Growing the U.S. economy is at the top of President-elect Donald Trump’s agenda, and tackling the many challenges in the U.S.-Chinese trade and investment relationship will be central to realizing this objective. Much of Trump’s rhetoric has focused on the use of tariffs: tariffs to rebalance the bilateral trade deficit, tariffs to incentivize U.S. multinational firms to reshore their supply chains and reduce their reliance on Chinese manufacturing, and tariffs to prevent other countries from answering China’s call to de-dollarize the global economy.
But tariffs are only one tool in a much larger toolkit. And if the United States is to protect its economic strength and move its own critical supply chains and those of its partners out of China’s reach, it will need all its tools. During his first term, Trump and his team began an effort to disentangle the U.S. and allied economies from China. President Joe Biden’s administration built on that foundation, developing domestic programs and foreign partnerships to diversify U.S. supply chains and invest in critical industries.
Washington, however, is still competing with one hand tied behind its back, and progress, although significant, is moving too slowly. It will take a full suite of economic incentives, public-private partnerships, and investment and trade deals to reduce the United States’ and its partners’ reliance on China. U.S. partners, concerned about Chinese influence themselves, are eager to work with Washington. If Trump can embrace a more ambitious economic and trade policy, his second term can supercharge the global shift away from dependency on Chinese supply, bolstering the U.S. economy and enhancing U.S. national security.
LAYING THE FOUNDATION
The U.S. economy is one of the strongest in the world. According to the annual Asia Power Index, which is published by Australia’s Lowy Institute and tracks the resources and influence of countries across the Indo-Pacific region, the United States has overtaken China over the last few years in terms of general economic capability and projected future resources. The United States has also maintained its lead in overall resilience, a measure that includes indicators such as internal stability and energy security. But the index also shows that Washington is punching below its weight in the critical area of economic relationships, which measures a state’s ability to use economic interdependence to exercise influence and leverage over trade and investment partners. Here, the United States ranks a distant second to China. And if the United States is underperforming in this measure in Asia, the same is likely true in Africa and South America, regions where China is the largest trading partner and an increasingly dominant source of investment.
Beijing’s lopsided advantage reflects the global economy’s continued overreliance—both real and perceived—on China. For decades, China’s massive size and growth created a sort of gravitational pull. Countries and companies raced to take advantage of the opportunities China offered. Beijing used industrial policy, low-cost labor, intellectual property theft, and trade and investment barriers to shape those interactions and push Chinese firms to the center of global value chains. As a result, Chinese companies are now at the forefront of investing in and deploying the industries and technologies—such as mining, clean energy, and information and communications technology—that will drive economic growth and ensure economic security for the rest of the century.
Many countries and multinationals recognize that they are too reliant on China and are seeking other options. The COVID-19 pandemic demonstrated the risk of overdependence on any single supplier, even a benevolent one. And Beijing has shown that it is not benevolent. Countries now worry about Chinese economic coercion reducing their exports and investments, Chinese overcapacity harming their domestic industries, and potential Chinese military action against Taiwan disrupting critical supply chains.
Tariffs are only one tool in a much larger toolkit.
Their collective concern presents an opportunity for Washington to shape global supply chains in ways that reduce Beijing’s influence and leverage, enhance the position of the United States, and make the world economy more resilient. Early steps in this direction began in the final months of the first Trump administration. In May 2020, U.S. officials initiated talks with semiconductor companies, including Taiwan Semiconductor Manufacturing Company, the U.S.-based Intel, and the South Korean–based Samsung, about how best to incentivize these firms to build cutting-edge fabrication plants in the United States, whether through public-private partnerships, tax credits, or grants and loans. Biden built on these initial efforts when he signed—with bipartisan support—the 2022 CHIPS and Science Act, which has so far awarded a total of more than $30 billion to 27 companies and catalyzed over $400 billion in private-sector investment for domestic semiconductor manufacturing.
The Biden administration has also laid other groundwork. In early 2021, it released an executive order that set priorities for supply chain diversification, focusing on critical minerals, semiconductors, advanced batteries, and active pharmaceutical ingredients. The order put the United States well ahead of its peers in reducing the exposure of critical sectors to China, and since its passage, Japan and the European Union have both announced their own economic security strategies that prioritize supply chain resiliency.
The 2022 Inflation Reduction Act, like the CHIPS and Science Act, has also triggered a race to the top as companies diversify their manufacturing supply chains in order to benefit from manufacturing incentives and other clean energy subsides. In its first two years, the IRA attracted investments equaling more than $215 billion in the battery, electric vehicle, renewable energy, and nuclear energy sectors. The law includes strict local content requirements for companies to receive tax credits for electric vehicle production: 50 percent of the critical materials used must be sourced from the United States or a country with which the United States has a free-trade agreement. By 2027, that figure will rise to 80 percent. The emphasis on domestic spending is the centerpiece of the U.S. strategy. It signals to markets that there is money to be made in alternatives to Chinese goods, and it brings advanced manufacturing jobs back to the United States.
SUPPLY CHAINS AND SEMICONDUCTORS
The Biden administration has taken advantage of other countries’ interest in “de-risking” their economies to create a centripetal force, pulling allies and partners toward new, more secure and more resilient supply chains. One focus is critical minerals, an area in which China accounts for roughly two-thirds of global production. In this sector, Beijing has a near monopoly on graphite, a mineral needed to make electric vehicle batteries. Periodically, China has used its control of these supply chains to pressure other countries, cutting them off from much-needed supplies. In 2023, the Chinese government rolled out new export controls on graphite as well as gallium and germanium—minerals for which Western dependence on Chinese supplies is particularly high. The restrictions were a warning shot. The only way to reduce Beijing’s leverage is to bring new supplies to the global market. This requires considerable funding, both for mines and for processing plants that turn raw materials into final products.
Anticipating the problem, Washington launched the Minerals Security Partnership in 2022 to invest in sustainable critical mineral supply chains. The partnership now includes 14 countries (Australia, Canada, Estonia, Finland, France, Germany, India, Italy, Japan, Norway, South Korea, Sweden, the United Kingdom, and the United States) and the European Union. The group also works with mineral-producing countries, such as Argentina, the Democratic Republic of the Congo, and Zambia, that are equally concerned about overdependence on China. Partnership countries do not want China to be their only source of critical minerals, and producing countries do not want Beijing to be their only source of investment. Both sides are looking to diversify. Two years in, this program is already moving markets. In May, the MSP announced a deal between the Belgian-based refiner Umicore and STL, a mineral processing company in the Democratic Republic of the Congo, to bring new germanium supplies to market. In September, it announced the South Korean–based steel manufacturer POSCO would be teaming up with Australia’s Black Rock Mining to develop a graphite mine in Tanzania. These types of multinational, public-private partnerships enable the United States and its partners to compete with Chinese suppliers, making all countries involved—including the producers—more resilient.
Washington is making progress outside of the MSP, too. The U.S. Department of Defense is signing agreements with non-Chinese suppliers, which helps strengthen alternative supply chains by giving mines and processing plants guaranteed revenue. Pentagon purchases support a graphite project in Alaska, graphite and cobalt projects in Canada, and a graphite mine in Australia, among others. In Greenland, where Washington and Beijing have been jostling over access to the world’s largest rare-earth deposits, Critical Metals Corp, the U.S. subsidiary of European Lithium Limited, won the bid to acquire a controlling share in the Tanbreez Rare Earth Mine. A Chinese-invested competitor attempted and failed to secure a mining license to develop a neighboring site to tap into the same rare-earth deposits.
Many countries and firms recognize that they are too reliant on China.
For now, the United States and its partners in East Asia and Europe dominate the global semiconductor industry. But Beijing is estimated to be investing more than $150 billion over a decade and a half in an effort to catch up with the leading-edge chip designers and manufacturers and dominate this supply chain. Washington and its partners’ lead therefore needs shoring up, lest semiconductors go the way of telecommunication equipment, solar cells, electric vehicles, critical minerals, and other industries in which China’s overwhelming share gives it dangerous influence.
Some of this work has already started with the CHIPS and Science Act. As domestic semiconductor manufacturing ramps up, new plants will need access to upstream manufacturing inputs and downstream processing capacities that are free from Chinese control. The law therefore provides $500 million to the State Department for a fund to make smart international investments in those supply chains.
Downstream processing investments were the first out of the gate. After chips come off the high-end fabrication lines in the United States, much of the testing, packaging, and assembly will be done in lower-income countries, a system that keeps costs down but preserves production jobs at home. The U.S. government has directed funding to countries that are ready to get these processes up and running quickly. Costa Rica, for example, was a fast mover. Together with the Organization for Economic Cooperation and Development, Washington is working with the Costa Rican government to make the local regulatory system more attractive to private investors. With State Department funds, Arizona State University—which has a leading semiconductor program—will train Costa Rican workers. Intel also recently announced new investments in the country. And U.S. investments do not stop there: the State Department is also disbursing funds across the Americas and Asia, including to India, Indonesia, Mexico, Panama, the Philippines, and Vietnam.
These types of on-ramps to the U.S.-centric chips supply chain provide partner countries the flexibility to ignore some of Beijing’s demands. In August 2023, for example, Costa Rica issued new cybersecurity regulations banning “untrusted vendors” from its telecom networks. (The Chinese company Huawei, a target of the ban, subsequently sued the Costa Rican government.) Access to the U.S. semiconductor supply chain likely helped assure the Costa Rican government that it could weather a backlash from Beijing. For other U.S. partners, funding programs open the door to a high-tech, U.S.-centric economic growth option. With the alternative being a lower-value-added, China-centric option, it is no surprise that they are racing to get in.
NEW DEALS
The Indo-Pacific Economic Framework for Prosperity (IPEF), an initiative the Biden administration launched in May 2022, is taking supply chain diversification to the regional level. In early 2024, the United States and the framework’s other 13 members (Australia, Brunei, Fiji, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam) began implementing an agreement that established a supply chain council to align policies and develop new initiatives, a crisis response network to share responsibility for identifying and addressing vulnerabilities, and a labor rights advisory board to represent workforce interests. The council already has plans to focus on three sectors that are core to economic competitiveness: semiconductors, chemicals, and critical minerals, particularly the minerals needed to manufacture electric vehicle batteries.
The framework also aims to energize U.S. and other investment in the region’s clean economy sector. In June, Singapore hosted an IPEF clean economy investment forum that drew 150 companies and investors and identified $23 billion in priority projects for sustainable infrastructure. U.S. companies such as Amazon Web Services, Bloom Energy, Google, and I Squared Capital also announced billions of dollars of new investment in clean energy and information and communications technology projects in the region. And together with Australia, Japan, and South Korea, the United States created an investment fund that is supporting a renewable energy platform in India, as well as projects in Indonesia and Vietnam.
In the Indo-Pacific and beyond, the International Development Finance Corporation, a U.S. agency created during the Trump administration, has been financing deals that help U.S. and foreign firms get a foot in the door in sectors dominated by China. The agency, for example, is investing $55 million to develop nickel and cobalt mining in Brazil and $50 million in a rare-earth processing facility in South Africa. Both projects reduce China’s stranglehold on critical minerals. A $50 million credit guarantee—which Japan matched, providing $50 million from its own development bank—enabled the Australian company Telstra to outbid a Chinese state-owned enterprise to acquire telecom assets in the Pacific Islands. The International Development Finance Corporation also financed the Greek company that won a shipyard bid near Athens and the Turkish firm that will expand and operate the Freetown International Airport in Sierra Leone. Both deals countered likely investments from Beijing. The state-owned China COSCO Shipping Corporation had expressed interest in the Greek shipyard; Sierra Leone canceled an existing loan agreement with Beijing that would have funded a more expensive airport project. The U.S. agency, furthermore, provided a $500 million loan to support a solar project in India that is using new technology to produce solar cells without the need for Chinese polysilicon. Project by project, the United States is creating alternatives to reliance on China.
THE MISSING PIECE
Efforts to de-risk the U.S. economy and the economies of U.S. allies and partners through supply chain diversification and targeted infrastructure investment have made real, measurable gains. Supply chains are moving. New projects are coming online. But progress is slow, labor-intensive, and expensive. If the goal is to secure U.S. and global supply chains and reduce China’s leverage over the United States and its partners, then Washington cannot holster the biggest weapon in its arsenal: trade.
For four years, the Biden administration considered trade deals to be off limits, a political third rail. But trying to rewire supply chains only with direct incentives, as the CHIPS and Science Act and the IRA offer, will not be enough. If the global market is set up in ways that make Chinese goods more attractive than others, subsidies and other direct incentives are rowing upstream. They can incentivize companies to build new mines and fabrication plants, but those companies still need to find buyers for their products. Doing so is difficult when Chinese alternatives are always cheaper—and Beijing can drop prices even lower if it chooses. As the Chinese government continues to subsidize both domestic manufacturing and overseas investment and sign new trade deals that further reduce the cost of trade with China relative to trade with the United States or its partners, Beijing will persistently undermine the progress Washington has made. The price of pivoting to non-Chinese supplies and suppliers will only go up. Critical minerals sourced outside China, for example, are now becoming available, but the viability of new projects is challenged as Beijing dumps minerals into the market at rock-bottom prices in a bid to drive U.S.-funded alternatives into bankruptcy. The U.S. and allied governments will need to step in to keep the new ventures afloat and to convince companies to pay a premium on manufacturing inputs instead of sticking with cheaper Chinese options.
Washington cannot holster the biggest weapon in its arsenal: trade.
Trade deals are the cost-effective solution. They are the most efficient way to make doing business with preferred partners cheaper. The best way for the United States to de-risk its economy would thus be to strike multilateral, high-standard trade deals that pull business away from China and toward friendlier destinations. After Beijing joined the World Trade Organization in 2001, the resulting drop in cross-border trade barriers contributed to the shift of jobs and supply chains toward China. Signing new trade deals with allies and partners that lower tariffs and align environmental standards, cross-border data transfers, labor safeguards, intellectual property protection, and regulatory burdens would produce similar effects but in the opposite direction—toward near-shore and “friend-shore” alternatives, which would make the United States more secure.
One option would be to work through the 13-country Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP. Joining the CPTPP would provide simplified customs and trade facilitation measures, alignment on the rules of origin, and regulatory efficiencies that would give the United States an advantage in trade and investment with fellow member countries and would thus help move supply chains out of China. This trade agreement was politically toxic in the United States due to the perception that it would mean losing American jobs to developing countries; Trump withdrew from its predecessor agreement, the Trans-Pacific Partnership, in early 2017. But soon the costs of remaining outside the CPTPP will start to bite. CPTPP tariff reductions are phasing in over time, and once they are fully implemented, parties to the deal will enjoy comparative advantages trading with one another, and U.S. exporters will be left on the sidelines. The Peterson Institute for International Economics has estimated that the United States’ failure to join the original TPP translates into an annual loss of $2 billion in real income and forgone potential gains of $131 billion. The U.S. agricultural sector has been particularly hard hit, losing an estimated $1.8 billion in exports annually. Signing onto CPTPP, in contrast, could increase U.S. exports of dairy, beef, and pork by almost $3 billion, according to the Purdue University Global Trade Analysis Project.
Washington and Beijing are in direct competition for the benefits of admission to the CPTPP. If China is admitted, membership will no longer be an option for the United States. As a member, China would be in the position to block other countries, including the United States, from joining. Even if China did support U.S. accession, Beijing’s membership in the pact would make Washington more hesitant to sign up, out of concern that China was not fully complying with existing standards and would be in a position to dominate future rule setting. Current signatories have thus far resisted the pressure to let Beijing in, largely based on the hope that the United States may eventually shake off its trade-deal paranoia and join. If that hope fades, China will pounce, and U.S. exporters will pay the price. China’s alternative multilateral trade agreement, the Regional Comprehensive Economic Partnership, is already expected to harm U.S. businesses; the UN Conference on Trade and Development has estimated that the deal would reduce annual U.S. exports by more than $5 billion as trade is diverted to RCEP countries.
Trump has the opportunity to put forward a bold economic policy.
If the Trump administration is unwilling to consider joining CPTPP, it should pursue another ambitious trade project in order to put Beijing on its back foot. Washington could take the approach set out in the U.S.-Mexico-Canada Agreement global. The USMCA, negotiated during Trump’s first term, strengthened labor, environmental, intellectual property, and digital trade provisions in ways that aligned with U.S. business interests. It also improved access to Canadian and Mexican markets for the U.S. automobile and agricultural sectors, as well as for small and midsize American businesses. Trade and investment among the three countries increased significantly after the agreement was signed. To expand that model, the new administration could pursue a high-standard, allies-only trade deal—bringing in advanced economies such as Australia, Canada, Japan, South Korea, Taiwan, the United Kingdom, and the European Union—that would protect critical supply chains by giving U.S. and allied firms preferential access to trusted technology and secure supplies. Restricting the deal to advanced economies would also reduce the likelihood of high-quality manufacturing jobs leaving the United States, lowering the chances of a political backlash.
If a comprehensive multilateral trade agreement remains beyond the reach of the administration, an easier political sell would be bilateral trade deals. Taiwan presents one such opportunity. In a September 2022 congressional hearing on U.S.-Taiwanese trade, U.S. agricultural representatives argued for such a deal on the grounds that it would lower Taiwanese tariffs and boost U.S. exports to Taiwan. Another option would be a sector-specific approach, which could take the form of a “buyers club” for critical minerals. If members of the Minerals Security Partnership agreed to source only from mines and processing plants that meet certain requirements, that would drive business toward the non-Chinese enterprises coming online, as most Chinese projects do not adhere to high environmental or safety standards. Still, bilateral or sector-based trade deals are less efficient than a more sweeping arrangement, as it takes more time and resources to negotiate and monitor multiple small agreements than to manage one large deal.
Trump has the opportunity to put forward a bold economic policy to energize and protect the American economy. The across-the-board tariffs he seems to prefer will not realize these objectives—and could well undo recent progress, leaving the United States in a worse position than before. His administration should begin, instead, with a full review of the foundation of U.S.-Chinese economic policy that was created during his first term and expanded by the Biden administration. The Office of the United States Trade Representative has gathered more than 1,400 comments from industry as part of a four-year tariff review—the Trump team should now use this information to determine where tariffs are actually helping U.S. business and where they are not. And it will have to consider the full range of economic tools at Washington’s disposal. No single one can address the array of economic challenges China presents to the United States, and the job is far from done.
Loading…
Source link : http://www.bing.com/news/apiclick.aspx?ref=FexRss&aid=&tid=67860856d8d4435f840b3886be12ac14&url=https%3A%2F%2Fwww.foreignaffairs.com%2Funited-states%2Famericas-china-strategy-incomplete&c=5441826180970891506&mkt=en-us
Author :
Publish date : 2025-01-13 16:21:00
Copyright for syndicated content belongs to the linked Source.
