Managed Competition & Competitive Coexistence

>> Elizabeth Economy: So, the Biden administration policy on China is called managed competition. And what this means is that for the first, I would say two and a half years of the Biden administration, really the administration was focused on developing the capabilities to compete effectively with China. And so there are three pillars to this approach, invest, align, compete.

So ultimately, Xi Jinping's world reflects a geographically expanded China that is economically and militarily dominant in the Asia Pacific and is a center of gravity globally in terms of the values and norms and institutions that underpin the international system. Now, before I talk about the US Response, let me just note that there's no guarantee that this, despite Xi Jinping's confidence, there's no guarantee that this vision is going to be realized.

And right now in Washington and within sort of the China scholarly community, there's a lot of discussion about whether China's domestic considerations are gonna be sufficient enough drag on China that Xi Jinping is going to have to rein in his foreign policy ambitions. And what people point to in particular are China's slowing economy, weak property sector, stock market is enormously problematic.

They've had, you know, intractable problem with local government debt, low consumer confidence, weak consumption, high rates of youth unemployment. So the economy, you know, supposedly growing at 5% according to official figures. Most US economists will say somewhere between 0 and 3%. The demographic challenge, people always point to this.

China has right now the lowest birth rate, despite having gotten rid of the one child policy, the lowest birth rate since the end of the Great Leap forward back around 1960. The working age population in China peaked in 2012. By 2100, people estimate that the population of China will be half of what it is today.

That places an enormous stress on things like China's pension system, which is already very heavily stressed in many provinces. People say the pension system will be broken China by 2035. It doesn't help with China's innovation because most innovation comes from, younger people. And of course it sort of undermines Xi Jinping's entire notion of China's economy, his dual circulation notion that China's economy is big enough for China to innovate, manufacture and consume.

So it takes an important hit in the consumption side of things. And then third, people point to international headwinds that China is facing, and they're serious. The Belt and Road initiative. If you look at probably any single country that has been the recipient of a belt and road project, you will find that there's been a protest in that country, around the project.

Whether it's because of labor issues or environmental problems, or the corruption and lack of transparency that went out with the tendering process for the project. We saw last year that in the third Belt and Road forum that Xi Jinping changed sort of the moniker for Belt and Road.

Now the sort of subtitle is small is beautiful, right? So smaller, more beautiful projects. People tend to think that this means retrenchment in bri. I think what it actually means is simply a different focus. And in many respects that focus is not supportive of our interests. So instead of building bridges to nowhere, China's gonna focus on the digital Silk Road.

It's gonna focus on ports, it's gonna focus on mining, right? These are all areas that matter enormously to US Economic interests. People look at the level of FDI foreign direct investment that's going into China, which is now at a 30 year record low as a sign of China's problems.

The tech sort of constraints, the export controls that the United States and other countries are placing on China, and the pushback that China is now experiencing around its overcapacity, right. The export of its EVs and its batteries to the point that many economies, and not just the United States and Western Europe, but countries like Brazil and India and Mexico are saying are gonna swamp our domestic industries and, are putting up barriers to the entry of these products.

So that's an important. That shift also from the complaints not simply coming from the United States and Western Europe or other developed economies, but actually coming from an emerging or middle income economy is very important to China because it still likes to consider itself a leader of those countries.

So again, many scholars and officials are starting to talk about China as perhaps not being as ambitious over the next decade or so. I think my personal take is that these woes, these challenges may give us a moment to breathe, a moment to think through what our strategy should be.

But fundamentally all it means is we should be running harder and faster and taking advantage of any sort of step back that China may take on any one aspect of the implementation of Xi Jinping's vision. It's really important when you're looking at China, not only to look at what's happening in the moment on the ground, but always bear in mind Xi Jinping's ambition.

Because even if there's one step forward and two steps back, Xi Jinping will still, and China will still seek to realize that ambition. Okay, so what about the US Response? I'm going to Talk about the Biden administration response. But I'm happy to talk about from Obama through to Trump to Biden if people are interested in some more how we got where we are today in US Policy.

So the Biden administration policy on China is called managed competition. And what this means is that for, for the first, I would say, two and a half years of the Biden administration, really the administration was focused on developing the capabilities to compete effectively with China. And so there were three pillars to this approach, invest, align, compete.

Invest meant investing at home in terms of the Chips and Science act, the Inflation Reduction act, the Bipartisan Infrastructure law. This was all about trying to ensure that the United States had both the fundamentals of our infrastructure and our technology and our manufacturing that would enable us to compete with China through the rest of the 21st century.

The compete part, I'll speak to it from the econ and tech side because that's the part that I was most involved in. It's really about modernizing our economic tools in order to ensure our own national security, our economic security, and our economic competitiveness. So this is sort of modernizing our export controls.

So it's not simply about controlling the technology, but it's also about controlling the know how. So we don't want people from Qualcomm or Intel or Nvidia. Not only do we not want them selling most advanced chips, you know, that can be used in ways that would undermine our national security, but we don't want people actually training Chinese scientists to be able to develop those chips to do that.

So thinking more broadly and comprehensively about what it will take to protect our national security. Supply chain resiliency is something new that came out of COVID And you know, the idea that the United States did not have enough PPE personal protective equipment to ensure our human security, right?

Our health security, I think sensitized everybody to the importance of ensuring that we don't have an overreliance on one single source, on one single supplier. In particular, in this case China, which is not a very dependable source. And we saw that Xi Jinping actually did weaponize PPE in COVID.

So Chinese diplomats used it to try to get other countries. To Germany they said, we're not gonna give you PPE unless you let Huawei be your 5G provider. So we saw them use PPE as a weapon. So we wanna ensure that we don't have overreliance. But even when it comes to our friends and partners like Taiwan, where we have very high dependence on Taiwan for the most advanced semiconductors, where that's the point.

A big part of the Chips and Science act is diversifying the source of our supply chain around semiconductors. So that's a sort of new and very, very significant effort that's underway in the Biden administration. Tariffs, the Biden administration kept the tariffs that were put in place by the Trump administration and added a few more on top of that.

That has both national security. It's done for national security implications, ostensibly national security implications, but also for economic competitiveness reasons. Trying to level the playing field with China. Whether China's doing something because of subsidies or because of IP theft, tariffs are seen as a way to again level the playing field.

So that whole effort there and then new efforts on outbound investment restrictions. We've had inbound investment restrictions. So paying attention to the type of investment that's coming to the United States, China or another country wants to buy agricultural land. Let's make sure that it's, you know, not next to a military base.

Right. So it's a review process that enables us to make sure that we're not allowing investment that again would undermine our national security. Now we're going to have outbound investment restrictions again that are going to do the same kind of thing, make sure that our money isn't going to investments in China or other countries that in ways that are going to support industries that will, could potentially harm us.

So that's the second part of the strategy. And then the third is the align. And this is exactly what it says. It's aligning with our partners and allies. And so there are a number of institutions, some of which have just been created, like the US EU Trade and Technology Council, the Indo Pacific Economic Framework, Aukus, which is Australia, the US and in Great Britain, the UK.

The Quad has a new group, the Quad Critical and Emerging Technology Working Group. All of these efforts are designed, and the G7 also, there's a lot that takes place there. All of them are designed to look at issues like export controls or tariffs or investment screening or supply chains or the Green Transition or AI ethics and governance, sort of the big economic, technological issues and some related to the military of the day and gain alignment with our allies and partners.

And in many cases, the same issues are being discussed in different forms. So, you know, the Quad Critical and Emerging Technology Working Group is discussing a lot of what is being discussed in the US EU Trade and Technology Council. So this is a way for the US to ensure that what's happening with one set of partners is happening with another set of partners.

And then again, you have the G7, which can bring the sort of largest economies together also to gain some coherence in this effort. On the security front, I think one interesting innovation that's happened is what people are calling a move from hub and spoke in this is in the Indo Pacific hub and spoke to a lattice framework so that the United States doesn't have to be at the center of all of the sort of regional military security.

Instead you have, the Philippines and Japan, working together or you have India and Japan doing some military exercises together. So different formations, different groupings don't always have to rely on the United States. And I think that's an important innovation that both encourages other countries to step up and to lead and to assume a greater share of the burden in ensuring regional security, but also just allows the United States to take a step back and think strategically about sort of the regional security issues.

So that's really the first two and a half years, I would say that was the focus of the administration was developing that competitive ability. Yeah, to sort of just to, as I think Secretary of State Blinken put it, basically to negotiate with China from a position of strength.

In the last year or so, there's also been an effort at what I would call the managed part of it, which is looking at ways, if not to cooperate with China, at least to establish channels of communication. Because I think there was a sense in the administration that there really weren't.

Aside from the talks with Jake Sullivan and Tony Blinken, most of the agencies were not having conversations with their partner agencies. And most significantly, we were not having military to military discussions. And that really matters in terms of trying to ensure that accidents that might take place or near misses are not misinterpreted or misunderstood or certainly don't blow up into something that then becomes some real kinetic conflict.

So there was an effort over last summer. You saw a number of the secretaries travel to China, beginning with Secretary Blinken, Secretary Yellen of the Treasury, Secretary Kerry, who managed climate change, and the Secretary that I worked for, Secretary Raimondo. We went to China and just again established sets of working groups that would enable us to talk about issues that mattered.

So the priority issues that emerge, they're all issues that are important to the United States. So, for example, the issue of fentanyl, right? Controlling the China's export of the precursors that are used, controlling the pill making machines, a lot of the stuff is coming through Mexico, but nonetheless telling China, you need to help to control this within your own country.

So that was one big, you know, area of discussion. At Commerce, we had a number of different working groups, things like statistics or on export controls, or we had one that's on trade. Many companies still wanna do business in China. Companies that are not involved in sort of areas of national security.

Why shouldn't Starbucks sell lattes in China? How do we ensure level playing field? So that was, you know, a working group that was established with the Commerce Department. Treasury had its own groups talking about macro level, sort of economics, talking about death, sustainability. State Department was focused a lot on civil society exchange, right?

How can we get back to a time when our students here in the United States are traveling and studying and learning in China? Of course, Chinese students are still. We don't have as much difficulty attracting Chinese students here. They're still coming. But how do we get back to a point where, you know, there's scholarly exchange going on?

So this is a big effort of the State Department. Ambassador Nick Burns came out, I think it was maybe a month and a half or two months ago. So despite the fact that at Woodside, when the two presidents met last November, out here in Woodside, California, right near here.

They agreed that this was gonna be a priority area, expanding the civil society exchange, etc. Ambassador Burns came out and said that the Chinese have basically canceled upwards of 70 different efforts that the US embassy had put forward that had been agreed to and then had been canceled for public diplomacy.

So really calling out Xi Jinping in China for not living up to the spirit of the agreement. But this continues to be an effort. I know that the State Department is pushing. And then climate change. And we did manage to get an agreement, a methane agreement, which is important, controlling another greenhouse gas.

So I would say that the energy behind these cooperative efforts is limited, I think, on both sides. I think neither side feels as though there's much give on the other side, I think. And in both countries, I think there are political constraints to actually moving forward in a kind of breakthrough way.

So just to give you one example, when we had a very good set of conversations when we were in China, the Commerce Department, the Chinese officials were very matter of fact, they were very gracious. There was no mention of sort of the hot topics that Chinese officials like to raise completely out of context about Taiwan or Xi Jinping thought there was none of that.

It was really focused on the economy and our commercial relationship. How do we think about de risking? What's the difference from de risking and decoupling? A really good set of conversations from the premiere on down. When we got back to Washington, we found that there had been this meme that had gone around with Secretary Raimondo advertising the Huawei Mate phone as though she was promoting it.

And then the Ministry of State Security came out and said this was basically, old wine in a new bottle. So it seemed as though maybe the meetings had not been as positive as, we had assessed. But then we got a call from, you know, Chinese officials asking and, you know, saying, we hope that what you're seeing here happening over here is not undermining what we thought were some really productive talks.

And I think that's an important reminder as well. Something that we often forget when we talk about China is that there are some pretty significant differences within China. You have public security, state security apparatus on one hand that's been very much empowered in China, and then you have the commercial side of things, which has not been empowered, but really would like to see the trade relationship improve and develop.