Witnesses Suggest 'Draconian' Measures to Defang China's Economic Threat

In a daylong hearing about how to deal with the distortion Chinese industrial policy creates in world markets, American witnesses recommended dramatic changes to government policies aimed at divorcing China from the U.S. economy, and not just in sensitive technologies, but also in consumer goods, such as cell phones and tablets or electric vehicle components. All were speaking on trade issues to the U.S.-China Economic and Security Review Commission April 14. The commission's mandate is to report to Congress on the national security implications and impact of the bilateral trade and economic relationship between the United States and China, and its members are appointed by Republicans and Democrats in Congress.

Nazak Nikakhtar, a former acting leader of the Bureau of Industry and Security and therefore a top official over export controls, said her recommendations on how to combat China's "economic war ... will require sacrifices." She said the level of decoupling she thinks is necessary would reduce U.S. GDP by 1%, which would be a drop of $230 billion. In comparison, the Great Recession's decline in GDP was 1.75%.

But, she said, after three to five years, those losses "will turn to substantial gains," and she said the "gain from disentangling from a predatory actor will be immeasurable."

USCESR Commissioner Robin Cleveland said, "In the aftermath of the COVID-19 pandemic and Beijing’s failure to live up to its obligations under the phase one deal, it is clear that the United States and many of its allies must craft a more resilient approach to trade policy.

"Our challenge in this hearing is not only consideration of trade remedies, but also trade agreements, new structures, and new rules to mitigate the effect of Beijing’s distortions."

Clyde Prestowitz, founder of the Economic Strategy Institute, submitted an opening statement that said democracies should agree that all of them should not have "any significant dependence on China for things like advanced telecommunications equipment, semiconductors, robotics, and essentially all advanced technology products and services," and that they should agree that their companies also would not be allowed to sell advanced products to China.

The consequences? "A corporation like Apple, which makes everything it sells in China, would have to be forced to move most of its production out of China and to halt transfer of any advanced technology to China," Prestowitz said.

It is not accurate that every Apple product is made in China. Some Apple products are assembled in Vietnam, India and Malaysia, and a small number of computers are made in the U.S. "This may sound draconian," he added, but said that Made in China 2025 justifies it.

Nikakhtar said that the Chinese government's "end game is to render the rest of the world dependent on it, and today this plan is succeeding."

Vanderbilt University law professor Timothy Meyer suggested that forcible wholesale divestment from China could be used to prevent China from invading Taiwan. He said there has been legislation introduced on divestment, but it talks only of "critical sectors." That's probably not enough of an economic deterrent, he said.

"I do think it needs to be sufficiently broad that it could conceivably encompass any kind of investment that a U.S. company might make in China," he said. "I do think you want to have conditions that would limit the president’s ability to wake up one morning and order a wholesale divestment from China. You would want a series of conditions that would have to be satisfied."

Nikakhtar said that using Chinese production because of its cheap prices is accelerating the demise of capitalism. "China’s made it too easy for U.S. businesses, global businesses to make money there. We’ve become addicted. Businesses will do it until we tell them not to," she said. "We’ve got to leverage stronger laws to prevent much of the economic harm that we’re worried about."

Nikakhtar suggested through her testimony that decoupling is necessary in the pharmaceutical sector, critical minerals, medical supplies, electronics and semiconductors, but did not respond to an e-mailed follow-up question from International Trade Today on how broad her recommendations for decoupling are.

She said the government should identify the items most critical to our economy that are imported from China and use a national security rationale to increase tariffs on those goods. She said that would allow domestic industries to grow without the threat of being displaced by cheap imports.

Prestowitz said self-initiated antidumping cases need to be part of the U.S. strategy to fight Chinese market distortions.

The commissioners also asked witnesses how effective the Indo-Pacific Economic Framework could be to counter China. Two witnesses said joining the slightly rebranded Trans-Pacific Partnership would be better, but acknowledged it's not politically feasible.

Lori Wallach, director of Rethink Trade and who has expressed anxiety that IPEF could be an echo of TPP, told them that the U.S. should not go from an "overreliance on China to overreliance, on, say, Vietnam."

Meyer said that before figuring out how to build resilient supply chains, we need much more government research into how supply chains are constructed now. But Deborah Elms, executive director of the Asian Trade Centre in Singapore, said that by the time you've mapped a supply chain, it will have changed. She also cautioned that mandating redundancy in supply chains or any other measure of resiliency could be inflationary.

Wallach argued that Vietnam, Indonesia and other exporters that are big players in Asia should not be allowed to export to the U.S. at the volumes that they do unless they improve their records on the environment and labor rights. She said the threat of making it more difficult to sell in the U.S. would be enough to convince Asian countries to negotiate something more progressive than the USMCA, which she said was only acceptable to free-trade skeptics because it was improving a trade deal that was already causing damage.

Asia Society Policy Institute Vice President Wendy Cutler, a former career staffer at the Office of the U.S. Trade Representative who helped negotiate the TPP, said the commission should consider that the U.S. had far more leverage with Canada and Mexico because 75% of their exports go to the U.S. The U.S. is not the top trading partner for almost all of the IPEF countries, and the American share of trade in the region is declining as China's is increasing.

USCESR Commissioner Randall Schriver said he expects IPEF will be weak and not that specific. But Cutler said she has an open mind about what might develop. She said the topics that the administration wants to advance -- fair and resilient trade, infrastructure, decarbonization, resilient supply chains, tax and anti-corruption -- are topics that Asian countries, also, see as relevant and urgent. "I think it’s going to be a lot more substantive than you’re expecting," she said. "If TPP is not going to happen, let’s go forward with this, let’s see if it works." But, she said, strong bipartisan support in Congress for the initiative would be helpful in getting other countries to compromise, since, she said, many countries in Asia are "still feeling the scars of our withdrawal from TPP."

USCESR Commissioner Derek Scissors said IPEF will never come to pass. "It’s an executive order that will never get implemented in the first term’s time and then it will be gone," he said.