If we lost a trade war, how long would it take us to find out? The vitality and flexibility of our financial system has obscured the degree to which we are living in the aftermath of a Chinese trade war victory—one in which the PRC not merely succeeded in subjecting the developed countries to trade competition, but also engineered the deindustrialization of both developed economies and many middle-income ones. This was not, however, merely a malign effort by a hostile foreign power. China profited from our own unforced errors and economic distortions. Our loss of capacity and foreign export markets shows that a naïve free markets, free trade perspective is inadequate for the challenges that an increasingly millenarian PRC leadership poses to the international system.
Even before the rise of the PRC as a manufacturing power, manufacturing in the developed world was in crisis. We wanted to have white-collar jobs, and Wall Street discouraged companies from holding troublesome assets that could weigh down returns on investor equity as they accrued regulatory liabilities or became too costly to maintain. Generations of harsh industrial working conditions, on the one hand, and a new focus on asset-light corporate structures, on the other, combined to create powerful incentives to offshore production. We now reflexively offshore, reciting superannuated justifications about labor costs and regulatory flexibility—even when offshoring undermines the national economic interest.
The PRC, by contrast, has achieved the impossible, reshaping the world in accordance with its domestic and international political goals. The G7 experience with other communist countries is not instructive because China is now the center of world manufacturing and exporting. Meanwhile, the old Warsaw Pact never managed to produce anything desirable other than raw materials. Analysts writing twenty years ago did not anticipate China’s emergence as a prime manufacturer in its own right, nor did they anticipate that, in such a short time, China would efficiently urbanize hundreds of millions of citizens who had been previously living in impoverished conditions.
In one sense, then, the PRC’s belated development to the standards of an upper-middle-income country should be considered a humanitarian triumph vindicating the globalists of yesteryear. But in another sense, this is a catastrophe for the rest of the world. G7 countries have seen their manufacturing capacities eroded as well as a loss of skilled workers and feeder industries. G20 countries have been reduced to truck farms and mining camps for the voracious PRC, harming their own prospects for industrialization and cementing their status as economic colonies.
Every country in the world, even the United States, has seen innumerable Chinese dependencies emerge in its supply chains. Often, we are technically capable of producing the products at issue, but no prospective onshore manufacturer is able to obtain financing to do so; instead, we must then make the ugly choice between further diminishing our capabilities or wastefully subsidizing onshore manufacturers at multiples of Chinese prices.
G7 analysts often frame this in terms of labor costs. Those are indisputably a factor, with Chinese manufacturing wages typically sitting between $2 and $4 per hour. The average salary in other middle-income countries, however, is by definition in the same range, and such countries conspicuously lack the leverage in supply chains and product categories that China enjoys; they are “takers,” not “makers,” in the international system. Such countries cannot point to thirty years of high average growth (from however poor a base) and likewise do not enjoy China’s strengths in raw materials processing, supply chains, ports and logistics, and advanced manufacturing technologies. More importantly, no other middle-income country has such lopsided trade balances or such a clear plan to effect the deindustrialization of its rivals. In short, the cheap labor explanation for Chinese manufacturing prominence is seriously misleading as to the drivers of Chinese growth today. It assumes a financially mediated homeostasis in international trade that is illusory.
In the 1990s, globalists believed that opening the Chinese consumer market would yield rich prizes for G7 manufacturers. This was true in some ways; for example, wireless mobility companies made rich profits for a few years, and many G7 importers obtained inexpensive, expert manufacturing while retaining IP and distribution. But overall, although the Chinese consumer sector is too large for G7 companies to ignore, the balance of trade is enormously lopsided in favor of the PRC, and G7 countries pay for the consumer savings on manufacturing through debt and technology transfer.
This situation has emerged, ultimately, because the PRC economy has taken shape as a dark reflection of the Western financial system. We must, therefore, choose between committing ourselves to the perpetuation of this corrosive system, or making the initially painful policy adjustments necessary to effectuate our own societal goals. And we must choose soon, because the crisis is well underway and our window for addressing it is closing rapidly.
Made in China
“Made in China” used to mean cheap, superfluous flotsam. Now, the PRC makes everything from $2 backpacks to high-end cars, ultra-modern microchips, and half the world’s ships. The PRC boasts of being “the world’s factory”; Chinese diplomat Victor Gao recently told British journalist Andrew Marr that China is the chief manufacturer for the world and does not consider Britain a significant enough rival to constitute a threat.1 This is no idle remark, considering the colossal volume of the PRC’s trade—and the colossal trade deficits this has created across all advanced economies. Chinese products are now critical to the world’s most advanced supply chains. In some important product categories, Chinese firms are now the sole suppliers of critical inputs.
This development is a recent one. Deng Xiaopeng’s famous “Southern Tour,” which opened the floodgates to foreign investment in Chinese manufacturing, took place about a year before Bill Clinton became president, and for most of the three decades since, the PRC was more a source of workhorse products than advanced ones. The G7 countries appear to have believed that either the PRC would democratize, or it would cease ascending the ladder of growth and sophistication. As such, Chinese production was to be celebrated. It would be a boon to Western lifestyles by reducing the cost of consumer products. It would stimulate Chinese demand for Western goods. It would increase Chinese engagement with the West, while the Chinese people would climb out of harrowing poverty—perhaps picking up liberal-democratic political ideas along the way.2
These beliefs were not unreasonable in 1992, perhaps not even in 2012, but they must be considered completely obsolete in 2024. China has modernized without liberalizing. China is a large market for Western companies, but this market is far smaller than the Western market for Chinese companies. Western countries find themselves de-skilling and losing essential industrial capabilities.3 Moreover, the PRC constitutes a permanent security threat as some of the products it sells to the West are widely believed to be riddled with spyware and kill switches.
The current trendline is catastrophic. The PRC is poised to dominate unfolding revolutions in electric vehicles and telecommunications; China has manufacturing capabilities that trounce those of G7 countries, and the economic depth to increase its military capacities while the U.S. defense industrial base declines. If these trends hold, the outcome is inevitable: capital will flee the other advanced countries for the PRC. This is a military risk for the present security order, a financial and trade risk to the international economic system, and also an existential risk for the hundreds of millions of workers in advanced countries who will find themselves in gig and service jobs that are insufficiently productive to support a first-world lifestyle. In 2024, we must confront hard questions about how we got here, what the PRC intends to do, and what we can do to regain ground and overtake them.
A Serious Response
First, the diagnosis. In finance and accounting, America has overlearned the lessons of the 1960s through the ’90s. Visionary companies of the time, from Teledyne to Berkshire Hathaway, took the view that the efficient use of corporate capital distinguished good managers from mediocre ones.4 It was undeniable that, at the time, capital was often poorly allocated, and corporate leaders have since made their reputations (and fortunes) by increasing shareholder returns. The drive for the highest possible capital efficiency, however, eventually created bizarre incentives. Wall Street’s ideal company became one with no assets and infinitely scalable profits. Great American companies in manufacturing-based, capital-intensive industries, like shipbuilding or steelmaking, were encouraged and finally forced to outsource their manufacturing overseas—not to save on labor costs or improve their output, but simply because outsourcing manufacturing to a foreign third party made their balance sheets look more impressive. If they were unable to offshore, they abandoned product categories altogether, which means the United States entirely lost those industries and capabilities. It is hard to look at Wall Street trends over the past thirty years without drawing the perverse conclusion that the most effective use of capital, in Wall Street’s eyes, is to pour it into financial assets or the valuations of software companies.
For over thirty years, the PRC has consistently taken the other side of this bet. The PRC evidently believes that hard assets and manufacturing capabilities are good to own, not only for their immediate economic returns but because they bring many valuable intangibles and synergies with them: a highly skilled industrial workforce, faster prototyping cycles, and mastery of supply chains. Thirty years on, can anyone really argue that the PRC bet wrong?
Second, the treatment. America and the rest of its Western G7 allies can no longer be dependent on a single “frenemy” to function. Any sound prescription must revitalize American industry to cut trade imbalances, return vital manufacturing to American shores, and preserve America’s economic and strategic security for the foreseeable future. Fortunately, America doesn’t have to learn this from scratch. There are already strategies we can replicate, not only from the industrial policies of our most successful rivals, but also from America’s own past.
Indeed, the PRC has clearly thought of industrialization as a security concern for over fifty years. The PRC’s foreign investment to GDP ratio never went above 0.54 percent before 1985 or 0.88 percent before 1990. Only in 1992, when the PRC began deliberately welcoming foreign investment, did it shoot up, reaching 5.99 percent by 1994.5 And, when it did, such foreign investment was almost entirely in the Pearl River Delta export processing sector, with most other industries and activities tightly protected.6 This allowed the PRC to both develop world-leading export industries and domesticate their products, without shattering the PRC’s highly socialized economy by disrupting innumerable jobs and social arrangements. In short, Chinese industrialization was not merely an artifact of the profitability of its banks’ loan books. It was a conscious, targeted choice within an economy that remained structurally closed and protectionist. It deliberately avoided shock therapy. We would do well to think in similar terms as the PRC leadership about the costs of profits.
Third, the PRC’s plans: despite the persistence of silly stereotypes about Chinese inscrutability or Communist Party secretiveness, the PRC has an active and loquacious press, and the CCP frequently deliberates in public. Strange as it may seem to the West, the PRC has consistently, publicly, and repeatedly placed all its chips on revolutionizing the international order by attaining technical and productive supremacy. Such statements are made in untranslated Chinese by top leaders at important Party and government events, as well as in policy documents for internal use, so there’s no point looking for feints: what you see is what you get. As the PRC clearly intends to pursue these plans, whatever we may think of them, they are key to great power competition today. We don’t have to think that they’re optimal to accept that they motivate the actions and choices of the Chinese government.
Industrial Policy
“Industrial policy” is a fraught term if you focus on the means instead of the goal. If we stipulate that the PRC has indeed achieved some economic outcomes and political goals by trying to become a manufacturing power, then we are agreeing that the PRC has an effective industrial policy. Looking at the PRC’s goals will begin to explain the PRC’s choice of means.
When it works, industrial policy usually begins with land reform. Not the Bolshevik sort, with private estates merged into huge (and hugely inefficient) collective farms, but the proto-capitalist sort, whereby excess land or old baronial plantations are converted into intensively cultivated household farms, such as those owned by smallholders that are effectively millions of newly-minted small businesses. This fosters a consumer market capable of providing demand for domestic industries. Indeed, the PRC itself eventually reached this conclusion in the 1970s, when it became clear that collective farms were utterly inadequate for meeting the food demand of its own cities.
Meanwhile, protected by trade barriers but subject to export discipline, domestic industries are forced to continuously improve, upskill, and make or buy capital goods. If they don’t, their governments deny them access to foreign exchange, export subsidies, or operating loans in favor of domestic industries that succeed in export markets.7
America, for its part, had its own rough and ready land reform during the nineteenth century, when Congress opened the lands of the West to settlement by millions of small farmers. In the critical decades from 1850 through 1930, the urban workforces of not just America but also Britain and France ate American grain.8 The income from this surplus meant the American Midwest could support a consumer economy, not just mere subsistence. This dynamic created a virtuous cycle between production and capital, and fueled the American Century.
It is shocking, then, that today America is partly regressing to what might be called a postmodern subsistence economy. True, few people are cutting sugarcane with machetes, but it’s also a fact that millions of American workers have fallen into gig work and retail jobs that are jarringly unconnected to any more sophisticated form of productivity. In the 1990s, neoliberals assured us that high-value service jobs would replace mass employment in moribund manufacturing industries. (For a sense of how pervasive this was in the post-Reagan era, the Bill Clinton character in Primary Colors suggests, in 1991, that Portsmouth Naval Yard shipbuilders should learn to code because “muscle jobs are going to go where muscle labor is cheap—and that’s not here.”) It is clear by now that this promise will never be realized; instead, we seem to shove everyone into the service sector—not because it’s always better than manufacturing but because we have nothing else to offer.
In developing countries, one variant of the “middle-income trap” is that it is individually rational for workers to enter menial jobs even though this is suboptimal from a national human capital perspective. This is why we have mandatory schooling: as a country, we’re better off if five-year-old children are in kindergarten than shining shoes and hawking newspapers. Most countries that attempt to achieve industrial development fall back into some form of menial service economy. For its first forty years, the PRC failed to understand this and fought its way to a low level of autarky on the backs of peasant farmers. Now we must ask what this implies for the American worker and American manufacturing in an environment where capital investment in production equipment is systematically disfavored by investors.
Companies that were once major manufacturers have become mostly contract buyers in order to slash assets to the bone. The American workforce has bifurcated into (a) design and finance professionals at corporate and (b) gig workers at retail; production workers are grudgingly tolerated only as a necessary evil,9 if at all.10 In some cases, even core corporate assets are owned by investors, not operating companies. To access capital, you have to make Wall Street analysts believe that investing in you will provide a good return, considering diversification, liquidity, risk, and time horizon; again, we see that Wall Street has pushed companies to take as much off their balance sheets as possible, and as a result, owning and employing manufacturing resources on one’s own account will tend to cause capital starvation.
If we were speaking only of the domestic situation, perhaps “asset-light” would be plausible as a corporate virtue. But a hypothesis can only be as good as the evidence, and the Chinese system succeeds while using different criteria for good companies. The prescription, in the end, is as simple as trying to learn what we can from Chinese investment and accounting, and from an impartial analysis of how the Chinese economy works—which may entail rejecting some previously accepted ideas of how it should work_._
Recent work on comparative budget constraints under socialism and capitalism argues that hard budget constraints under capitalism ensure that only immediately profitable projects get funded, while soft constraints under socialism fund a mix of high-quality, low-quality, and long-term projects. The failure of socialist central planning is well-known. Yet this failure does not show that there cannot be overall upsides to soft budget constraints under capitalism, even if many present soft budget constraints, particularly in the federal government, need an immediate hard look. My reading of the developmental economics literature suggests that soft budget constraints underwritten by effective financial oversight and export discipline are precisely what an industrial policy, on the Hamiltonian or Listian model, is intended to achieve.11 If capital can be prevented from flooding into real estate and trading assets, and redirected to industrial capacity instead, long-term industrial goals are achievable. If this sounds dubious, just look at the past thirty years of Chinese industrial history.
What Losing Looks Like
[T]he bad news on the Goodyear sign in Detroit, which continued to proclaim disastrous auto production figures for 1982, might be even worse than it seemed. It might mean not only that the Japanese made better autos, that they had newer plants, that the relationship between workers and managers was better, but that Japanese society, with its greater harmony, its greater belief and discipline in basic education, its more limited personal freedoms, was better prepared for the coming century. That was the real crisis, the grimmer one that hung over America.
—David Halberstam, The Reckoning
Today, many visitors to the PRC remark on how “modern” and “high-tech” it feels. Let’s stipulate that they aren’t visiting poor, traditional villages in Yunnan or Guizhou. Still, no American in 2004 or 1984 or 1964 would have had this impression about any part of the PRC. But gadgets and apps are one thing, and even a backward country can have a few skyscrapers. To assess the real meaning of high tech in the PRC, it’s better to look at cars.
The 2024 Beijing Auto Show raised eyebrows with unprecedented battery capabilities, shockingly low price points, and stunningly sophisticated electronics.12 Americans reading reports on this show might be forgiven for wondering when exactly Geely got so good, or how the cell phone company Xiaomi became an automaker. They might also feel discomfort that a parallel universe of advanced auto companies has emerged to scant comment in the American press. We may not be seeing BYD or Xpeng dealerships in America anytime soon, but if Chinese cars keep getting better and cheaper, we will instead be seeing the world export market slipping away before our eyes—not merely for GM or Ford, but for Peugeot, Volkswagen, and Toyota. The world auto industry has annual turnover of about $3 trillion, by far the largest consumer product category, and Chinese companies have come from nowhere to be contenders.
This is partly luck. The PRC has never produced a first-rate domestic automotive internal combustion engine (ICE).13 The in-house ICE has long been considered the acid test of the auto industry because automotive drive trains are the most difficult part of making cars. Without its own ICE design, a car company is nothing more than a kit assembly shop. The ICE is the culmination of machining, precision component supply chains, and electronic controls. Mastering it establishes a car company’s independence and, therefore, its home country’s status as an international auto exporter.
With the emergence of the EV sector at scale, however, the PRC’s failure to master the ICE has been rendered almost irrelevant. Electric cars don’t need transmissions or combustion power trains, but they do need batteries and power systems of staggering sophistication. And in batteries, the PRC is king. Thus, the EV transition allows Chinese companies to skip over what was, until now, the primary constraint on developing an internationally competitive auto industry; this must have been a big factor in the emergence of no less than five electric-only PRC auto manufacturing groups since 2014 (Hozon, Nio, Leapmotor, Xpeng, and Xiaomi).
Still, fortune favors the prepared. The Chinese vehicular battery industry as it exists today grew out of the humblest possible roots: manufacturing aftermarket batteries for foreign consumer electronics products like camcorders and PDAs. But the PRC took the fateful decision to commit resources to the battery sector beyond those required at the time by a small and unsophisticated export processing industry. Since the 1990s, some cites have mandated electric buses, and for fifteen years, PRC businesses and government have focused on controlling lithium processing for lithium-ion batteries. Indeed, they went much farther than the free market alone might have suggested, going to such extraordinary lengths as creating an Australian lithium mining industry from acquisitions of troubled miners of other minerals.14 Naturally, the research and processing that resulted was onshored to the PRC.
In short, the PRC, for three decades, has sought to maximize upside from any future EV transition. The PRC has been the largest national auto market by unit volume for sixteen years, so its domestic market has the depth to pivot unilaterally to new technologies in a purely self-sustaining fashion.15 Furthermore, it has oriented its domestic infrastructure so that an EV transition will enjoy adequate support, with some 1.8 to 2.7 million EV charging stations in operation,16 as compared with 162,000 in the United States.17
The American auto industry, by contrast, benefits from a tight grip on the domestic market but suffers from declining exports. American specialization in vehicles exempt from fuel economy thresholds creates a significant nontariff barrier, as does the manufacturer-affiliated dealer system. The 100 percent tariff on Chinese vehicles, announced May 14, 2024, is an explicit trade protection. But whether or not Chinese companies eventually crack the American market, perhaps by assembling in nafta countries, it seems inevitable that Chinese exports will only increase elsewhere.
Today, General Motors makes about as many vehicles in North America as it did in 1982, which is lower than annual peak production fifty years ago and about 60 percent of Toyota’s fiscal year 2023 production.18 Production numbers, however, disproportionately reflect the domestic American market, as GM North America only exported about sixty thousand vehicles; overall, worldwide GM sales were about 60 percent of the sales of Toyota, with about 1.5 million international sales across all affiliates. By contrast, China exported about one million vehicles in 2020 and about five million vehicles in 2023.19 Dwindling North American export performance is illustrated by GM’s crashing Chinese sales,20 which are down about 80 percent in profitability and 40 percent in market share from their 2014 peak. Considering both quantitative and qualitative evidence, it seems improbable that American automakers will play leading roles in export markets in the near term. If that is true, it is fair to say that the United States is a protected market with local brands which are increasingly uncompetitive in the global economy. Such a state of affairs begins to resemble Malaysia’s Proton more than the American titans of yore.
We can’t mince words at this point: this is a disaster waiting to happen. The American auto industry employs about three million workers, or about 5 percent of the entire private sector workforce. Retrenchment in the auto industry in the 1970s and ’80s destroyed incalculable amounts of value—from depopulating large cities and depreciating their real estate and industrial capital, to dislocating innumerable skilled workers and costing us decades of their potential productivity. One also can’t ignore the connections to family breakdown and spikes in violent crime. Let’s stipulate that the American auto industry of the 1970s needed to reform. But there’s no way that its hard landing, leading to generations of malaise, bailouts, and value destruction, represented the best achievable outcome.
While caution is important when considering historical analogies, it’s hard to avoid thinking that Detroit’s preference for large, profitable cars, and its reluctance to modernize designs prior to the 1973 oil shock, has parallels with our contemporary situation. Chinese EV companies, however, have far more scale and greater state backing than any Japanese auto company could have imagined fifty years ago. In short, the Chinese tech edge isn’t about apps or glamorous aerial photos of gleaming new cities. Rather, it’s about becoming the dominant player in the world auto industry and destroying a major American industry in the process. And it’s just risible to argue that this is creative destruction or free trade allocating capital by the invisible hand—there are clearly visible hands making this happen.
Betting Big on Tech
The automotive industry is no outlier among Chinese high-tech export industries in scale or sophistication. The PRC is the largest trading partner for not only the United States but for most of the world.21 It is widely believed that the PRC’s prominence as an exporter is mainly a matter of low wages, poor environmental and safety standards, and currency manipulation. One might reasonably question whether these factors alone could support a leading position in cutting-edge vehicle technology. But in any case, vehicles are only a small part of the picture.
The Financial Times recently reported that the PRC installed about seven times as many industrial robots in 2023 as did the United States, even though China harbors a population four times the size of the United States.22 This is far out of line with the rate of uptake compared to other major industrial nations; in fact, the PRC alone is installing more than half the world’s new industrial robots. Normally, automation substitutes for labor when the marginal cost of automation declines below that of labor.23 The PRC’s robotics investments, however, are far in excess of what wage levels in the PRC would predict. To the extent that they are in line with automation investments anywhere, they are at the extreme end of a trend that is also evident in South Korea, Japan, and Taiwan. One should also note that, should the PRC receive more bang for its yuan than other countries due to synergies between robotics research and manufacturing, the cost hurdle for a new robotic installation will be relatively lower than elsewhere.
This seems hard to explain in terms of American theories of investment. Indeed, American onshore robotics investments are only about 70 percent of what wage levels alone would predict, indicating that substituting automation for wages is done only reluctantly in the United States—perhaps out of concern for optics, perhaps because of the bias against capital investment discussed above. But could it be true that the PRC has no sensitivity to these issues? Could other factors be driving this as they did PRC strategic investments in the battery sector?
Liberal economics and free trade cannot explain Chinese investment in robotics, but industrial policy can make a start. In March of this year, the annual “Report on the Work of the Government,” a statement of priorities and direction, was delivered by Premier Li Qiang at the annual session of China’s National People’s Congress. It raised eyebrows because it prioritized not merely expanding domestic demand, as had been anticipated, but also (a) the modernization of the industrial system and developing new quality productive forces, and (b) strengthening China through science and education to consolidate the foundations of high-quality development24 and scientific institutions capable of pushing humanity to new technological frontiers. The report left “Western observers incredulous,” amid the country’s depressed demand from years of lockdowns and a serious property bubble.25 Yet, as we have seen, betting against Chinese industrial policy has a dubious record.
In 2016, a top CCP planning document announced the aim of making China the “leading scientific power in the world.” This is not normally a priority or, indeed, a possibility for a middle-income country with a secondary education completion rate below 50 percent, one in which rural schoolchildren routinely lack glasses and suffer from parasitic worms.26 Tanner Greer and Nancy Yu point out that contemporary Chinese intellectual culture is haunted by the failure of the Qing dynasty to modernize, leading to vast civil strife and the “century of humiliation.” Moreover, they cite Politburo member and prominent intellectual Wang Huning’s 1991 declaration that “if the Americans are to be overtaken, one thing must be done: surpass them in science and technology.” Similar statements are made in official textbooks for state security aspirants. Such language may sound at once paranoid and megalomanic to Americans, who have enjoyed security within their borders since the War of 1812 and who have become complacent in enjoying seventy years of the Pax Americana. The Chinese have enjoyed no such security, and any questions concerning the seriousness of their intentions ought to be settled by Chinese leaders’ prominent, public, and unambiguous statements.27 Even among less bellicose PRC intellectuals, the PRC’s development planning is seen as the defining vector of competition between the American and Chinese systems.
Notably, from an American point of view, almost all of the technologies blessed by Chinese policy are physical technologies, not software. Indeed, China’s 2020–22 regulatory “crackdown” on software companies was seen as “capricious” by a Western press that has come to identify technology with software.28 When we say “Big Tech,” we aren’t talking about General Electric or Raytheon. But when Chinese leaders talk about advanced technologies, such as AI, materials science, genetics, neuroscience, quantum computing, green energy, and aerospace engineering, they also signify physical technology. For instance, even Chinese AI is focused on industrial applications and is a separate academic major from computer science.29 Once again, the PRC could not be telling us more clearly that its intent to become technologically supreme means supremacy in out-of-the-envelope physical science and manufacturing technology: the hardest of hard assets.
Without detracting from this vaulting ambition, we must also consider how this mission statement will address the PRC’s domestic political concerns. Even if it is true that the PRC’s political class has bet its future on using technology to attain the leading position in a new world order, they still need to maintain popular support. The tellingly silent term in Chinese techno-modernizing rhetoric is human capital.
Much attention has been paid to China’s population decline, which began in 2022.30 This has led some commentators to predict that China’s period of rapid economic growth must soon come to an end, as China will “get old before it gets rich” (a now stock expression that dates back to at least 2008).31 A PRC which is not yet wealthy and has an older population would have a higher proportion of retirees to workers than the PRC of the boom times. This is bad news in a manufacturing economy, where retirement is inevitable for those in “muscle jobs.” But less attention falls, at least explicitly, on the PRC’s education level and its implications for attaining full development—or its role in motivating the Chinese push for technological supremacy.
Two Chinas
A map of the PRC by GDP per capita yields results that most Americans would find shocking. Beijing’s is over $28,000 per year ($47,000 by purchasing power parity); Shanghai’s is almost $27,000 ($44,000 PPP), but ten out of thirty-three administrative divisions are under $10,000, with Gansu the lowest at under $7,000. The difference between rich and poor divisions is more pronounced in China than in the United States—such as that between New York and Mississippi. About 388 million Chinese citizens live in such “have-not” regions.32
What’s more, Chinese residents of poor provinces lack a fundamental opportunity that Americans take for granted: the right to live anywhere they like in the country. The PRC’s hukou residence permit system restricts permanent residence outside of one’s province of origin, and thus the ability to own property, go to school, or receive other public services outside of that province. Americans marvel at the massive train trips home that Chinese urban workers undertake at the Lunar New Year. This isn’t merely tradition—for many urban workers, it may be the only opportunity they have to see their parents and children once a year because their relatives may not legally reside in the regions in which the workers are employed. As such, a Chinese “Great Migration” is illegal and impossible.
The PRC’s migrant labor force is thus simultaneously insulated from social shocks, such as boomtown slums and dislocation from ancestral villages, while being subjected to serious restrictions on opportunity. One might compare and contrast this with the American system: it is not the intent of this essay to argue that the Chinese system is inferior or immoral; however, inevitably, Chinese rural life and education lag far behind the urban in terms of human development. Partly because of this and partly because the PRC was within living memory a far poorer country, fewer than half of the Chinese workforce has completed secondary education.
Normally, the prospects for a modestly educated country are dim because it struggles to move up the value chain and tends to get stuck at low manufacturing sophistication levels, such as sweatshops or maquiladoras. Industries at this level are more productive than subsistence farming, but offer few opportunities to develop the skills and technology base to ascend to a fully developed economy.
This is precisely the level at which many China watchers expected the newly open PRC of the 1990s to stagnate, at least for a time, until it could attain levels of education comparable to other nations that had recently attained full development, such as Israel, Taiwan, South Korea, Singapore, and Ireland. No one was sure whether the PRC would make it over the line, and indeed, it has only done so in some regions. Considering the power of the security state and the entrenchment of the hukou and migrant labor system, the PRC is more capable of bearing regional inequality than other countries of comparable average wealth. Still, one has to ask about the long-term stability of this system.
Of course, the PRC can continue investing in the development of its inland provinces that have not modernized; however, it takes a long time to turn over a workforce. Even if the PRC were to immediately attain 100 percent secondary-school completion for this year’s eighteen-year-old cohort, and every cohort behind them, it would take a generation to reduce the non-completion rate from today’s 40 percent to a still inadequate 30 percent. There is no path to the required educational attainment in any timeline acceptable to the CCP.
To return to Chinese industry: we should note that there are large pockets of Chinese production that are at least as advanced as any competitors worldwide. This would not be typical of a middle-income country with low variance in capitalization, educational attainment, and sophistication of production. Instead, it exemplifies a high-variance country that contains regions that are poorer than Angola and others that are on par with Poland or Portugal, but also one which routinely generates vast quantities of scientific research and six annual Math Olympiad golds. This is to say nothing of “X-factors,” such as its links to diaspora communities capable of contributing know-how and billions of dollars of private capital, astronomical trade surpluses, and deep involvement with overseas resource production.
A sense of the PRC’s demographic structure and geographic disparity thus explains why the CCP has publicly called for a technology and manufacturing moonshot even as it deliberately engineered the destruction of over one trillion dollars of software company share value—without, it must be said, impeding in any evident way its continued progress in telecom, chip design, or export manufacturing.33 The Chinese regime believes that continued manufacturing and export supremacy is an existential interest. The CCP leadership further believes that much of its population is presently incapable of the productivity levels that this would require. It has therefore decided to allocate intellectual resources and investment capital away from the software and financial sectors and into applications that it believes will artificially raise the productivity of the average Chinese worker—whose best options absent such intervention will continue to be in low-value-added manufacturing of the sweatshop and maquiladora variety. This is industrial policy on the grandest possible scale for the highest possible stakes. It reveals a PRC actively opposed at the highest levels of its government to free trade ideology and to positive-sum international trade. A trade system in that guise would fail to promote the developmental outcomes within the CCP system that the CCP believes are fundamental to its continued credibility and viability as the steward of Chinese society.
Two Americas
It’s time for America to admit that it has a China problem. You don’t have to believe in the truth of another actor’s ideology to believe that it motivates them sincerely and that they will act in accordance with it. American leaders, however, have failed to do this.
Complaints about “unfair trade practices” are surely as old as trade itself. At present, we are seeing a renewed round of them as American and European countries raise auto tariffs. Western countries point to Chinese industrial subsidies to justify their tariffs, and the PRC calls Western tariffs and export controls unfair. Instead of trying to square this circle in some court of cosmic justice, it’s better to ask what each party should wish to achieve.
The PRC’s interest is obvious. If the PRC becomes the dominant player in the international auto trade, it hopes to secure a huge market for its domestic players, make them indispensable in international trade, and normalize the presence of hundreds of millions of vehicles packed with sensors, radios, and firmware on every road in the world. The intelligence benefits alone are incalculable, but control of such markets will in addition weaken countries that the PRC routinely calls its geopolitical adversaries, subject them to internal strife as a result of economic dislocation, and fund continued Chinese industrial learning in technologies identified as national priorities.
America’s interest is also obvious. In the short term, it is protectionism, which is always narrowly politically popular. One hopes that this will not turn out to be mere venal protectionism for uncompetitive industries, which is always a loser in the long term, and instead marks the beginning of an industrial policy that addresses incipient crises in American society.
We cannot speak of industrial learning and industrial policy in the PRC without accepting de-skilling and the mirror effects of Beijing’s policies in America. We must ask ourselves honestly whether the decline in manufacturing employment has covered up losses in skill sets and industrial capacities that it is in the national interest to have onshore. If these onshore skill sets aren’t easily captured on a balance sheet, we should ask ourselves to what degree we intentionally sought to offshore such jobs, or whether we attributed offshoring to the outcomes of the market. In other words, we must ask whether the United States has an implicit, perhaps even accidental, deindustrial policy and to what degree that has been a poor choice for our country’s prospects.
At this point, we must recall that the United States is the number two exporter in the world while noting that American exports are a strange mix of bulk raw materials, cutting-edge high-tech products, and services. We might sum this up by saying that sectors of the economy that were never considered tradeable before have come to be traded by us, and that America’s ability to design ultra-premium high-tech equipment remains strong. At the same time, neither our import nor our export profiles can be called healthy because we possess many undesirable import dependencies.
As such, the key challenge facing the next administration, of whatever party, will be determining to what degree we need to reshore production in order to accomplish goals for the national interest. If the United States were a business, we would say that it is catastrophically overconcentrated in a single vendor relationship and must find ways to diversify, lest it be economically Finlandized. No responsible actor would choose to be in this situation, and no successful administration would permit this situation to go on. Like many Asian countries after the Second World War, we need to discipline our capital and business institutions so that we do not sleepwalk into landlordism, crony capitalism, or disaster.
A Generational Challenge
The PRC pursues not merely an industrial policy but also a clearly articulated geostrategic plan, announced in untranslated Chinese across state organs and venues, to upend the world order by achieving preeminence in multiple technological revolutions. The PRC explicitly intends to use trade as a lever to accomplish this goal. The PRC’s own domestic political needs disfavor importing finished goods and favor importing raw materials to be finished into value-added exports.
American leaders and experts have explained these developments as artifacts of the invisible hand and a lifestyle subsidy to Americans. To the extent that this was ever true, it is not true any longer. The work of undoing these dangerous trends is half-begun, as we have started to consider defense implications; however, until we also recognize the effects on national capacities and human capital, the task cannot be properly completed. We must fully come to grips with the flaws in our system that left our own institutions eager to undermine our national strength and health.
Meanwhile, the United States and the other G7 nations are suffering from obvious deficiencies in military industrial capacity. Tellingly, these deficiencies are most evident in old-economy technologies like artillery shell manufacturing and shipbuilding. Our problem isn’t that we can’t develop advanced drones or aircraft—our problem is that we can’t manufacture artillery shells (or drones) fast enough, even though a pariah state like North Korea can. There is obvious continuity between peacetime and military production, so this should be taken as a sign that we are simply deficient in manufacturing capacity.
It would have been unthinkable for Cold War America to source key components in logistics and telecommunications from the Warsaw Pact. We never had to address the question because the Soviet Union didn’t make any finished goods that Western countries wanted to buy. But if they had, integrating them into basic social functions would have been considered too absurd to take seriously. And yet, our long history of peaceful relations with the PRC has led us to sleepwalk into exactly this unacceptable state of dependency.
The PRC’s internal discourse makes it painfully clear to any serious American observer that peace with China can only be sustained if we stabilize our trade and restore our strength. Any incoming administration must therefore be ready to implement a reindustrialization plan that goes far beyond ad hoc subsidies to address the larger question of why we lost industrial capacity in the first place. This plan should use tariffs and waivers as precision tools for strategic products and industries, but it must also address larger questions of tax, accounting, and finance rules that have contributed to an anti-industry investment environment. Finally, this plan must be implemented with the will to reallocate federal spending to promote world peace through American strength.
The past five years have seen enormous international realignments in major industrial categories like telecommunications, logistics, and transportation. It’s time for us to get serious about the scope of these changes. It’s time for the American people to demand solutions. And it is time for us to show the world that there is a trade and industrial model for a new American-led world order, lest our friends and allies be forced into the PRC’s arms because we have failed to provide an alternative. The social costs of failure, here and abroad, will blight the lives of generations yet unborn. Are we up to the challenge?
This article originally appeared in American Affairs Volume VIII, Number 3 (Fall 2024): 3–23.
Notes
1 LBC, “Is China a Threat? Andrew Marr Questions CCP Spokesperson,” YouTube, September 12, 2023.
2 National Security Council, “United States Strategic Approach to the People’s Republic of China,” Executive Office of the President, May 26, 2020. “[I]t has become evident that this approach underestimated the will of the Chinese Communist Party (CCP) to constrain the scope of economic and political reform in China. Over the past two decades, reforms have slowed, stalled, or reversed. The PRC’s rapid economic development and increased engagement with the world did not lead to convergence with the citizen-centric, free and open order as the United States had hoped. The CCP has chosen instead to exploit the free and open rules-based order and attempt to reshape the international system in its favor.”
3 National Security Council, “United States Strategic Approach,” 2–3. “Beijing did not internalize the norms and practices of competition-based trade and investment, and instead exploited the benefits of WTO membership to become the world’s largest exporter, while systematically protecting its domestic markets. Beijing’s economic policies have led to massive industrial overcapacity that distorts global prices and allows China to expand global market share at the expense of competitors operating without the unfair advantages that Beijing provides to its firms. The PRC retains its non-market economic structure and state-led, mercantilist approach to trade and investment.”
4 William N. Thorndike Jr., The Outsiders (Boston: Harvard Business Review Press, 2021), xii. “Singleton outperformed the S&P 500 by over twelve times . . . much of what distinguished Singleton from his peers lay in his mastery of the critical but somewhat mysterious field of capital allocation. . . .” (Emphasis in original.)
5 “China Foreign Direct Investment 1960–2024,” Macrotrends, accessed July 18, 2024_._
6 Françoise Lemoine, “FDI and the Opening Up of China’s Economy,” Centre d’etudes Prospectives et D’informations Internationales, June 11, 2000. This study finds that between 1992 and 1998, over 80 percent of FDI went into southeastern coastal provinces.
7 Joe Studwell, How Asia Works (New York: Grove Press, 2013), 77. “[Park Chung Hee] quickly discovered the power of [export subsidies] when, desperate for foreign exchange, his regime created a textile cartel on the Japanese model, furnishing it with cheap loans, tax exemptions, and tariff exemptions on its raw materials. Overseas sales increased and precious foreign exchange started to flow in. . . . Park was so happy that he declared in 1964 that November 30 would be Korea National Export Day. . . . ‘Thereafter,’ the scholar Alice Amsden noted, ‘the Park regime increasingly made exports a compulsion rather than a choice.’”
8 Dan Morgan, Merchants of Grain (New York: Penguin Books, 1979). “Through wheat . . . I saw the close connection between two enormous events, the settling of the North American prairies and the Industrial Revolution, with its insatiable need for bread. . . . By 1800, England was a country that ran on coal and wheat; bread had become the established food of the Industrial Revolution, the staple of populations drawn away from their usual food supply on farms and in villages. British millers turned to the new American nation and imported flour from Baltimore and Richmond.” (Britain became even more dependent on Russian exports.)
9 Andrew Tangel and Sharon Terlep, “The Disarray inside Boeing’s 737 Factory before the Door Plug Blowout,” Wall Street Journal, April 2, 2024.
10 Jennifer Haupt, “Lessons of Boeing’s Cultural Decline—and How It Can Recover,” From Day One, May 1, 2022.
12 Max Jerneck, “When Soft Budget Constraints Promote Innovation: Kornai Meets Schumpeter in Japan,” Industrial and Corporate Change 29, no. 6 (December 2020): 1415–30.
12 Georg Kacher, “Beijing Auto Show Is a Home Run, but Mostly for Domestic Brands,” Car and Driver, April 26, 2024.
13 “China Has Never Mastered Internal-Combustion Engines,” Economist, January 2, 2020.
14 Henry Sanderson, Volt Rush: The Winners and Losers in the Race to Go Green (New York: Oneworld Publications, 2022), 55–59. “In 2015 Ganfeng bought a 25 percent stake in the Mount Marion mine in Western Australia. . . . It was a move that fired the starting gun on a new gold rush that would see Australia become the dominant lithium producer. . . . At the time [one geologist] joined Pilbara it was a penny stock. But he needed to find financing to build the mine. . . . By the summer of [2021], as the world recovered from the Covid-19 pandemic, shares in Pilbara Minerals had risen by over four hundred percent, making it one of Australia’s best-performing stocks.”
15 Ford Model e division COO Marin Gjaja, quoted in Inside EVs: “The size of the market in China is so big that those players are going to be in a position to go potentially dominate the world, unless we as Ford and other OEMs can respond,” Gjaja said. “Think about all of the capital: the human capital, physical capital, financial capital that’s built into these ecosystems to build vehicles—that is all being massively disrupted, because this technology is progressing so fast.” Patrick George, “Japan’s Automakers Shift Into Crisis Mode Over The EV Race,” Inside EVs, February 19, 2024.
16 Shizuka Tanabe, “Huawei Rolls Out Ultrafast EV Chargers in China, Taking on Tesla,” Nikkei Asia, February 8, 2024.
17 “The Number of Electric Vehicle Charging Ports in the U.S. Nearly Doubled in the Past Three Years,” Office of Energy Efficiency and Renewable Energy, July 17, 2023.
18 “Sales, Production, and Export Results for 2023 (January–December),” Toyota, January 30, 2024.
19 Katharina Buchholz, “Chinese Car Exports Continue to Soar as EV Share Grows,” Forbes, March 28, 2024.
20 Michael Wayland, “U.S. Automakers Like GM Are Rapidly Losing Ground in China, Once an Engine for Growth,” CNBC, May 6, 2024.
21 Lee Ying Shan, “China De-Linking Talk Is Overdone and It’s Still Key to the Global Economy, Asian Development Bank Says,” CNBC, February 25, 2024.
22 William Langley and Gloria Li, “Chinese Robot Maker Says Protectionism Will Not Stop Its March,” Financial Times, April 4, 2024.
23 “China Is Close to Leading in Robotics Innovation, New ITIF Analysis Finds,” Information Technology and Innovation Foundation, March 11, 2024.
24 “Report on the Work of the Government: Delivered at the Second Session of the 14th National People’s Congress of the People’s Republic of China on March 5, 2024.”
25 Tanner Greer and Nancy Yu, “Xi Believes China Can Win a Scientific Revolution,” Foreign Policy, April 30, 2024.
26 Scott Rozelle and Natalie Hell, Invisible China: How the Urban-Rural Divide Threatens China’s Rise (Chicago: University of Chicago Press, 2020). “Our studies have shown that 40 percent of schoolchildren in many rural communities in southern China attend school every day with intestinal worms quietly sapping their energy. More than 30 percent of rural students (in grades four to eight) have vision problems but do not have glasses.”
27 “In this sense, the ‘new’ part of the new Cold War is that the differences between the U.S. and China are no longer ideological differences between communism and liberalism or socialism and capitalism, but are instead based on different understandings of the development path of modernization and the resulting arrangements of the global order. . . . If the disintegration of the Soviet Union was one lesson for China, allowing China to maintain a clear-headed political consciousness throughout, then America’s decline is another lesson, counseling China to always exercise strategic restraint, overcome the cultural vanity of saving the world, and to maintain constant strategic focus on nation-building, constantly increasing its power, both hard and soft. Because in a world of international competition, ‘power is the hard truth.’” Jiang Shigong, The “Critical Decade” in the Sino-American Relationship, trans. David Ownby.
28 Angela Huyue Zhang, “Why Big Tech May Never Recover in China,” Time, May 7, 2024.
29 A. J. Cortese, “How Realistic Are Chinese University AI Ambitions?,” Macro Polo, December 28, 2023.
30 Farah Master, “China’s Population Drops for Second Year, with Record Low Birth Rate,” Reuters, January 17, 2024.
31 John Gordon IV et al., Domestic Trends in the United States, China, and Iran (Santa Monica, Calif.: RAND Corporation, 2008).
32 National Bureau of Statistics of China, accessed February 29, 2024.
33 Zhang, “Why Big Tech May Never Recover in China.”