CHALLENGE #2: COMMUNIST CHINA’S ECONOMIC AGGRESSION AND QUEST FOR WORLD DOMINATION

Among all of its bilateral trade relationships, America’s relationship with Com- munist China is the most fraught with difficulty. The problem is not just that the relentlessly mercantilist and protectionist trade policies that China has pursued ever since its accession to the WTO in 2001 have led to chronic, massive, and ever-expanding trade deficits. Communist China’s economic aggression in the traditional trade policy space is further facilitated by equally aggressive industrial policies and technology transfer–forcing policies that are designed to shift the world’s manufacturing and supply chains to Communist Chinese soil. The Chinese Communist Party’s policy goal is to propel the Chinese economy, but its broader goal is to strengthen Communist China’s defense industrial base and associated warfighting capabilities. That China unabashedly seeks to supplant America as the world’s dominant economic and military power is not in dispute. Rather, it is a prominent feature of Communist Chinese dictator Xi Jinping’s rhet- oric. Xi has promised that the deed will be done by 2049, the 100-year anniversary of the Communist takeover of the Mainland.19

In light of Communist China’s broader geopolitical and military agenda, the American President who takes office in January 2025 must view the U.S.–China trade relationship and associated policy reforms within the context of the broader existential threat posed by Communist China. The question is whether that next President should seek to decouple economically and financially from Communist China as America’s first best response to China’s unrelenting aggression or con- tinue efforts to negotiate with an authoritarian country and brutal dictatorship with a well-established reputation for failing to abide by any agreements it enters. Institutionalized Aggression. Table 5 depicts more than 50 types of policy aggression institutionalized by the CCP across six different categories of such aggression. Viewed as whole, the extent of Communist China’s aggression is breathtaking.

At the trade policy level, Communist China relies heavily on a wide range of mercantilist and protectionist tools to protect its own markets and unfairly exploit foreign markets. These instruments of Communist Chinese trade aggression include high tariffs and nontariff barriers, currency manipulation, a heavy reli- ance on sweatshop labor and pollution havens, the dumping of unfairly subsidized exports, and widespread counterfeiting and piracy: Communist China is the world’s largest source of counterfeit and pirated products.

In addition, Communist Chinese enterprises benefit from preferential policies that have burdened world markets with subsidized overcapacity. The resultant glut

of Communist Chinese exports in turn depresses world prices and pushes foreign rivals out of the global market—steel is a major example.20 Industrial policy tools that further reinforce Communist China’s mercantilist and protectionist trade policies include numerous direct and indirect subsidies to boost exports and the consolidation of heavily subsidized state-owned enterprises into “national champi- ons” that can compete with foreign companies in both domestic and global markets. Communist China also uses a predatory “debt trap” model of economic develop- ment aid that proffers substantial financing to developing countries in exchange for their willingness to mortgage their natural resources and allow Communist China access to their markets. The practical effect of this debt trap model is to give Com- munist China a competitive edge internationally that stems from its preferential access to relatively lower-cost commodities needed in the manufacturing process. These commodities range from bauxite, copper, and nickel to rarer commodities such as beryllium, titanium, and rare earth minerals.

As a complement to this debt trap gambit and to exploit its commanding share of a wide range of critical raw materials that are essential to the global supply chain and production of high-technology and high-value-added products, Com- munist China strategically uses protectionist export restraints, including export quotas and export duties. These export restraints thereby restrict access to raw materials such as rare earth, tungsten, and molybdenum that are essential in the high-technology production space. The result is to drive up world prices and thereby put pressure on American and other foreign downstream producers to move their operations, technologies, and jobs to Communist China. American industries that have been affected by Communist China’s export restraints range from steel, chemicals, and electric cars to wind turbines, lasers, semiconductors, and refrigerants.

Technology-Forcing Policies. Table 6, extracted from the White House Office of Trade and Manufacturing Policy’s report on Communist China’s economic aggression,21 provides a summary of the various policies the Chinese Communist Party uses to force the transfer of the West’s technologies to Communist Chinese soil. Formally, Communist Chinese industrial policy seeks to promote the “diges- tion, absorption, and re-innovation” of technologies and intellectual property (IP) from around the world.22

As noted in Table 6, this policy is carried out, for example, through state-spon- sored IP theft—coercive and intrusive regulatory gambits to force technology transfer, typically in exchange for limited access to the Chinese market. Commu- nist China’s looting of American technology is further enhanced by “information harvesting” conducted by Communist Chinese nationals who infiltrate U.S. uni- versities, national laboratories, and other centers of innovation. Strategic sectors targeted by Communist Chinese economic espionage have included electronics, telecommunications, robotics, data services, pharmaceuticals, mobile phone

Academia is an opportune environment for learning about science and technology since the cultural values of U.S. educational institutions reflect an open and free exchange of ideas. As a result, Chinese science and engineering students frequently master technologies that later become critical to key military systems, amounting over time to unintentional violations of U.S. export control laws.27

State-backed Chinese enterprises also increasingly finance joint research programs and the construction of new research facilities on U.S. campuses. For

services, satellite communications and imagery, and business application software. It has been estimated that the theft of trade secrets alone costs the U.S. “between $180 billion and $540 billion” annually.23

Closely related to Communist China’s espionage campaigns are its state-backed efforts to evade U.S. export control laws. These laws are designed to prevent the export of sensitive technologies with military applications.24 However, a significant problem facing agencies like the Departments of Commerce, Defense, and State is the growth of “dual-use” technologies, which have both military and civilian utility. For example, airplane engine technologies have an obvious commercial application. When acquired by a strategic economic and military competitor like Communist China, however, such commercial items can quickly wind up propelling the aircraft of the People’s Liberation Army.

As an example of Communist China’s coercive and intrusive regulatory gambits to force the transfer of foreign technologies and IP to Chinese competitors, foreign companies often must enter into joint ventures or partnerships with minority stakes in exchange for access to the Chinese market. Once a U.S. or foreign company is coerced into entering a joint venture with a Chinese partner, the door is open to the transfer of technology and IP. Similarly, a relentlessly coercive Communist China has forced American patent and technology holders to accept below-market royalty rates in licensing and other forms of below-market compensation for their technologies—and the American government has done little or nothing about it.

Information Harvesting

Every year, more than 300,000 Communist Chinese nationals attend U.S. universities or are hired at U.S. national laboratories, innovation centers, incubators, and think tanks. To put this in perspective, accord- ing to the Chinese Ministry of Education, only 20,000 American nationals were studying abroad at Chinese universities on the mainland in 2018.25 These Chinese nationals—often members (or the sons and daughters of members) of the Chinese Communist Party—now account for approximately one-third of foreign university and college students in the United States and about 25 percent of graduate students specializing in science, technology, engineering, or math (STEM).26 As a Defense Innovation Unit Experimental (DIUx) report has warned:

example, Huawei, well-known within the American intelligence community as an instrument of Chinese military espionage, has partnered with the University of California–Berkeley on research that focuses on artificial intelligence and related areas such as deep learning, reinforcement learning, machine learning, natural language processing, and computer vision, all of which have important future mil- itary applications.28 In this way, UC–Berkeley, whether unwittingly or wittingly, helps to boost Communist China’s capabilities and quest for military dominance. Communist Chinese state actors are also strategically building research cen- ters in innovation centers and hubs like Silicon Valley and Boston. Such American research has accelerated Communist China’s development of hypersonic glide vehicles, which travel at speeds in excess of Mach 5 and are aimed at evading modern ballistic missile defense systems while they deliver their nuclear weapons. Technology-Seeking, State-Financed Foreign Direct Investment (FDI).

If American entrepreneurs build it, Communist Chinese investors will come. And come they have in droves. In the words of the United States Trade Representative: The Chinese government directs and unfairly facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies, to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by state industrial plans.29

Communist Chinese buyers have included most prominently state-owned enterprises, private Chinese companies with interlocking ties to the Commu- nist Chinese state, and state-backed sovereign wealth funds. These agents of the Communist Chinese government push their foreign direct investment through vehicles that include mergers and acquisitions, seed and venture capital financing, and greenfield investing, particularly in strategically targeted high-technology industries. Since 2012, CB Insights has catalogued more than 600 high-technology investments in the United States worth close to $20 billion—with artificial intelli- gence, augmented and virtual reality, and robotics receiving a particular focus—by Communist China–based investors.30

All of these behaviors raise the question of whether Communist Chinese nation- als should be granted visas to penetrate our universities, think tanks, and research institutions and whether Communist Chinese capital should be allowed to invest in America’s cutting-edge technology firms.

Policy Responses to Communist Chinese Aggression. It should be clear from this review that Communist China’s economic aggression is both widespread and systemic. The CCP’s self-proclaimed goal is to supplant the U.S. as the world’s dominant economic and military superpower. The question: How should the next American President address this aggression? Policy responses range from further attempts to negotiate with the CCP to strategically decoupling economically and financially from Communist China.

The Fruitlessness of Further Negotiations. If the past is prologue, and as we learned during the Trump Administration, any further negotiations with Com- munist China are likely to be both fruitless and dangerous: fruitless because the CCP now has a very well-established reputation for bargaining in bad faith and dangerous because as long as the CCP’s aggression continues, it will further weaken America’s manufacturing and defense industrial base and global supply chains. The record regarding Communist China’s bad-faith negotiating is clear. In September 2015, President Barack Obama stood with Xi Jinping in the White House Rose Garden where Xi solemnly promised not to militarize the South China Sea and agreed that Communist China would not conduct knowingly cyber-enabled theft of intellectual property.31 Within a year, the first promise would be broken.32 As for Communist China’s cyberattacks on American busi- nesses, they have never stopped.

Upon taking office in 2017, President Trump put on hold his 2016 campaign promise to put high tariffs on Chinese products immediately. Instead, as a gesture of good faith, he sought to negotiate a comprehensive trade agreement with China that would have addressed many of the issues raised in this discussion. By the middle of 2018, it was clear that the CCP had no intention of bargaining in good faith. As a result, on June 15, President Trump began to impose a series of tariffs33 on Chinese products that would eventually rise to cover more than $500 billion of Chinese imports. These tariffs would lead Communist China’s lead nego- tiator, Vice Premier Liu He, to agree tentatively in April of 2019 to what would have been the most comprehensive trade deal in global history.34 On May 3, 2019, however, Liu would renege on that 150-page deal and seek its drastic re-trading.35 Finally, on January 15, 2020, the U.S. and Communist China signed a “Phase One” deal that was a pale shadow of the original deal.36 This so-called Skinny Deal (as it was derisively and rightly called) combined proposed modest Communist Chinese reforms on issues related to forced technology transfer and intellectual property theft with promises of large-scale purchases of agricultural, manufactur- ing, and energy products. To date, this deal has been a predictable bust: Communist China has failed to consummate a significant fraction of its promised purchases and has made little or no progress on reforming its mercantilist, protectionist, and technology transfer–forcing policies.

The clear lesson learned in both the Obama and Trump Administrations is that Communist China will never bargain in good faith with the U.S. to stop its aggres- sion. An equally clear lesson learned by President Trump, which he was ready to implement in a second term, was that the better policy option was to decouple both economically and financially from Communist China as further negotiations would indeed be both fruitless and dangerous.

TABLE 6

Vectors of Communist China’s Economic Aggression in the Technology and IP Space

1. Physical Theft and Cyber-Enabled Theft of Technologies and IP • Physical Theft of Technologies and IP Through Economic Espionage • Cyber-Enabled Espionage and Theft • Evasion of U.S. Export Control Laws • Counterfeiting and Piracy • Reverse Engineering

2. Coercive and Intrusive Regulatory Gambits • Foreign Ownership Restrictions • Adverse Administrative Approvals and Licensing Requirements • Discriminatory Patent and Other IP Rights Restrictions • Security Reviews Force Technology and IP Transfers • Secure and Controllable Technology Standards • Data Localization Mandates • Burdensome and Intrusive Testing • Discriminatory Catalogues and Lists • Government Procurement Restrictions • Indigenous Technology Standards that Deviate from International Norms • Forced Research and Development • Antimonopoly Law Extortion • Expert Review Panels Force Disclosure of Proprietary Information • Chinese Communist Party Co-opts Corporate Governance • Placement of Chinese Employees with Foreign Joint Ventures

3. Economic Coercion • Export Restraints Restrict Access to Raw Materials • Monopsony Purchasing Power

4. Information Harvesting • Open-Source Collection of Science and Technology Information • Chinese Nationals in U.S. as Non-Traditional Information Collectors • Recruitment of Science, Technology, Business, and Finance Talent

5. State-Sponsored, Technology-Seeking Investment • Chinese State Actors Involved in Technology-Seeking FDI • Chinese Investment Vehicles Used to Acquire and Transfer U.S. Technologies and IP – Mergers and Acquisitions – Greenfield Investments – Seed and Venture Funding

SOURCE: White House Office of Trade and Manufacturing Policy, How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World, June 2018, https://trumpwhitehouse. archives.gov/wp-content/uploads/2018/06/FINAL-China-Technology-Report-6.18.18-PDF.pdf (accessed March 21, 2023).

The following policy options were on the drawing board or in discussion as preparations for a potential Trump second term were being made. These options span the spectrum from purely trade-related like increasing tariffs to cutting off Communist China’s access to American financial markets, research institutions, and consumers. The next American President should strongly consider adopting all of them as a package:

Provide significant financial and tax incentives to American companies that are seeking to onshore production from Communist China to U.S. soil. Stop Communist China’s abuse of the so-called de minimis exemption, which allows it to evade the tariffs for products valued at less than $800. Prohibit Communist Chinese state-owned enterprises from bidding on U.S. government procurement contracts (for example, contracts for subway and other transportation systems). Prohibit the use of Communist Chinese–made drones in American airspace. Ban all Chinese social media apps such as TikTok and WeChat, which pose significant national security risks and expose American consumers to data and identity theft. lProhibit all Communist Chinese investment in high-technology industries. lProhibit U.S. pension funds from investing in Communist Chinese stocks.

Delist any Communist Chinese stocks that do not meet Public Company Accounting Oversight Board standards or, alternatively, close off the Chinese “A shares” stock market to U.S. investment and deregister U.S.- sanctioned Communist Chinese companies. Prohibit the use of Hong Kong clearinghouses as transit points for American capital investing in the Chinese mainland. Prohibit the inclusion of Chinese sovereign bonds in U.S. investors’ portfolios.

Strategically expand tariffs to all Chinese products and increase tariff rates to levels that will block out “Made in China” products, and execute this strategy in a manner and at a pace that will not expose the U.S. to lack of access to essential products like key pharmaceuticals.

Systematically reduce and eventually eliminate any U.S. dependence on Communist Chinese supply chains that may be used to threaten national security such as medicines, silicon chips, rare earth minerals, computer motherboards, flatscreen displays, and military components. Sanction any companies, including American companies like Apple, that facilitate Communist China’s use of its Great Firewall surveillance and censorship capabilities.

Order the Department of Homeland Security (DHS) and Department of Justice to contract with U.S.-owned and U.S.-operated artificial intelligence companies that are capable of detecting, identifying, and disrupting both the domestic groups’ and CCP influencers’ social media operations and funding streams using public information as a rapidly available offensive measure. Reinvigorate and expand the DHS crackdown on the CCP’s use of e-sellers (including third-party sellers) and the shippers and operators of major warehouses such as Amazon, eBay, and Alibaba to flood U.S. markets with counterfeit and pirated goods.

Compel the closure of all Confucius Institutes in the U.S., which serve as propaganda arms of the CCP.

Significantly reduce or eliminate the issuance of visas to Chinese students or researchers to prevent espionage and information harvesting. Hold the CCP accountable for the COVID-19 virus, which almost certainly originated as a genetically engineered virus from the Wuhan Institute of Virology, and do so through the establishment of a presidential commission or select congressional committee that would investigate the origins of the virus; its various costs, both economically and in human life; and the possible means of collecting damages from the CCP, which are likely to rise to the trillions of dollars.

If the new U.S. President wishes to defend this country against the serious exis- tential threat posed by Communist China, that President will adopt all of these proposals through the requisite presidential executive orders or memoranda. Effective Trade Policy in the Real World. To conclude this analysis, it is useful to offer brief reflections on a number of key obstacles to implementing the policy initiatives recommended in this chapter. These obstacles include:

The dogma of the Ricardian free-trade model, which has been used as propaganda to thwart the adoption of measures that seek to level the global trading field for American manufacturers, farmers, ranchers, and workers; The politics of trade policy, which has led to a great divide that makes trade policy reforms difficult to implement; The economics of trade deficits, which are not adequately understood either by the American public or by the policymaking intelligentsia; and The crucial role of supportive White House and Administration personnel in implementing effective trade policies.

The Dogma of Free Trade. Clearly, the fair and balanced trade orientation of this chapter runs starkly against the free trade grain of the globalist Ricardian orthodoxy, which is predicated on the theory that free trade represents the best path by which to achieve both American and global prosperity. This orthodoxy is based on the ivory tower academic conclusion that if countries trade freely among each other, each will pursue its own comparative advantages; production will be most efficient around the world; the economic pie will be bigger both for the globe and for each free trading country; and (so long as workers who lose their jobs are fairly compensated from the gains from trade) everyone will be better off.

The most obvious problem with this orthodoxy (there are many more) is that nowhere is Ricardian free trade mirrored in the real world. Instead, America trades in a world where the WTO’s MFN rules are stacked against us, scofflaws like Communist China run roughshod over what meager WTO rules there are, and the United States among all of the world’s developed nations is the biggest victim of the free trade Ricardian orthodoxy.

During his first term, President Donald Trump preached that there can be no free trade without fair, reciprocal, and balanced trade. He was right then, and who- ever is the next President in 2025 should heed this critical principle whenever the flag of free trade is waved to prevent the adoption of needed reforms. The Politics of Trade Policy: Who Benefits? Today, there is a great divide among Americans that stands in the way of constructive trade policy reforms. This great divide is certainly not about a partisan desire for low taxes and a reduced regulatory burden. Rather, it is over whether our borders should be open or secure and whether it is prudent to offshore our manufacturing and defense industrial base and associated supply chains.

Those who support secure borders and seek to onshore more of American pro- duction and supply chains do so to boost the real wages of American workers and to enhance our national security. Some Americans historically have supported open borders and offshoring under the flag of the Ricardian trade model, which assumes the free flow of both labor and capital. Yet it is equally true that open borders and offshoring also help American multinational corporations to maximize their profits by minimizing their labor and environmental protection costs.

In particular, an open border policy, which allows for the unlimited migration of cheap labor, depresses American wage rates and thereby boosts corporate profits. At the same time, offshoring gives American corporations readier access to the sweatshops and pollution havens of Asia and Latin America. Our skies and water may be cleaner, and our products may be cheaper, Main Street manufacturers and workers bear the brunt of these policies.

The obvious political problem in adopting many of the policies proposed here is that they will be opposed by the special-interest groups that benefit from open borders and offshoring and that contribute lavishly to both political parties. These special-interest groups range from the hedge funds of Wall Street and tech entre- preneurs of Silicon Valley to big-box retailers that stuff their aisles particularly with cheap “Made in China” goods.