U.S. Senator Cotton said the battle between the United States and China is a “protracted twilight battle that will determine the fate of the world” and that “we need to defeat this evil empire and throw the Chinese Communist Party …… into the ash heap of history.”
On Feb. 17, U.S. Sen. Tom Cotton (R-UT) released an 84-page report. The report says that China needs the United States more in the U.S.-China economic relationship, and that the United States holds six Trump cards if the U.S. economy is decoupled.
The report, titled “Beat China: Targeted Decoupling and the Economic Long War,” was called by Vox, a U.S. media outlet “the most detailed strategy for long-term U.S.-China competition.
Vox said the report “reflects a growing bipartisan consensus on the future of the U.S.-China economic relationship, and really puts into writing the view coming out of Washington that the U.S.-China relationship is a zero-sum game.
Cotton, who chaired the last congressional subcommittee on economic policy, is familiar with the most sensitive messages in the U.S.-China economic relationship. In the preface to the report, Cotton says: The U.S.-China economy is far more integrated than the economic relationship between the free world and the Soviet Union during the Cold War, and it is this relationship and U.S. freedoms that the Chinese Communist Party hopes to use to replace the United States and reshape the global order according to its own ugly ideology without a major war. Decades from now, when Americans wake up to find America poorer, weaker, and more disadvantaged, it will be too late.
Introducing the report in a speech at the Reagan Institute, Cotton said that the battle between the United States and China is a “protracted twilight battle to determine the fate of the world” and that “we need to defeat this evil empire and throw the Chinese Communist Party …… into the ash heap of history. We need to defeat this evil empire and throw the Chinese Communist Party into the ash heap of history.”
The cost of targeted decoupling from China (CCP) pales in comparison to the cost of passivity,” the report said, “and we cannot stand by and watch the United States become increasingly decrepit, ceding its position to a totalitarian state committed to bending the world to its will. Americans must act decisively to avoid this fate.”
The report is divided into four parts: first, the current state of U.S.-China economic relations, second, targeted economic decoupling from China (the Chinese Communist Party), third, how to reduce the costs of decoupling, and fourth, the role of the federal government.
This article focuses on the part of the report that says that China needs the United States more than the other way around in the U.S.-China economic relationship. Contrary to the Perception of many, the United States has a greater ability to reshape its economic relationship with China on its own terms.
China’s Economy Becomes More Dependent on the United States
The report says that the U.S. and Chinese economies are deeply interdependent, but U.S. policymakers should keep in mind that China remains dependent on the United States in key areas and that it will be much more difficult and costly for China to break away from that dependence than people think.
China’s most important leverage over the United States is its manufacturing capabilities, and China supplies the United States with a wide range of goods and components, particularly in key areas such as Medicine, technology, and defense. In recent years, for example, Chinese manufacturers have supplied the United States with more than 90 percent of its antibiotics, vitamin C, ibuprofen and hydrocortisone, more than 70 percent of its acetaminophen and 40 to 45 percent of its heparin. about 80 percent of U.S. rare earth imports in 2016-19 were also supplied by China.
Another bargaining chip for China is the Chinese market. Years ago, China lured U.S. companies to the country with its cheap, unskilled labor and lax regulatory environment. Today, China attracts companies because of its experienced engineers, advanced supplier network and industrial capabilities. China’s large market also gives the Communist Party the ability to exert control over U.S. companies.
But the fact that China’s Destiny is more closely tied to the United States than America’s destiny is to China is a fact that American strategists must keep in mind. China’s dependence on the United States is in the following areas.
- High-end research and technology
Beijing relies on the United States for high-end research and technology. While the CCP is developing its high-end technology domestically, it has not yet achieved its goals in many areas.
The CCP has planted agents in U.S. R&D facilities to obtain early research at minimal cost and risk. Chinese companies then apply this research and rapidly expand their scale to compete unfairly with U.S. companies in the global marketplace.
Qiaohai Shu of the Chinese Academy of Social Sciences explains the logic behind this strategy, writing, “Innovation is Time-consuming, costly and risky …… but when it comes to technology application, the opportunity cost of leapfrogging is low and the chances of success are high. “
This strategy helps explain why the CCP spends only 6 percent of its R&D budget on basic research, while the U.S. spends 17 percent of its R&D budget on basic research. It also reveals why Beijing spends 84% of its R&D funds on experimental development (R&D), while the U.S. spends only 63% of its R&D funds on experimental development.
Thus, access to U.S. research and innovation is a central part of the CCP’s long-term economic, military, and political planning. Communist strategists have good reason to fear that the U.S. “high-tech embargo” will slow China’s economic development.
Washington can disrupt the CCP’s economic strategy by ending this parasitic relationship. If the CCP is denied access to U.S. research and high-end technologies, such as semiconductors, it will have to make additional investments in basic research. And at the end of 2020, the CCP’s total domestic debt has reached 335% of its GDP. Beijing will have to make these investments while maintaining its capacity for experimental development, rapid scale-up and production. China’s tax situation will be even worse than it is today.
- Foreign Investment
Outbound investment is another key dependency point. U.S. real estate and stocks are safe havens for Chinese companies and elites, despite the Chinese Communist Party’s draconian measures to curb capital flight in 2017 in an effort to stabilize the balance of payments.
U.S. investment plays a key role in China’s economic development, and this investment provides legitimacy to the CCP, builds industrial and technological capacity for the CCP, and creates a political force within the U.S. that is committed to not confronting the CCP. Reducing such investments would materially harm the CCP’s economy, international standing, and possibly the CCP itself.
The United States should close loopholes that prevent U.S. companies from forming joint ventures with Chinese companies in sensitive areas, such as advanced computer chip manufacturing. Because such joint ventures almost always transfer U.S. intellectual property to Chinese companies, the CCP clearly benefits most from these loopholes.
The U.S. should strengthen its regulation of inbound Chinese investments, and CFIUS, at the outset, should make a presumption of rejection of inbound CCP investments in key U.S. industries such as higher Education, entertainment, semiconductors, advanced telecommunications, rare earth elements, medical supplies and equipment, and artificial intelligence. Any entity that is directed by the CCP or inextricably linked to its strategy must be subject to strict scrutiny.
- U.S. Stock Market Access
Another point of reliance is that Chinese companies are allowed to list on U.S. stock exchanges despite the CCP’s refusal to comply with SEC audit standards. This prompted the U.S. Congress to pass legislation, co-sponsored by Senator Cotton and signed late last year, that would remove Chinese and Hong Kong companies from the U.S. stock exchanges if they fail to comply with Public Company Accounting Oversight Board (PCAOB) audits. The total market value of the more than 250 Chinese and Hong Kong companies listed on U.S. exchanges is more than $2 trillion.
- US Dollar Settlement System
China’s entry into the U.S. dollar settlement system is another bargaining chip for the United States. Because most dollar transactions are settled through the U.S. financial system, the U.S. has the power to block, hold, or otherwise interfere with numerous Chinese transactions.
The ubiquity of the dollar allows the U.S. to inflict huge losses on its adversaries with the stroke of a pen. For example, the Iranian economy shrank by 5.4 percent in 2018 and another 6.5 percent in 2019 after the Trump Administration reimposed sanctions on Iran, and the Iranian rial was trading at about 40,000 to the dollar on the eve of the sanctions, while in October 2020 it was trading at more than 300,000 to the dollar. dollar sanctions have also helped weaken Syria’s Bashar al-Assad and Vladimir Putin’s regime in Russia.
While the Chinese Communist Party seeks to overthrow the dollar-dominated trading system, it almost certainly will not risk catastrophic damage to its economy by weakening the dollar. This could leave its most important companies, such as huawei and ZTE, which rely heavily on foreign inputs, international trade and the dollar system, isolated.
However, each major sanction by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) puts the dollar system at increasing risk, making the dollar less attractive as a reserve currency and less reliable as a trading currency. This tension between the power of sanctions and the threat such sanctions pose to the dollar must be handled with care.
- The U.S. market
China is also dependent on the U.S. market, which imported 19 percent of China’s exports in 2018 and which is an irreplaceable export for China’s oversupplied goods. In contrast, U.S. exports to all countries accounted for only 11.7% of U.S. GDP in 2019, and U.S. exports to China accounted for less than 1% of U.S. GDP in 2019.
While China has made efforts to accelerate domestic innovation and reduce its dependence on exports, it is still a long way from being as innovative as the U.S. or as self-sustaining as the U.S. economy, so China’s large trade surplus with the U.S. is both a sign of the Communist Party’s productive capacity and a potential weakness that the U.S. can exploit.
In the case of the U.S.-China trade war, for example, while the U.S. economy grew at a healthy rate from 2017 to early 2020 prior to the outbreak of the CCP virus, official CCP economic growth, while still higher than that of the U.S., slowed to its lowest level in decades during this period, illustrating the extent to which the Chinese economy is dependent on the U.S. consumer market.
The slowdown also has important political implications, with the potential for internal discontent and a possible rethinking of the CCP’s role by Chinese citizens willing to accept an increasingly harsh authoritarian state in exchange for a higher standard of living. Thus, the CCP’s fear of declining exports, growth and employment could constitute political liability. Other domestic issues could exacerbate the pressure on the regime.
U.S. policymakers must recognize that the United States has enormous influence over the CCP. Having become accustomed to the CCP’s use of the domestic market as a weapon, many in the United States seem to forget that U.S. market access is one of the world’s most valuable prizes, especially for the world’s largest exporter. Thus, U.S. market access may be the single most powerful bargaining chip in the overall competition, but only if the United States can build resilient supply chains for essential goods that are not dependent on Chinese manufacturing.
But time may be running out to take advantage of this opportunity. China’s economy is not as export-oriented as it once was. in 2006, exports accounted for 36 percent of China’s GDP, but only 18 percent in 2019. The window of opportunity for the United States to pressure the Chinese Communist Party by restricting access to Chinese markets is closing.
- Higher Education
In terms of higher education, the U.S. has more leverage. about 370,000 Chinese students are studying in the U.S. in 2018-19, up from fewer than 100,000 a decade ago, and nearly half of them are enrolled in STEM (science, technology and engineering) programs, compared to the minuscule trace of U.S. presence in Chinese higher education.
U.S. universities and laboratories offer high-level training and research opportunities that are not readily available elsewhere. With the right incentives, these institutions could replace most Chinese graduate students with Americans or students from India, Japan, Korea, and other countries that are not systematically stealing from our allies and partners.
By excluding China from STEM institutions, the U.S. could jam the Chinese Communist Party’s innovation and technology pipeline and force it to find alternatives at a high cost.
While breaking the post-Cold War model is disruptive, maintaining the status quo is the more dangerous path, and the CCP will grow rapidly with subsidies from U.S. investors and consumers. At that point, the CCP will decouple in a more destructive way than the targeted decoupling proposed in this report.
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