The Cost of Pursuing Wins for the US Economy

Framing China as a strategic threat to the United States was one of the lasting legacies of President Donald Trump’s first term. Since 2017, when the Trump administration started to challenge China’s economic expansion, pushing back against Beijing’s abuse of global markets and violations of free trade rules has become a clear concern for all advanced economies. Yet U.S. economic policy toward China has been anything but straightforward over the years, and the gap between what Washington envisages as victory against China and what other advanced economies are seeking in terms of future economic relations with Beijing is widening.

A united front against China’s economic coercion, export of excess capacity, and rising military-industrial complex remains the biggest force multiplier for Washington and its allies, as well as potential partners at all levels of economic development across the Indo-Pacific. For the advanced economies of the region as well as for many European nations, the systemic challenge posed by China’s advanced technology is of ever increasing concern as it weighs down the competitiveness of businesses worldwide.

The United States has remained the sole economic power that is able to push back against China and also has the capability to rally like-minded countries against the Chinese challenge. Yet Washington’s appetite to rally its economic allies and to confront China has been sputtering.

A senior U.S.-China Business Council delegation set off to visit Beijing in late July, and speculation abounds that Trump’s visit to the country will soon follow, with deals to be made with Xi Jinping. Whether and when a summit meeting could happen remains to be seen. What is clear, though, is that ahead of the August 12 deadline for a trade deal, economic interdependence between the United States and China cannot be undone.

The bilateral truce between Washington and Beijing reached in June lowered the potential U.S. tariff against Chinese goods to 55 percent, while China kept 10 percent tariffs on U.S. imports across the board. That does not, however, change the fact that the United States remains highly dependent on China – not just for basic consumer goods, but also for critical minerals and other strategic goods.Neither side has a clear upper hand, and the stakes to win are increasingly high.

In almost all key technology sectors, China is on par or even above the United States, with artificial intelligence being one of the few sectors where U.S. advantages are still clear – at least for now. Yet the U.S. strategy to maintain its lead over China in advanced technology is not just unclear but also uncertain.

The first Trump White House made clear efforts to widen the technology and innovation gap, but follow-through was inconsistent. For example, the first Trump administration banned telecom groups ZTE and Huawei from U.S. markets, but its policies led to confusion as the administration eventually softened its ban on the operations of both Chinese groups.

Meanwhile, under the second administration, export controls on advanced semiconductor manufacturing put in place under the Biden administration have been pulled back. In early July, chipmaking behemoth Nvidia said it would resume selling its H20 chips to China, which effectively reverses U.S. efforts to restrict cutting-edge processor sales to the country. China remains the sole country able to challenge the United States as a leader in developing and applying artificial intelligence.

For now, the expectation is that the U.S. economic strategy toward China will prioritize the nation’s commercial interests rather than national security concerns. That was made all too clear in late July, when the Financial Times reported that the Trump administration had refused to allow Taiwan’s president to stop in the United States, as is customary, on his way to visit diplomatic allies in Central America. As the news broke, U.S. and Chinese officials were meeting in Stockholm, Sweden, for their latest round of trade talks.

Beyond its China policy, Washington continues to press ahead with a trade vision that has led to confusion and alarm among some of its staunchest allies. Both Japan and the European Union have acquiesced to a U.S. tariff rate of 15 percent, but neither will be reciprocating in kind by imposing their own tariffs against U.S. goods. Instead, in the case of Japan, Tokyo has agreed not only to the tariffs, but also to about $550 billion in foreign direct investments into key industries of the United States including shipbuilding, pharmaceuticals, and critical minerals development. The ability to contribute to strategic U.S. industries is seen as essential for keeping tariff rates from advanced economies low. At the same time, the risk of tariff rates being renegotiated at a later date remains.

As the United States moves to strike a trade deal with China, the global trade landscape has already been altered significantly. Expectations for the United States to focus on collective economic security – whereby the shared concerns of like-minded countries would be at the forefront in developing a longer-term strategy for handling economic challenges posed by China – have now abated. Instead, the focus will be on whether a potential deal that Washington could strike with Beijing – which could be a win-win for the world’s two largest economies, but at the price of decreasing the economic security of other countries.