America is at a crossroads. We must stop dealing with China as we hope they would be and begin dealing with them as they are. The United States is in a favorable position in the struggle because China needs our consumer markets more than we need theirs. It is not an exaggeration to say we are in the beginning of a cold war with China and must defend ourselves just as we did with the Soviet Union. Accepting the status quo like we did for 20 years is no longer an option. Decoupling from China will be a long, slow, and contentious process, but it is time to face reality and do something for the country, our citizens, and American manufacturing. We need short-term sacrifice to avoid long-term collapse. The future is now.
Do you remember when China was accepted into the World Trade Organization (WTO) in 2001? Presidents Clinton and Bush, as well as many other public policy leaders, predicted that it would improve the U.S.–China trade balance and would encourage China to abandon communism for Free Market Capitalism (FMC), both of which would benefit America. I don’t know how they got it so wrong.
Clyde Prestowitz in his book, The World Turned Upside Down, says
It is also clear that there is no comfortable middle ground. The more one invests in China, the more one feeds the Chinese Communist Party (CCP)-dominated machine while making oneself hostage to coercion by the Party. It is now self-evident that the United States and the free world cannot continue to drift in this direction.
More importantly, Prestowitz goes on to name the true drivers of our China policy-America’s Multinational Corporations (MNCs). He says the President
must make clear that the interests of the country and of freedom outweigh those of global corporations and investment bankers, and he must explain that the Cold War with the Soviet Union was just a warm-up game for the main match now coming.1
The Economist Magazine, which has been a long-term advocate of free trade, said in March 2018 that the notion of changing China from a communist dictatorship to FMC was a false hope. Elizabeth Economy in her book The Third Revolution says that contrary to the wishes of U.S. politicians, China has become less liberal, more centralized, and more authoritarian as it has become richer and more powerful.2
The original rationalization for allowing China into the WTO was that it would move China to become a more democratic country with an open market. The policy makers assumed that working interdependently with China would bring greater stability because both countries would be more dependent on each other’s fortunes. China would then become cooperative and a more honest trading partner and a reasonable competitor.
But it simply did not happen. Instead of becoming more democratic, China under Chairman Xi has intensified the Communist Party’s totalitarian power over its people, and it is now a big threat to Hong Kong, Taiwan, and the Uyghur muslims in Xinjiang Province. Instead of becoming an economic partner, they have become an economic destructor—and a threat to U.S. national security. Instead of competing like the United States and other industrial nations, they have chosen to compete using predatory mercantilism.
A more truthful description of China and the Communist Party’s intentions is their policy toward the Uyghur population in Xinjiang Province. They have sentenced hundreds of thousands of Uyghurs (who are Muslim) to open air prisons and reeducation camps. They sterilize many Uyghurs and force them to work construction and in factories without pay—essentially slave labor. On January 6, Congress passed the Uyghur Forced Labor Prevention Act (UFLPA) which prohibits the imports to the United States of any items mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous region. I think this new law shows that the support for China and its mercantilist policies is waning.
The U.S. strategy of forbearance: China continually challenges the United States by ignoring free-market rules and doing whatever it takes to capture market share. Meanwhile, the United States looks the other way when China breaks the rules, thus encouraging them to do it again.
The Bush Jr. administration negotiated with China for two years but never laid out any real targets for China and did little to protect American manufacturing. The Bush administration filed a report in 2006 that cited Chinese barriers to some U.S. exports, failure to protect intellectual property, failure to protect labor rights, and extensive government subsidies of Chinese industries and companies. But then there was no enforcement and nothing happened after the report.
The Obama administration also had many meetings with the China, where they discussed climate change, the South China Sea, United Nations issues, green ports, and illegal trade in animals. But like Bush, Obama never pursued reshoring manufacturing during his entire eight years in office, and he never enforced existing agreements.
Every Congress and administration since President Clinton have ignored China’s illegal strategies. Instead of facing up to the problems, the United States has chosen dialog, diplomacy, and collision avoidance over enforcement.
This policy is generally called forbearance, which is “refraining from enforcement of what is due.” It is based on the illusion that China would eventually see its interests best fulfilled by following the rules. After 21 years since joining the WTO, forbearance has failed, and China is the winner. It is a rogue nation whose reaction to our diplomacy is to be ever more aggressive because we have avoided enforcement. The United States is like the mouse who has seen the circling hawk shadow. Its strategy is to stay very still in hopes the hawk won’t see it.
The limited response to China’s aggressive trade policy has many origins. First, MNCs and Wall Street spend a lot of lobbying money on both the Congress and the administration to avoid confrontations with China and to maintain the status quo. Obama’s Treasury Secretary, Jacob Lew, said doing anything about currency manipulation “would have the unintentional consequences of stopping global banks from buying bonds to combat weak growth.”
Kurt Campbell, who was assistant secretary of state for Obama, argued for a policy of conciliation in order to avoid the trap of two great powers clashing (collision avoidance). Other staff members said that Obama worried that putting any pressure to stop China’s cheating would put them on the defensive and could backfire. And of course, every administration is worried that if we upset China, they may quit loaning us the money to finance trade deficits. The policy of forbearance has not worked, and it is ironic that the most ruthless and unlawful are winning over the most lawful and ethical.
Still another argument used by conservatives is that anything we do to stop China from cheating will be viewed by China as protectionism, which could lead to a trade war. I find this kind of thinking laughable. We are already in the trade war, and China is the decisive winner. As it turned out, making a trade agreement with China without enforceable penalties for cheating is a long-term ticket to economic oblivion.
We allowed this to happen: America has been complicit in its own demise by politically ignoring China’s unfair and illegal strategies for 20 years. Until Donald Trump countered China by imposing tariffs, both Democratic and Republican politicians did nothing to stop China’s illegal and unfair policies. We naively supported our economic philosophy of FMC because of our stateless MNCs who rely on imports, while China pursued mercantilist strategies and played by their own rules.
It was naive of U.S. politicians to think that allowing China into the WTO could change China’s outlook or governance. But I think that U.S. politicians are slowly waking up to the reality that China is a totalitarian, monolithic, and nationalistic country controlled by the Chinese Communist Party (CCP). China is not a nation on the road to democracy, and Mao Zedong said, “Communism is not love. Communism is a hammer which we will use to crush the enemy.”
They are an amoral government that uses predatory mercantilism in its commercial endeavors, and no agreement or negotiation is going to change this fact. So, the question is when will we wake up to the fact that China is a rogue economic power that will always take advantage of weak nations that won’t confront cheaters? Appeasing China has been a failed policy from the start because China only responds to leverage, and the U.S. policy of forbearance and diplomacy has simply made matters worse.
China cheating methods: China’s authoritarian government has taken advantage of their competitors by ignoring trade agreements and implementing a comprehensive program to get their hands on foreign technologies using a wide variety of tactics such as:
• Currency manipulation: China manipulates its currency to keep the U.S. dollar value high, so that Chinese companies have from 20 to 30 percent cost advantage. This undervaluation is illegal and should be considered a direct export subsidy, yet the Treasury Department has refused to treat currency undervaluation as actionable under the law.
• State-owned enterprises (SOE): China owns and subsidizes many companies, and it uses these subsidized companies to target a market, capture market share, and drive competitors out of business.
• Subsidies: An example is the wind turbine industry, where the Chinese government offers 40 different types of subsidy programs to their wind turbine manufacturers. China’s wind turbine company Goldwind is now the Number 3 turbine manufacturer in the world and wants to overtake G.E. and Vestas to be number 1. In 2019, Xiaoguang, a G.E. employee in New York, and a Zhaoxi Zang in China were indicted on charges of economic espionage and conspiracy to steal G.E. trade secrets in turbine technologies, so regardless of the indictment, they probably already have the secrets in China.
• Technology transfer: As a condition of accessing the Chinese markets, China requires U.S. companies that build plants in China to create joint ventures with local companies—and share with them their latest technologies. This is a way for China to get our technologies without having to do the R&D.
• Technology theft: China knows that technology and innovation is what can make them the Number 1 economy in the world, and they are prepared to get it any way they can.
• Advanced technology products: They are particularly interested in getting our advanced technology products all of which are central to U.S.’s own innovation strategy. In 2020, the U.S. trade deficit with China in advanced technology products was $190 billion. Testimony to Subcommittee on Trade by Patrick A. Mulloy in July 2006 asserted that we are slowly losing the advanced technology products industries to China.3
• Security reviews: The Chinese government can require security reviews of competitive technologies, which allows them to examine proprietary secrets and technologies.
• Product testing: This is another practice that is designed to access proprietary technology under the excuse of safety or standards.
• Antimonopoly laws: This is basically extortion, where the Chinese government can impose fines in order to force foreign companies to share their intellectual property (IP). An example is Qualcomm, an American company located in San Diego, California, which was fined $975 million because of monopoly complaints from Chinese smartphone manufacturers.
• Dumping: This occurs when China overproduces a product such as steel or solar panels and then dumps it into foreign markets at or below cost to gain market share.
• Smuggling: In 2013, U.S. Homeland Security detained nearly 3,000 people, some but not all of them from China, for trying to smuggle weapons and sensitive technologies out of the United States.
• Ignoring patents: Chinese leaders do not like America’s patent laws and try to undermine them. So, some Chinese companies ignore patents and copy the technology knowing that the laws are difficult to enforce in China.
• Acquisition of U.S. companies: China also tries to acquire targeted technologies by acquiring U.S. companies or buying their stock.
• State-sponsored intellectual property theft: IP theft includes cyber espionage, reverse engineering, counterfeiting, piracy, smuggling, and physical theft.
• Evasion of export control laws: These are laws designed to prevent the export of sensitive U.S. technologies with military applications. The espionage used to acquire these military technologies is a state-sponsored program which ignores the Arms Export Control Act.
• Espionage: According to the U.S. China Economic Panel Security Commission’s 2015 report to Congress, “China’s government conducts and sponsors a massive cyber espionage operation aimed at stealing trade secrets and intelligence from U.S. corporations and the government.” The Chinese government funds ongoing programs to recruit operatives inside of U.S. companies to steal secrets. China has infiltrated, among many others, General Electric (wind turbine software), Monsanto (genetically modified corn), Avago (microchip technology), T-Mobile (core router software), Tennessee Valley Authority (nuclear material secrets), and Solar World (proprietary solar cell technology). A survey by the Center for International Studies lists 160 publicly reported instances of Chinese espionage directed at the United States since 2000.
This list illustrates what China views as acceptable business practices and what China will continue doing even if its leaders sign an agreement. In testimony before the Senate Small Business Committee, Bonnie Glaser, the Center for Strategic and International Studies’ senior Asia adviser, said that “China steals more intellectual property than any other country.” Chinese theft, she added, is “the single biggest threat to U.S. technology.”
In a testimony to the Senate Intelligence committee, Bill Priestap, Assistant Director, Counterintelligence Division, Federal Bureau of Investigation, said,
Because the Chinese government creates an uneven playing field, and because this is done partly to facilitate the transfer of technology to China, our companies face what appears to be a very grim choice: participate and compete in the Chinese market and put vital corporate assets at grave risk, or neglect China and risk the loss of the second largest market in the world.
Priestap goes on to say,
While U.S. companies may be able to operate and profit in China for a time, it is on borrowed time. The Chinese government will permit foreign companies to operate only so long as it is advantageous to China. If a U.S. company is making a product that China needs but cannot yet produce domestically, such as sophisticated agricultural machinery? If so, the U.S. company will be allowed to operate, but only until China learns enough about the business that they can replace it with a domestic version.
Alternatively, a company may be allowed to operate simply to give China a better opportunity to understand how to copy the business and outcompete it globally. From the viewpoint of the Chinese government, many of the foreign companies doing business in China represent a temporary failure of the domestic market to meet demand. The government believes that if something can be made in China, then it should be made in China.4
We have become dependent on China: The COVID-19 crisis woke up the American populace to the danger of relying on China for medical products. I don’t think the average citizen had any idea of just how many manufactured goods were transferred to China. It is now clear that the United States is dependent on China for a wide range of products, including medications, computers, electronics, cell phones, telecommunication equipment, household appliances, industrial machines, semiconductors, and generators to name just a few. Through an ongoing policy of outsourcing plants and products to China, the United States has allowed China to steal its technologies and take over critical industries.
The COVID-19 pandemic has dramatically exposed the vulnerabilities of U.S. supply chains. U.S. government officials have been carrying out President Biden’s executive order to propose remedies to the risks that such networks pose to four specific areas (pharmaceuticals, strategic materials such as rare earth minerals, semiconductors, and large-capacity batteries) and six sectors of the economy (defense, public health, communications technology, energy, transportation, and food production).
Pharmaceuticals: After COVID-19 began, we found out that 90 percent of active pharmaceutical ingredients (API) come from either China or India. Quality oversight of China and India are poor which causes about two-thirds of the drug shortages. If China shuts the door on exports of medicines and their key ingredients, U.S. hospitals and clinics will cease to function within months. We are very vulnerable, and this is a security issue. There is no plan yet to make these ingredients domestically.
The Biden administration announced that the Department of Health and Human Services will use the Defense Production Act to make a commitment of approximately $60 million to increase the production of API.
Medical products: We also found out during the COVID-19 crisis that we could not ramp-up production of surgical masks, ventilators, and other needed medical equipment, because they had been sourced from China. The Trump administration asked textile manufacturers to invest in making masks and gowns in the United States and they did. But after 2020, The New York Times headline said “A Glut of Chinese Masks Is Driving U.S. Companies Out of Business.” The government did not give the domestic producers long-term contracts, and hospitals found that they could buy them on the Internet (duty free) if the order was less than $800. So, manufacturers that were funded by the Trump administration at the beginning of the pandemic emergency are now going out of business or laying-off their workers. Most of the personal protective equipment (PPE) products are again coming from China.
Mining minerals and metals are the front end of nearly every manufacturing supply chain, from smartphones and computer chips to renewable energy technologies and fighter jets. A recent article in IndustryWeek shows that China now controls 90 percent of the global supply of rare earth elements which are used everywhere in the digital economy: “We now find ourselves reliant on imports for nearly 50 essential minerals and metals and 100% reliant on imports for 18 of them.”
Neodymium magnets: The United States is also dependent on these special magnet imports which are used in motors and many other devices for both defense and civilian uses. The Biden administration is looking into using Section 232 of the Trade Expansion Act of 1962 to make them domestically.
Auto parts: The U.S. auto industry has abandoned many of its domestic parts suppliers and is now the largest buyer of Chinese auto parts of the five countries who have large auto industries. An article by the Office of Industries revealed that in 2018, U.S. imports of automotive parts from China reached $15 billion for American assembly plants.5 Since 2001 the U.S. has lost 1000 establishments and 211,803 employees in auto parts manufacturing. China is now the largest supplier of automotive parts in the world and exported $38.4 billion in 2018.
Semiconductors: China is stepping up efforts to become a major player in semiconductor design and manufacturing. If it succeeds, integrated-circuit companies around the world could face significant risks and opportunities. MNCs in every industry are clamoring to establish design centers in China to take advantage of China’s growing need for microprocessors. Developing a world-class semiconductor industry is part of the “Made in China 2025” plan to serve both commercial and military agendas. An article in the National Interest says, “Yet, after years of being blocked from acquiring the capability overseas, the Chinese government appears to be adapting, deploying a ‘by all means necessary’ strategy to achieve self-sufficiency in semiconductor R&D and production.”6 Semiconductor technologies should be declared national security technologies, and the MNCs should be prevented from giving them to the Chinese.
American manufacturers began offshoring production as early as the 1970s, which included information technology (IT), communications equipment, and a wide array of products from 38 manufacturing industries. According to an article in the Harvard Business Review, the primary goal of most MNCs was to “drive prices down, not ensure domestic supplies.”7 The public did not know how extensive this offshoring of critical product was until COVID-19 hit. The government is now faced with what to do about many critical products and supply chains that are now in China and are important to national security.
Negotiation won’t work: I think negotiating with the Chinese communist government is an exercise in futility, and there is little chance China will change its methods and policies regardless of a signed agreement. In testifying recently to the Senate finance committee, U.S. trade Representative Robert Lighthizer said, “I don’t know if tariffs alone will get them to stop cheating. I know one thing that won’t work is talking to them.” Dan Dimicco, former Chairman of the Coalition for a Prosperous America, said, “We have been down this road many times before, and Beijing has never actually changed course. The good news is that Trump’s tariffs are taking a bite out of China’s economy.”
We have been through 21 years of China’s excuses and promises about agreements, but I think the bottom line is that they can’t stop cheating— it is endemic in their society. Unless we can make progress in stopping China’s illegal and unfair trade practices, we cannot compete with them over the long haul and will lose the economic war. Accepting a status quo with China today means they will eventually take our advanced technologies and dominate our major manufacturing industries.
If we continue to play the trade game based on China’s rules, we will surely lose, endangering not just our economy but our whole society. China is the anaconda who is now totally wrapped around the U.S. body. Every breath we take allows them to tighten their grip, and eventually, we will be crushed and swallowed if we continue to play the trade game by China’s rules.
China’s 2025 plan: China has a 10-year plan called Made in China 2025, which “seeks to leverage the power of the Chinese state to promote indigenous innovation, advances technological self-sufficiency, and creates comparative advantage in key strategic sectors on a global scale.” “Indigenous innovation” is a code phrase for innovation gained from others. Cities and counties receive subsidies and financial support from the government based on how much indigenous innovation they can bring into their geographic region, and it doesn’t matter how they acquire the technology.
The 2025 plan includes the following goals:
1. Acquire key technologies and intellectual property from other countries.
2. Capture the emerging high-technology industries that will drive future economic growth. According to their 2025 plan, China wants to dominate advanced IT, automated machine tools, wind turbines, semiconductors, aircraft and aeronautical equipment, maritime vessels and marine engineering equipment, advanced rail equipment, electrical vehicles, electrical generation and transmission equipment, agricultural machinery and equipment, advanced materials, pharmaceuticals, and advance medical devices.
China has already swallowed the low-tech products we use to make. What they want now is our advanced technology products and all of the new technologies developed around them.
These technologies are found in America’s 35 advanced technology industries (ATIs), including oil and gas, aerospace, biotechnology, life sciences, optoelectronics, communication weapons, computer systems, and software. The sector also includes nanotechnology, optics, additive manufacturing, advanced materials, advanced robotics, big data analytics, cloud computing, the Internet of Things, autonomous vehicles, and genomics. If we lose the technologies in these industries through IP theft or multinational companies outsourcing, we will lose our economic future. So, the big question is how can we stop them?
Penalties: In January 2022, the news media was awash with stories about the shortages of consumer goods, including the critical medical goods and pharmaceuticals mentioned earlier. These shortages will hopefully serve as a wake-up call for where America is in terms of dependence on imports. There are stories about the U.S. ports not being able to unload ships, not enough trucks or drivers, spiraling shipping costs, and the dependence on rogue countries like China.
The solution is not to find other foreign exporters, but it is to reclaim these manufacturing sectors and to become more self-sufficient. The good news is that many American manufacturers are demonstrating the advantages of domestic suppliers and many are beginning to reshore. Doing so, could help reduce the dangerous dependence on China.
The first step is to recognize China as a competitor not a trading partner, and do everything possible to stop this competitor from gaining strategic and tactical advantages. We need a plan like China’s “Made in China 2025” plan that describes all of the technologies and manufacturing industries that we must protect if we are really going to compete using a strategy of innovation.
And, of course, there is always the simple solution of reciprocity. Why don’t we just ask China to reciprocate? Clyde Prestowitz suggests in his book The World Turned Upside Down that “The openness of U.S. society combined with the tightly closed nature of China enables Beijing to exploit American openness in ways that undermine free world values generally, and American economic, technological, and military values specifically.” Why should China be able to charge a 19 percent value-added tax (VAT) when the United States has no VAT? Why should China be able to buy our currency and keep our dollar high when they don’t allow procurement of their currency? The answer is that China wants to play the game using their own rules and always having the advantage. So why not begin a strategy of reciprocity?
The United States is beginning to fight back and compile lists of Chinese companies that won’t play by the rules. These lists should include any Chinese company found guilty of using any of the 16 cheating methods explained previously. Also, companies which are a threat to our national security and companies with ties to the People’s Liberation Army, surveillance technologies, or involved in human rights abuses. We can’t stop China’s mercantilist strategies, but we can stop companies who are on the list from exporting to America and access to our markets.
We can’t stop the Chinese from forcing American companies into forced technology transfer agreements, but we can put our advanced technologies on a national security list that can’t be manufactured outside of the United States. We can also stop China from accessing American university research labs or contracting with American scientists on work that affects our national security. The government could also offer tax incentives for American corporations to reshore their production or find better foreign vendors. We could also assess fines on all State Owned Enterprises (SOEs) that are subsidized by the Chinese government to enable them to dump products into America below cost or to simply deny their products from going through customs.
The mood in Congress is changing, and there are now many bills that could stop or reduce China cheating such as:
• House Ways and Means Chairman, Earl Blumenauer, introduced a bill titled the Import Security and Fairness Act which would reduce the value of merchandise considered “de minimis” and get through customs duty free. The value of goods sold on the Internet that are duty free is now $800 but would be reduced to $200 if this act is passed.
• A bill titled Chips for America was passed by the Senate and included $52 billion in federal investments for domestic semiconductor research, design, and manufacturing. The bill has passed the Senate and includes a 25 percent tax credit to build fabs in the U.S. However an anti China security measure was removed from the bill which would have barred companies from manufacturing chips in China.
• The Country of Origin Labeling Online Act (COOL) would require Amazon and other e-commerce sites to display the origin of the goods. This bill is still being debated by Congress and is being strongly resisted by the retail lobby. The COOL bill never got out of committee to be voted on by the Senate.
• The Holding Foreign Companies Accountable Act was passed in 2021 and now must be implemented at the SEC. The new law protects U.S. investors by prohibiting Chinese and other foreign companies from being listed on U.S. security exchanges if the company has failed to comply with a (Public Company Accounting and Oversight Board) audit. However, the law does not cover 4,200 A-share companies that are now in passive investment products in the portfolios of U.S. investors.
• The Made in America Office of the Office of Management and Budget (OMB) has unveiled a new Buy America transparency process affecting 24 federal agencies and $600 billion annual procurement. The Buy America program was implemented under President Biden’s Executive Order 14005.
• The U.S. steel and aluminum industries were saved from China dumping by the Section 232 tariffs, but China and EU lobbyists are pressuring the government to eliminate the tariffs.
• For most Chinese goods the only defense the United States has for protection are the Trump 301 tariffs under Trade Act of 1974. But there are 549 different products that have negotiated exclusions, and the pressure is on the Biden administration to accept more exclusions. Until some of these other bills can be passed by Congress, the only protection we have are the 301 tariffs and they should be extended.
• President Biden’s Executive order 14032 expanded capital market sanctions on Chinese companies to include defense-related companies and Chinese companies that develop surveillance technology to facilitate repression of serious human rights abuses.
• The new Uyghur Forced Labor law banning all imports from Xinxiang Province that are closely identified as coming from forced labor was passed by Congress January 6, 2022. The new law will add 14 Chinese companies to the entity list and five others for aiding the China Armed Forces.
• The U.S. Court of International Trade (CIT) removed the Section 201 tariffs on bifacial solar panels that put in jeopardy U.S. solar panel makers. However, the Coalition for a Prosperous America has urged the Biden administration to file an appeal, but the request has fallen on deaf ears.
• The Congress needs to sanction individual companies that cheat, like the recent sanctioning of Huawei. On May 17, 2020, the U.S. sanctioned Huawei and its 67 affiliates in 26 countries to limit their access to U.S. suppliers. The Justice Department is also prosecuting Huawei for bank fraud, technology theft, and violating the U.S. Sanctions against Iran.
China’s reaction to all of these bills is to use climate change as a battering ram to reverse attempts to hold them accountable. According to the Coalition for a Prosperous America, China is saying, “No climate negotiations, no phase two trade negotiations, until sanctions, including capital market sanctions and the Commerce Department’s Entity List Restrictions on some Chinese companies like Huawei, are removed.” Chen Weihua, the China Daily EU Bureau, made the China trade position crystal clear. He said,
Unilateral U.S. trade actions, especially in the name of national security, have not only violated global rules but created obstacles for resolving critical bilateral trade issues. It is time for the Biden administration to revoke those policies, starting with lifting Trump’s punitive tariffs and stopping the trade war against China.
Instead of attempting to negotiate some kind of compromise to reduce their cheating, the Chinese Communist Party CCP’s reaction is always to retaliate or threaten the other party. We are at another crossroads with China. The Biden administration has passed several laws to stop China from cheating. So the question is now whether the administration is going to enforce the laws or fall back into a policy of forbearance.
The Wall Street/China problem: Wall Street’s never-ending pursuit of profits at any cost has resulted in their continuous investment in Chinese companies even if they are on the U.S. government’s entity list. When it comes to profit seeking, they apparently just cannot help themselves.
We are in an economic struggle with China, and they are using all of the tools available to their authoritarian regime to overtake us. However, many of the large financial firms on Wall Street are pursuing their own short-term interests rather than what is good for the nation’s future. They don’t seem to acknowledge (or don’t care) that investing in Chinese companies is really investing in a police state.
Financial firms such as Vanguard, Blackrock, and others continue to invest in Chinese companies that are on the Department of Commerce’s entity list as well as companies who are part of the China Military Industrial Complex. Blackrock is the world’s largest asset manager and surprisingly recommended in 2021 that investors triple their allocations in Chinese assets.8
For example, it is now well known that China has engaged in facial recognition, voice recognition, forced sterilization, forced labor, and reeducation camps to control the Uyghur population in Xinjiang Province. The American Investment firm T. Rowe Price was an investor in Hikvision (a surveillance technology company), and Hoshine Silicon was part of three of Vanguard’s mutual funds’ portfolios. Five polysilicon Chinese companies that make material for their solar panel industries are in Xinjiang Province and have been added to the Commerce Department’s entity list, but two of them, Hoshine Silicon Industry and Xinjiang Daqo Energy, are traded on U.S. exchanges via passive investment products. The vast majority of American investors are unaware that their mutual funds include Chinese companies that are not compliant to U.S. laws. American Financial firms Blackrock, Invesco, Goldman Sachs, Vanguard, and State Street own over 18 million shares of Chinese companies on the entity list. Blackrock alone owns $600 million in Daqo.
The Biden administration is trying to prevent American investors from buying stock in companies tied to China’s military industrial complex. Eight of these Chinese companies were recently added to the entity list that were assisting Chinese military’s quantum computing efforts, which support military applications such as counter-stealth and counter submarine applications, and the ability to break encryption codes.9
The Biden administration also recently added the Chinese company Sense Time to the entity list because it is connected to the CCP’s human rights abuses and supports the Chinese People’s Liberation Army. The list also includes Huawei, which is a huge telecom manufacturer, China National Offshore Oil, and Semiconductor Manufacturing International, who wants to dominate the world semiconductor market. The American public is only now waking up to the fact that the Communist party’s efforts to surveil their citizens and conduct human rights abuses is on an Orwellian scale and is a real threat to our national security.
The U.S. government is progressing in adding Chinese companies to the Commerce Department entity list, but the progress is slow. So far, Wall Street only cooperates when a company is added to the entity list. According to the Coalition for a Prosperous America, there are 4,200 unregulated Chinese companies in the investment portfolios of scores of unwitting retail investors, and in a letter to Janet Yellen, they said, “What are you going to do about this outrageous level of largely unregulated American Investor funding of a totalitarian police state.”10 Even though Biden’s executive order said that it was to “ensure that U.S. investments are not supporting Chinese companies that undermine the security of values of the United States and our allies,” Wall Street continues to put profit before country.
China is using all of its tools as an authoritarian government to try and overtake us. I think that our only competitive hope is to devise our own long-term strategy to combat China’s unfair trade practices and protect the technologies invented in America. But, this would require the support of MNCs.
Decoupling from China: If China remains intransigent and is not willing or able to change its mercantilist methods, then the only practical alternative is to begin the process of decoupling from China. This process has already begun with Trump’s tariffs, and there is support for decoupling from Republican Senators like Josh Hawley, Tom Cotton, and Marco Rubio and Democratic Senators Tammy Baldwin and Mark Warner and others.
China’s “Made in China 2025” plan, according to U.S. Senator Josh Hawley, is a plan that “seeks to remake the world in its own image and to bend the global economy to its will.” The China plan describes which industries they want to dominate and which technologies they are after to achieve their goals. The problem is that instead of investing in designing and manufacturing their own technologies, they have developed methods to acquire these technologies through forced technology transfer agreements, IP theft, and industrial espionage.
After decades of our government and U.S. MNCs advocating the outsourcing of American products and jobs—and touting the advantages of importing cheap Chinese products—it is time to face up to the fact that these policies have led to deindustrialization, lower wages, a shrinking manufacturing sector, and a threat to our national security.
The problems of the WTO: The WTO was created in 1995 to replace the post-WWII General Agreement on Tariffs. Many American corporations have benefitted from the governance of the WTO, but it has been very lax in regulating countries who break the rules, like China. In fact, the WTO has become a joke in terms of pretending to administer trade, while China freely violates trade rules claiming to be in accord with the law.
In 2020, Senator Josh Hawley, R-Mo., published a dramatic proposal to abolish the WTO. He introduced a joint resolution in the Senate that would begin America’s withdrawal from that organization. Hawley said, “The global economic system as we know it is a relic; it requires reform, top to bottom. We should begin with one of its leading institutions, the World Trade Organization. We should abolish it.”
Another solution is for the industrialized liberal democracies being undermined by Red China to simply withdraw, start their own organization, and leave the WTO to irrelevance. The WTO as currently organized works well for American multinationals who import or who have plants in China, but it does very little to stop China’s mercantilist policies or protect American advanced technologies and workers.
Multinationals will oppose any solution on China: For decades, American MNCs have been willing to sell out to the CCP, to enhance their own strategies for short-term profits and shareholder value. They have been willing to sacrifice American manufacturing, jobs, suppliers, industries, and communities in this Faustian bargain. I think it goes without saying that most American MNCs will oppose decoupling, but they are going to be pressured to change because the politics regarding China are changing in the U.S. Congress. I think the MNCs might cooperate if the government can give them some relief from forced technology transfer and some protection of their products and markets. Big-box retailers like Walmart and Target source many of their products from China and will not want to upset their supply chains. But if the tariffs on the consumer products become permanent, or are expanded to more products, they may think twice.
America is at a crossroads. We must stop dealing with China as we hope they would be and begin dealing with them as they are. The United States is in a favorable position in the struggle because China needs our consumer markets more than we need theirs. It is not an exaggeration to say we are in the beginning of a cold war with China and must defend ourselves just as we did with the Soviet Union. Accepting the status quo like we did for 21 years is no longer an option. Decoupling will be a long, slow, and contentious process; but it is time to face reality and do something for the country, our citizens, and American manufacturing. We need short-term sacrifice to avoid long-term collapse.
Now, I know the free-market capitalists will scream protectionism and criticize any effort to penalize or tax Chinese imports. But they do not offer any solutions to the growing list of Chinese problems listed in this chapter. I think this problem is at least as threatening as the war on terror because China now has the power to kill our economy. It is time to stand up to China.
1 C. Prestowitz. 2021. The World Turned Upside Down, America China, and the Struggle for Global Leadership (New Haven and ondon: Yale University Press).
2 Elizabeth Economy. 2018. The Third Revolution—Xi Jinping and the New Chinese State (Oxford University Press).
3 Testimony by P. Mulloy to the Subcommittee on Commerce on H.R. 5337 National Security Foreign Investment Reform. July 11, 2006. Washington, DC.
4 B. Priestap, Assistant Director, Counter Intelligence Division, FBI. December 12, 2018. China’s Non-Traditional Espionage Against the United States.
5 D. Coffin. August 2019. “China’s Growing Role in U.S.” Automotive Supply Chains, Office of Industries Working Paper ID-060.
6 G. Levesque. June 18, 2018. “China Is Achieving Global Semiconductor Dominance,” The National Interest.
7 W. Shih, R. Huckman, and J. Wyner. May 26, 2021. “The Challenge of Rebuilding U.S. Domestic Supply Chains,” Harvard Business Review.
8 N. Iacovella. January 5, 2020. “CPA to SEC Chairman Gensler: Prohibit Index Providers from Including U.S. Sanctioned Chinese Companies,” Coalition for a Prosperous America.
9 K. Rapoza. December 6, 2021. “Why Is Wall Street Still Investing in Blacklisted China Companies?” Coalition for a Prosperous America.
10 Z. Mottl. Chairman. January 10, 2022. “CPA Letter to Secretary Yellen Regarding Protecting American Investors from Risky, Dangerous A-Share Investments in Chinese Companies,” Coalition for a Prosperous America.