Thank Beijing for Overdue Changes to U.S. Economic Policy

(Bloomberg Businessweek) -- With the Chinese government oppressing Uighurs in Xinjiang, jailing democracy advocates in Hong Kong, and harassing Taiwan, gratitude isn’t something you’d think the U.S. owes its most threatening competitor right now. But credit should go where it’s due. Americans should give China their heartfelt appreciation—for fixing U.S. economic policy.

The U.S. Innovation and Competition Act, co-sponsored by Senate Majority Leader Chuck Schumer and Republican Senator Todd Young of Indiana, passed the Senate on June 8 by a 68-32 vote. It’s known as the “China bill” for good reason: It was inspired and made possible by Beijing. The legislation mimics aspects of the Chinese state-led economic model, with $250 billion to fund scientific research and support semiconductor manufacturing. Only China’s rise and hostile foreign policy, and the fear and concern they are fomenting in Washington, could have bonded otherwise irreconcilable Democrats and Republicans into bipartisan action.

Chinese officials, of course, blasted the bill, though they have no one but themselves to blame. It was probably inevitable that the U.S. and other countries would respond to China’s extensive subsidization of cutting-edge industries—including electric cars, artificial intelligence, and chips—with similar state programs of their own. Unable to pressure the Chinese into curtailing their largesse through talks or tariffs, the U.S. has effectively decided that if you can’t beat ’em, join ’em. A spokesperson for China’s Ministry of Foreign Affairs complained that the Senate bill “slanders China’s development path.” In fact, it’s high praise.

It’s also a major breakthrough in American economic policy. China has succeeded where many economists and policymakers have failed: It convinced an ideologically paralyzed Washington that the state can play a positive role in economic progress. U.S. politicians used to believe that. Taxpayer cash helped build the Transcontinental Railroad, the Interstate Highway System, and the U.S. semiconductor industry. But since the Reagan Revolution, metaphysical certitude in the free market has dominated policymaking, and state investment in the economy has withered. Anyone who has recently navigated the crumbling New Jersey Turnpike understands the consequences. Yet despite these obvious detriments, many politicians have insisted that every and any economic problem can be solved with a tax break.

Now the state is back. On top of the Senate bill, which heads next to the U.S. House of Representatives, President Joe Biden’s American Jobs Plan also envisions an activist government, with a China-like $174 billion earmarked to jump-start a U.S. electric-vehicle industry. Such lofty, state-promoted goals represent a significant shift from the notion that man cannot outthink the market. Some diehard conservatives may squirm, but thanks to China, the ideological tide is turning against them.

This shift in U.S. policy reveals China’s growing influence in the global economy. Its power has already been felt in trade and technology; now it is entering the critical realm of ideas. For much of the past two centuries, China has borrowed them from the Western powers—everything from constitutions to dating habits. Modern China is built to a great degree on the imported philosophies of Marxism and capitalism. When China opened to the world in the 1980s and introduced free-market reforms, its policymakers were heavily influenced by Western economists and economic theory.

Now the flow is beginning to reverse. President Xi Jinping’s administration has generally spurned calls for deeper market liberalization in favor of greater state control. Policymakers around the world, meanwhile, have watched China’s astronomical ascent and figured Beijing has concocted some kind of special sauce to promote prosperity—a recipe worth copying. The Senate bill is a result.

Although China has reminded the U.S. that government action isn’t all bad, its example also warns against too much of it. The free-market guys are right that state intervention can distort as well as develop. Despite persistent American fascination with Asian state-led industrial policies going back to the 1970s, their beneficial effects have often been exaggerated.

In Japan, where government ministries tried to “pick winners” and nurture them with protection and financing, the record is, at best, spotty, with a long list of failures as well as successes. As with China today, the rise of Japan in the 1980s convinced many U.S. experts that Washington policymakers had to adopt similar state-led industrial policies, and that more competitive Japanese companies would continue kicking American butt until they did. Back then, Washington demurred, and based on the divergent fates of the two economies, it’s hard to say that wasn’t the wise choice.

China’s extensive state programs also expose the deep downside to intrusive bureaucrats. Government support may have accelerated the development of certain industries, such as solar panels and electric cars, but it also generated tremendous excess capacity and waste, and produced uncompetitive companies. China’s mania for electric vehicles, for instance, spawned 119 manufacturers, according to a November 2020 study by the Center for Strategic & International Studies—obviously an unsustainable horde. Many of the country’s most severe economic problems—its high debt, low productivity, property bubbles, and endemic corruption—can be traced to the overly heavy hand of the Chinese state. And the verdict is still out on its current batch of industrial policies. It’s not at all clear that expensive efforts to create world-beating technologies will succeed. Despite much energy and many billions, China remains as dependent on imported chips as ever.

A better approach for the U.S. is to avoid the penchant of Chinese technocrats to target certain industries and national champions in favor of setting broad goals that can reshape the economy and its direction. Jake Sullivan, now Biden’s national security adviser, and Jennifer Harris, a Roosevelt Institute fellow, explained it well last year in Foreign Policy: “Rather than focusing on picking winners in specific sectors, there is an emerging consensus that suggests governments should focus instead on investing in large-scale missions—like putting a man on the moon or achieving net-zero emissions—that require innovations across many different sectors.” Biden just happens to have embraced both those projects.

Perhaps we should thank China twice over, for alerting us not only to the potential economic benefits of state intervention but also to its dangers. As Clyde Prestowitz, author of the book The World Turned Upside Down: America, China, and the Struggle for Global Leadership, wrote me: “It is a case of the Chinese putting too much faith in the state and the U.S. too little.” Both sides have a lot to learn.
 
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