Compared with a decade ago, Washington is significantly more focused on the techno-economic and trade challenge from China. That\u2019s the good news.<\/p>\n
The bad news is twofold.<\/p>\n
First, little has been done beyond passing the CHIPS and Science Act, establishing the House Select Committee on the Strategic Competition Between the U.S. and the CCP, implementing some export controls, and making various minor policy and legislative tweaks.<\/p>\n
Second, and more important, Washington is still not afraid. It should heed the warning: \u201cBe afraid<\/a>. Be very afraid.\u201d Yet few within the establishment\u2014including pundits, academics, government officials, journalists, and lobbyists\u2014believe China is poised to dominate advanced and emerging industries. Consequently, they fail to appreciate the fundamental shift in global power that would occur if the PRC succeeds.<\/p>\n I have made this case many times<\/a>. If you don\u2019t believe the threat is real, that\u2019s fine. But if the threat is real, what explains the widespread equanimity? The reasons are many. Here are a few I hear regularly.<\/p>\n \u201cU.S. companies earn high profits; Chinese companies earn low profits. Therefore, we are stronger.\u201d True, but beside the point. For Chinese firms backed by government subsidies, accepting low profits is a deliberate strategy to gain market share. Following the classic pattern of low-end disruption<\/a> identified by Clayton Christensen, Chinese firms attack markets from the bottom, where profit margins are lower, entrench themselves, and then gradually work their way up into higher-value segments.<\/p>\n \u201cThe United States leads in AI and has Silicon Valley.\u201d To listen to the Washington debate, one might think the U.S. economy starts and ends in Northern California, and that generative AI is the only important technology. Both are wrong. We cannot compete with China through Silicon Valley and AI alone. Many other industries are critical to reducing U.S. dependence on China and maintaining a strong defense industrial base. Most U.S. regions also must play key roles as innovation and production hubs.<\/p>\n \u201cU.S. firms are leaders.\u201d They are. But, as ITIF has shown<\/a>, Chinese firms are gaining ground, at least as measured by R&D spending and scientific publications<\/a>. Moreover, even after almost a decade of encouraging U.S. companies to leave China or at least develop alternative sources, many leading advanced U.S. companies still have a significant presence in China, helping strengthen the Chinese economy.<\/p>\n \u201cWe are the most innovative.\u201d This is a nice bedtime story, but two things are wrong with it. First, innovation is only part of the equation; scaling and production are what really matter. Many cases\u2014electric vehicles, solar panels, and batteries, to name a few\u2014show how U.S. innovation helped develop technologies, only for China to capture much of the global market through scaled, low-cost production. Second, China is becoming increasingly innovative<\/a>.<\/p>\n \u201cWe will innovate in areas China can\u2019t.\u201d This narrative holds that it may not be good that we lost to China in established industries like electric vehicles, steel, electronics, and the like, but it\u2019s okay because we will innovate and build new industries. There are three things wrong with this. First, we cannot afford to give China a monopoly in existing advanced industries. Second, there is not enough room at the top. Even if the United States captured the most innovative emerging sectors, such as AI, fusion, synthetic biology, and quantum, these sectors are unlikely to be large enough, on their own, to produce the exports needed to balance U.S. trade. Finally, this is hubris: It ignores just how innovative China has become and continues to become.<\/p>\n \u201cCommunists can\u2019t innovate.\u201d Related to the two preceding rationales is the myth that communists can\u2019t innovate. If that is the case, how has China reached the global forefront of the EV and EV battery industries<\/a>, become the world\u2019s leading proponent of nuclear energy<\/a>, and come to lead the world by volume in both robotics<\/a> production and use\u2014all while advancing rapidly in many other areas? A Gosplan-style economy like the Soviet Union struggled to generate broad-based commercial innovation, but China does not have such an economy. It is a state-directed and state-assisted capitalist economy in which firms and entrepreneurs retain considerable commercial latitude while receiving substantial state support.<\/p>\n \u201cWe have long been number one, so we are in good shape.\u201d Who cares? History is rife with examples of nations that led the world economically only to fall by the wayside. There is nothing inevitable about U.S. leadership.<\/p>\n \u201cU.S. manufacturing has not declined, and job loss is due to productivity, not China.\u201d This is widely repeated, and if true, it would suggest that the China challenge is not really a challenge. But as ITIF<\/a> and others have shown, it is simply wrong. Growth in manufacturing labor productivity was slower in the 2000s than in the 1990s, even as job losses were much greater.<\/p>\n \u201cWhy don\u2019t we see Chinese products in the United States? Things must be okay.\u201d One challenge in developing a clear-eyed understanding of the China challenge is that most people, including elites, tend to extrapolate from what they see and experience. A typical member of Congress uses an iPhone from an American company, U.S.-developed AI tools, and U.S. e-commerce platforms. They don\u2019t see the areas where China leads. In part, this is because many of China\u2019s strengths lie in intermediate goods, like steel, chemicals, and electronic components, rather than final goods. But Chinese companies also sell here under brands whose ownership or origins may not be obvious to most Americans, including EGO outdoor power equipment and SKIL power tools (both owned by China\u2019s Chervon), GE Appliances (owned by Haier), Volvo Cars (majority-owned by China\u2019s Geely Holding), Hisense televisions, and Motorola Mobility (owned by Lenovo). China\u2019s presence in U.S. markets can therefore be larger than brand recognition alone suggests.<\/p>\n