Trump’s Trade War Is the Wrong Way to Compete With China
The rivalry between the United States and China is here to stay. But the Trump administration is bringing the wrong tools to the contest, applying blunt trade-war tactics reminiscent of the nineteenth century instead of crafting a strategy to keep the United States the world’s economic and technological leader in the twenty-first. Defensive protectionism will not meet the China challenge; only domestic revival can do that. Restoring the United States’ global standing and revitalizing its economy will require an ambitious strategy that doesn’t rely solely on changing Chinese behavior so much as on preparing the United States to compete.
After a pause in the trade war earlier this year, the cycle of escalation has resumed. In the last several months, the White House has hiked tariffs on hundreds of billions of dollars’ worth of Chinese imports and announced sanctions on the Chinese telecommunications giant Huawei. China has retaliated with tariffs of its own and is now preparing for a protracted economic conflict.
The Trump administration is right that China’s high-tech mercantilism threatens U.S. economic competitiveness and national security. China aims to replace the United States as the global leader in several high-tech sectors. The Trump administration is also right that the United States should push back. But so far the United States has not responded with nearly enough ambition.
Tariffs were always a poor choice to change Beijing’s behavior. At best, the administration’s punitive measures will shape China’s policies at the margin, earning U.S. companies a little more access to the Chinese market and slightly reducing the trade deficit. In the meantime, however, the tariffs are hurting U.S. businesses, consumers, and farmers. They are alienating U.S. allies. And, analysts warn, they are increasing the risk of a global recession.
There’s a better solution. History offers a blueprint: the United States’ strongest response to external economic and technological challengers has always been to invest in itself. When, in 1957, the Soviet Union launched the world’s first artificial satellite, Sputnik, the United States responded by passing the National Defense Education Act, which transformed all levels of science and math education, dramatically boosted federal funding for basic research and development, and created NASA and DARPA, which supported the development of many of the technologies that power modern society. Today, China’s technological advancements—a more serious threat to U.S. primacy than the Soviet Union ever posed—should produce a similar response.
The flaw in the administration’s strategy is that it has focused too much on China and almost not at all on the United States. The missing piece is revitalization at home. Rather than slapping tariffs on Chinese goods, the United States should be investing in science, technology, education, and infrastructure; restoring its voice on key values; strengthening U.S. alliances; and reforming the immigration system to bring in the entrepreneurs and skilled workers of tomorrow.
The right strategy would start by returning science and technology to the center of policymaking. The Trump administration, more than any other in modern history, has purposely reduced the role of science in government. When the federal government released its mandated National Climate Assessment last November, the president dismissed it. The administration has neglected or disbanded long-standing scientific committees across the government, including JASON, the Department of Defense’s premier outside science advisory group.
These actions are short-sighted. The U.S. government has long played an essential role in developing new technologies, from groundbreaking medical advances to the microchips used in iPhones. As the economists Jonathan Gruber and Simon Johnson show in their new book, Jump-Starting America, public investments in science have produced big returns, fueling the strongest periods of U.S. economic growth. Every $10 million in public funding given to the National Institutes of Health, for example, has produced an additional $30 million in value for the private sector.
But amnesia about these achievements has set in. U.S. government spending on R & D has fallen steadily as a share of GDP, from around two percent in the 1960s to just 0.7 percent today. Trump’s most recent budget proposes to slash billions of dollars in funding from scientific and medical research. In the past, Congress has wisely rejected similar cuts and last year approved the largest R & D funding boost in a decade. But the United States needs a much greater leap in R & D support if it is to keep up with China. Between 1991 and 2015, China raised its R & D spending 30-fold, averaging an 18 percent increase each year since 2000. As a result, the National Science Board estimates that China might have overtaken the United States as the world’s leader in research spending last year, and if not, it will do so soon.
Just as the government-driven space race sparked a golden age of U.S. technological development, a new national program of basic research and development can reestablish the United States’ technological leadership. Acting alone, the private sector is simply unlikely to innovate on the scale and at the speed necessary to compete with China, which is devoting significant public resources to moonshot projects such as quantum computing, artificial intelligence, and biotechnology. Nor can private firms—naturally focused on more narrow commercial goals—be relied on to make farsighted investments in basic R & D—investments that might not yield a profit in the next decade, but that will form the foundation for the next generation of technology. Only with greater federal support, and by cultivating public-private research partnerships, can America lead in developing new technologies.
The United States should be making much greater long-term investments in education, too. Instead of running up deficits in the service of tax cuts that will exacerbate inequality, the federal government should focus on investments that bring tangible returns. As MIT President Rafael Reif has written, fending off Chinese technological supremacy requires sustaining the United States’ unique asset: its “large number of first-rate … universities pursuing advanced research with long-term federal support.” A forthcoming Council on Foreign Relations report wisely proposes investing an additional $10 billion a year over the next five years to support technological research at universities.
As well as developing cutting-edge technologies, the United States also needs to stay ahead of their disruptive effects. Robots and artificial intelligence are already beginning to displace workers and will eventually transform almost every sector of the economy, from health care to transportation. A recent Brookings Institution study found that nearly a quarter of American workers face a high risk of losing their jobs to automation in the coming decades.
The government should work with the private sector and educational institutions to prepare Americans to weather the effects of new technologies on labor markets. Schools and universities should train students for the jobs that technology is least likely to obviate—according to the McKinsey Institute, those involving critical thinking, social interaction, and management. Getting this transition right will do far more for the U.S. economy and society than Trump’s trade wars ever could.
BRIDGING THE GAP
If the United States is to remain the world’s most attractive place to invest and innovate, it will need to revamp its infrastructure. Under President Dwight Eisenhower, the United States embarked on a vast public works project to build the country’s first national network of highways. The Interstate Highway System generated economic dividends that strengthened the country over the long term. Today, the deteriorating state of American roads, bridges, tunnels, and airports threatens to roll back many of those gains. The American Society of Civil Engineers estimated in 2016 that a failure to repair U.S. infrastructure will cost the United States $3.9 trillion in GDP and 2.5 million jobs by 2025.
The United States is overdue for a twenty-first-century version of Eisenhower’s road-building project, one that upgrades the country’s infrastructure and prepares it for the era of high-speed rail, electric vehicles, and self-driving cars. As the Trump administration has fought to make cars and trucks less efficient, China is pushing electric vehicles, encouraging Chinese drivers to buy them, and building a grid to support their use. China has also begun designing infrastructure to better serve self-driving cars, potentially speeding up their development.
Future generations of Americans will judge today’s leaders harshly for squandering this moment. The country desperately needs new and rebuilt infrastructure, the economy is entering the late stages of a long recovery, and interest rates are historically low, making borrowing cheap. As the economists Lawrence Summers and Jason Furman recently argued in this magazine, “long-term structural declines in interest rates mean that policymakers should reconsider the traditional fiscal approach that has often wrong-headedly limited worthwhile investments.” There may never be a better time to undertake a large-scale infrastructure program.
The United States is also failing to capitalize on its status as a nation of immigrants. To compete with China, the United States needs to remain a place that talented immigrants both can and want to call home. The United States has long enjoyed a demographic advantage over China: in part due to the legacy of the one-child policy, China’s population is shrinking and aging while the United States’ is still growing. But that demographic edge is eroding. According to Census Bureau estimates, U.S. population growth is at an 80-year low. The demographer William Frey projects that as native-born Americans have fewer and fewer children, immigration will provide the main source of population growth in the decades ahead. Immigration boosts economic growth, too, since immigrants tend to be younger than the native population, more likely to work, and often more successful when they do. The longtime technology investor Mary Meeker recently found that more than half of the country’s 25 most valuable tech companies were founded by a first- or second-generation immigrant.
The Trump administration’s hostility to immigration, therefore, threatens to undermine one of the United States’ most important advantages. A future administration should reverse course, enacting a set of reforms that will bring in more talented immigrants and restore the United States’ image abroad as a welcoming place for newcomers.
The United States needs to set its house in order, but even then, it cannot go it alone in a global economic, technological, and military competition with China. Trump’s trade wars have alienated the United States’ closest partners. A recent poll in Germany found that the German public now views the United States as a less trustworthy trading partner than China. Regaining the United States’ stature in the world is essential, as only a collective front can pressure Beijing to stop stealing intellectual property and start granting foreign companies greater access to the Chinese market.
A good place for the next president to start would be by reviving U.S. participation in the Trans-Pacific Partnership. A stronger TPP with U.S. involvement would be the ultimate tool for checking China’s unfair trade practices. It would signal to Beijing that it can only shape Asia’s economic future by respecting intellectual property, dismantling bloated state-owned enterprises, and playing fairly with other countries. Trump’s decision to scrap the TPP, in 2017, conveyed exactly the opposite message, assuring China’s leaders that they could double down on the old ways of doing business without consequences.
The administration’s China policy reflects Trump’s belief that China has long taken advantage of the United States, especially on trade. Whatever the merits of that position, a response focused on changing China’s behavior is woefully inadequate. U.S. primacy was born not by defensive protectionism but by building the greatest economic engine in human history. Keeping ahead of China is much more about us than about them.