter, “Infographic: China's Rise to Economic Superpower,” Statista Infographics, June 27, 2022, https://www.statista.com/chart/27688/chinas-share-of-global-gdp-vs-the-us-and-the-eu/#:~:text=World%20Economy&text=According%20to%20estimates%20from%20the,purchasing%20power%20parity%20(PPP).

⁶ See also: Ash Jain and Matthew Kroenig, “Toward a Democratic Technology Alliance: An Innovation Edge That Favors Freedom,” Atlantic Council, June 13, 2022, https://www.atlanticcouncil.org/in-depth-research-reports/report/toward-a-democratic-technology-alliance-an-innovation-edge-that-favors-freedom/.