2020 Country Brief: China

Economy: China exhibits a history of unfair trade practices that must and can be addressed without a devastating trade war. 

China cheats and no administration has gotten the response right. Donald Trump is just the latest to be completely outmaneuvered by a Chinese leader on the economy. Ultimately, America and its allies must set the rules for commerce in the world, not China. We have to make the case that China can also prosper under a system based on the rule of law, openness, and honesty that the United States has sought.

The United States must condemn the Chinese government when it abuses the free market economy for its gain—but this cannot come at the expense of the American consumer. Congress must undo the economic devastation imposed on Americans through Trump’s reckless trade war by working with allies to ensure China does not take advantage of the global market.

Since abandoning communism and embracing an ostensibly market-based economy, the Chinese government has taken advantage of the open, rules-based system of trade. It subsidizes Chinese exporters, requires US companies to share confidential business information if they operate in China, and steals US intellectual property (IP).¹In fact, the US Trade Representative Office found that Chinese theft of American IP costs between $225 billion and $600 billion annually.² This information is then sometimes used to create counterfeit goods, with an estimated 100,000 counterfeit products shipped to the United States every day.³

China launched the BRI to offer loans and investments to at least 70 countries, particularly in Asia and Africa, in order to bring them under the Chinese sphere of influence.⁴An example is a billion-dollar loan to Sri Lanka for a major new port. Sri Lanka is unable to repay the loan and, in exchange for debt relief, leased the port to a Chinese state company for 99 years.⁵This result is widespread, as some countries in Central Asia owe debt worth as much as 20% to 40% of their GDP to China.⁶While estimates vary, Morgan Stanley predicted in January that China’s overall spending on the BRI could reach $1.2-$1.3 trillion by 2027.⁷As a result, many countries are torn between historical ties to the United States and economic development offered by China.

President Trump’s trade war with China and others, including America’s allies, exacerbates these efforts and undermines the reputation of the United States as a stable trading partner. This is proving to be economically disastrous for Americans. The US-China trade war increased the US trade deficit with China to $55.5 billion, its highest level in 10 years, before the COVID-19 crisis.⁸In 2019 alone, the trade war cost the average American family $1,277 through lowered wages and increased prices for household items.⁹The trade war has also disproportionately affected US farmers, whom the government is now subsidizing up to $28 billion for lost export sales.¹⁰Consequentially, US farmers are experiencing an alarming increase in bankruptcies and debt. Farmers who filed Chapter 12 bankruptcies increased by 24% in 2019 compared to 2018.¹¹Farm debt in 2019 was the highest ever recorded in American history, reaching a staggering $416 billion.¹²

While the Trump Administration and the Chinese government signed “Phase One” of a trade deal at the beginning of 2020—pledging, among other things, to increase US exports to China for the next two years—doubts linger about whether China will uphold the agreement or that it will survive tensions related to COVID-19. Provisions of the agreement detail that China will increase purchases of US manufacturing, energy, and agricultural goods and services by at least $200 billion over two years.¹³The deal also promises to protect American companies’ IP from being stolen, eliminate the sales of Chinese counterfeit goods, and allow American companies to operate in China without “pressure to transfer their technology” to the Chinese government.¹⁴But it remains to be seen if China will meet its $200 billion obligation.¹⁵Further, the deal lacks specificity regarding how China will ensure that IP theft and technology transfers do not occur,¹⁶which is concerning given China’s attempt to steal information from researchers developing COVID-19 vaccines.¹⁷

For both sides to fully realize the benefits of trade, the United States must work with global allies to insist that China play by the rules. It won’t be easy, but must be done. This will require re-engaging with the World Trade Organization and recognizing that trade with our allies is not a national security threat—both things that President Trump has been unwilling to do. China must end its subsidies for Chinese exporters, as well as other unfair trade practices that provide their domestic businesses an advantage in overseas trade. China must also explicitly detail its efforts for allowing US firms to fairly compete within the country and combating IP theft. Because innovation and openness constitute the sources of our economy’s vitality, a balanced trade policy would address all the ways China takes advantage of the system. At the same time, the United States must invest more heavily in technology and innovation of its own (e.g., semiconductors, artificial intelligence, quantum computing) and must strengthen cybersecurity against China’s espionage and theft of intellectual property. However, because of the entanglement of our economies, continuing the trade war only creates a lose-lose proposition.

Military: China’s growing military power and muscular foreign policy are alarming US allies…and US war planners.

For the past several years, China has been using its newfound wealth to support its growing military ambitions, threatening regional and global peace and stability. However, policymakers should seek non-military solutions to deal with these threats.

Over the past two decades, China’s defense spending increased nearly seven-fold to $266.4 billion in 2019.¹⁸While this pales in comparison to the US defense budget, which was $738 billion for FY2020,¹⁹China still spends more on defense than Japan, South Korea, the Philippines, and Vietnam combined.²⁰With this spending, China can contest territorial claims in the South China Sea, expand its military presence beyond the Indo-Pacific, and remain in constant friction with the United States through its growing cyber capabilities.

China’s militaristic zeal poses some of the following risks for the United States:

A small standoff in the South China Sea could snowball into a major conflict. The South China Sea is a major geostrategic water lane through which $5.3 trillion in trade passes annually—30% of all global trade.²¹Additionally, the US Energy Information Agency estimates that 11 billion barrels of oil and 190 trillion cubic feet of natural gas exist in the South China Sea.²²China wants to dominate the South China Sea, arguing that the competing claims of Vietnam, Malaysia, Taiwan, Brunei, and the Philippines should give way to its historical rights over the entire territory.²³To cement its claims, China has been building and militarizing islands in the South China Sea.²⁴These formations are part of a broader strategy to make it difficult for the US military to operate in the region during a conflict and to form a buffer around China. For years, and even at the height of the COVID-19 pandemic, Chinese military vessels have been intimidating Vietnamese, Filipino, and Japanese fishermen and commercial vessels, leading to worries that a major conflict could erupt.²⁵The US State Department announced for the first time that China’s claims in the South China Sea are “completely unlawful,” raising tensions in the area.²⁶

With China refusing rulings by an international tribunal that denies its territorial claims,²⁷the United States must ensure its allies do not suffer from Chinese encroachment and that it retains the ability to uphold its alliances. Should conflict between China and US allies—such as Japan, the Philippines, and South Korea²⁸—occur, the United States would be obligated under existing treaties to consider military action, making conflict more complex and costly.²⁹These countries, too, have been building up their military capabilities and strengthening ties with the United States in the face of Chinese military presence. Japan has increased its defense budget after years of decline under Prime Minister Shinzo Abe.³⁰And despite the ebbs and flows of the US-Filipino relationship, the Philippines confirmed in June 2020 their willingness to maintain a military pact with the United States that permits US forces to conduct joint exercises in the Philippines.³¹As China grows in strength, the United States must reassure its allies and partners of America’s ability and willingness to temper Chinese influence.

• China is expanding beyond its traditional sphere of influence as the United States retreats. China has increased its influence beyond the Indo-Pacific region through many different means, while the United States has retreated from some of those same places. China’s President Xi Jinping expressed China’s growing ambitions by claiming it will seek to “project the country’s power beyond its immediate ‘back yard’ in East and South-East Asia.”³²And the country has used many different approaches to do this. For example, in 2017, China opened its first overseas naval base in Djibouti—mere miles away from a US military base—where it holds over 70% of the country’s GDP worth of debt.³³The US Defense Department told Congress that it expects China to repeat this move in other countries where it has made significant investments through BRI.³⁴These ambitions are compounded by the United States increasingly retreating from global affairs. For example, President Trump proposed a 22% cut to foreign aid for the FY2021 budget, which limits the United States’ ability to assist in humanitarian assistance and disaster relief efforts, among other areas.³⁵The United States must ensure it does not abandon its strategic partners and that they still see the United States as a key resource for support. Retreating from global engagement only strengthens China’s hand.
• China is increasingly investing in military technology to gain an advantage over the United States and resorting to cyberattacks to bridge the innovation gap.China’s investments in technology help its government ensure that more and more actors in the global economy are reliant on China for 21st century technology and provide it with military advantages. The most important domains of Chinese military technological competition with the United States are Artificial Intelligence (AI) and quantum computing, both of which pose serious threats to America’s competitive edge. Major figures from former Google CEO Eric Schmidt to former Deputy Defense Secretary Bob Work warn that China will soon overtake the United States in AI, which the Chinese believe will not only dramatically boost economic growth, but also change the entire character of warfare.³⁶AI can improve autonomous systems, wargaming, simulation, and information processing.³⁷China has also invested in a $10 billion quantum computing center to support military and national defense efforts,³⁸whereas the United States has earmarked only half a billion dollars in FY2021 for AI and quantum technologies.³⁹The country that reaches “quantum supremacy,” or the ability to operationalize quantum mechanics, first will have an advantage, as quantum computing threatens to break widely used encryption standards that safeguard critical information for national and economic security.⁴⁰And where the Chinese fail to innovate, they resort to IP theft—as they did with the design plans of the F-22 and F-35—to catch up to the United States.⁴¹If the United States falls behind in developing and securing its AI, quantum computing, and military technologies, China could hone advantages that will limit our ability to compete on the global stage and defend our allies and partners.

To counter the threat of China’s military, the United States must continue to look for ways to strengthen our alliances, including by providing ongoing economic, military, and other forms of assistance to these countries. The United States must also ensure that its military and diplomats have the required resources and capabilities to deter and rapidly respond to Chinese aggression against the United States and its allies. But if we wish to truly continue playing a dominant role in Asia and around the globe, the United States must invest more heavily in strengthening its military technological capabilities and reverse President Trump’s retreat from global engagement.

Technology and Supply Chain Security: The United States must limit the repercussions of a Chinese-controlled supply chain and protect itself from Chinese cyber threats.  

China plays a large role in the global technological and medical supply chain, placing the United States at a strategic disadvantage when it comes to remaining the global leader in technology innovation, securing itself from cyberattacks, and protecting Americans from public health threats. Closing this gap and protecting Americans will require robust congressional efforts that prioritize substantial funding for 21st century technology, while securing our critical infrastructure from cyber threats.

With our economy and everyday life increasingly becoming digitized, ensuring the security of core components of the internet and the technologies that rely upon them is of the utmost importance. For example, 5G technology will yield tremendous benefits by transmitting and receiving data at faster rates and in greater volume compared to 4G; this will pave the way for autonomous vehicles, smart cities, and telehealth. However, America has struggled to compete with China in the development of these new technologies due to market consolidation in the United States that led to a lack of innovation and investment.⁴²The US government, too, has failed to adequately provide R&D support to building 5G components.⁴³As a result, China is now one of the primary producers and exporters of 5G technologies.⁴⁴The Trump Administration and Congress have accused Chinese telecommunications companies that produce these technologies, particularly Huawei and ZTE, of helping the Chinese government to spy on other countries and steal IP.⁴⁵Realizing their power over this market, China’s goal is to eliminate the competition and have a “stranglehold on th[is] global supply chain.”⁴⁶The White House and Congress have taken steps to ban the use of these Chinese companies,⁴⁷proposed bills to fund US organizations to create 5G technology,⁴⁸and lobbied US allies not to use Chinese telecommunications technology.⁴⁹Yet no US company currently has the capability to deploy 5G at a nationwide scale⁵⁰and countries are hesitant to ban Chinese companies from their networks due to the time, investment, and lack of options for replacing those networks.⁵¹Even if American companies can scale up their capacities and other countries reject the use of Chinese technologies, China’s efforts to lead and influence international forums and organizations that set standards on technologies presents a major challenge for the United States at a time when the Trump Administration has all but gutted America’s influence in these same institutions.⁵²

The COVID-19 pandemic has also shown us that, like the information and communications technology (ICT) supply chain, China maintains a firm grip on the medical supply chain that the United States relies upon to support its health care sector. In fact, China was the second largest exporter of drugs and biologics to the United States in 2018.⁵³In the wake of the pandemic, the Congressional Research Service (CRS) noted that “ [b]ecause of China’s role as a global supplier of personal protective equipment (PPE), medical devices, antibiotics, and active pharmaceutical ingredients, reduced export from China have led to shortages of critical medical supplies in the United States.”⁵⁴China spurred this shortage by nationalizing the production and distribution of these supplies in February 2020 and using them for domestic purposes.⁵⁵Worse yet, the redistribution of these supplies has been made through “political calculations,” which could further disadvantage the United States and allow China to make stronger ties with foreign governments.⁵⁶Unfortunately, the Trump Administration’s negligence of COVID-19 dramatically exacerbated the situation. The Administration’s late invocation of the “Defense Production Act” (50 U.S.C. App. 2061 et seq.) allowed US companies to decide whether to fill domestic or foreign demands for critical medical supplies and equipment first, rather than placing an export constraint on them at a time when US COVID-19 cases were rapidly rising.⁵⁷

In addition to using the technological and medical supply chains to threaten US national security, China also relies on its cyber capabilities to collect troves of personal information on Americans and targets US critical infrastructure to maintain a deterrent effect. In 2015, China hacked the Office of Personnel and Management, stealing the private information of 22 million US citizens.⁵⁸Similarly, in 2017, the Chinese military stole over 145 million American’s information from Equifax.⁵⁹The intelligence community also noted in its 2019 Worldwide Threat Assessment report that the Chinese government exhibits a growing threat to US critical infrastructure systems.⁶⁰This assertion was validated in the midst of the COVID-19 pandemic, as the FBI and DHS warned that China was threatening our health care sector by targeting researchers and institutions developing COVID-19 cures, which could “jeopardize the delivery of…treatment options.”⁶¹This warning would come into fruition with the US Department of Justice indicting two cybercriminals who were working on behalf of the Chinese government to steal COVID-19 vaccine data, among other things.⁶²

While these challenges are daunting, Congress is positioned to make substantive progress. First, it can provide grants to organizations to conduct research and development (R&D) that promote 5G and other ICT innovations to ensure the United States retains a leading edge in technology. In the short term, Members of Congress should protect technology supply chains from Chinese threats and mitigate risks of Chinese IP theft, which are aspects of current bills such as the MICROCHIPS Act (S.2316) and the US-China Economic and Security Review Act (S.987).⁶³Second, as the world grapples with the COVID-19 pandemic, Congress should incentivize the domestic production of a wide assortment of medical supplies to lessen US dependence on Chinese products that could be restricted. This will be even more important for the supply chains of potential vaccine candidates for COVID-19.⁶⁴

Foreign Relations: American cooperation with China is necessary, where possible, despite China’s human rights abuses and threats to the United States and its allies.

Despite bilateral tensions and concerns about the Chinese government’s abhorrent human rights abuses, US-China partnership will be required for overcoming international challenges. This includes preserving global public health, limiting North Korea’s nuclear weapons program, and addressing climate change.

While US-China relations have been particularly strained due to the COVID-19 pandemic and criticisms from the US government concerning China’s handling of the crisis from the outset (see the COVID-19 and Global Health Security brief for a more detailed analysis), the Chinese government’s actions in Hong Kong and human rights abuses perpetrated against Uighur Muslims and other citizens have also exacerbated the tense relationship between the two countries. Hong Kong has enjoyed relative autonomy under a “one country, two systems” framework since the United Kingdom (UK) handed Hong Kong back to China in 1997. Under the terms of the agreement between China and the UK, Hong Kong was able to keep this autonomy, which protected civil liberties, until at least 2047. This autonomy is now severely undermined as China’s legislature passed a new “national security law” this summer to crack down on Hong Kong citizen’s ability to protest and speak out against the Chinese government.⁶⁵The new law essentially criminalizes all opposition to the Chinese government in Hong Kong by loosely defining offenses related to “separatism, subversion, terrorism, and collusion” that come with harsh punishments.⁶⁶In response, the US government has imposed visa restrictions on Chinese Communist Party officials and restricted defense exports to Hong Kong, among other actions.⁶⁷

Additionally, China has committed atrocities against the Uighur Muslims in the Xinjiang region, which experts believe meets the definition of genocide in the UN genocide convention.⁶⁸These actions include detaining roughly a million Uighurs in “re-education” camps, where there have been reports of torture, and reducing birth rates through forced sterilization measures.⁶⁹The Uighurs have also been under intense surveillance and forced to provide DNA and biometric samples to the government.⁷⁰The United States has called China’s abuses against the Uighurs an attempt to “erase its own citizens,” blacklisted a number of Chinese tech firms connected to the abuse, and passed a law to impose visa restrictions on Chinese officials involved in these atrocities.⁷¹

The United States must continue to uphold human rights in its foreign policy and hold China to account for their horrific actions. While the Administration has taken steps to punish China, it has at times only done so begrudgingly and when it suits the president. When experts agreed that the Chinese government was stifling information at the initial outbreak of the virus, Trump was busy praising and coddling President Xi.⁷²Worse yet, President Trump actively encouraged the Chinese government to build concentration camps for the Uighur Muslims and initially declined to implement sanctions for their inhumane actions in order to save his trade deal.⁷³Members of Congress should hold the Administration to account for these actions, particularly in light of evidence that people associated with the Chinese government contributed hundreds of thousands of dollars to President Trump’s re-election campaign as early as 2017.⁷⁴

But, while the United States should speak out against, and impose consequences for, the Chinese government’s actions not just when it is convenient, it must also find areas of cooperation to address global challenges that cannot be overcome without China’s involvement. First, the COVID-19 pandemic and other global health crises is one critical area where some level of cooperation will be necessary. The United States was right to join with allies in pushing for an independent, impartial international investigation into the global response to COVID-19 due to the Chinese government’s stifling of its origins and promotion of disinformation.⁷⁵However, without access to public health information from the Chinese government and a willingness to cooperate on global health issues, America may be unable to prepare for and manage future outbreaks. In particular, ensuring US researchers are able to continue to work with Chinese researchers on COVID-19 and other infectious diseases will be critical.⁷⁶

Second, despite the global sanctions placed on North Korea for its nuclear and ballistic missile programs, China remains North Korea’s largest and most important trading partner. While the US government should work with its allies and partners to push back against the actions of Chinese nationals who assist the North Koreans with money laundering and cybercrime to fund their nuclear program,⁷⁷it must also find ways to cooperate with China to reduce the threat posed by North Korea. This should include working through the United Nations Security Council, where China retains a permanent seat.⁷⁸

Third, climate change was also a key area of cooperation between the United States and China in the past. While President Trump foolishly withdrew the United States from the historic Paris Agreement aimed at tackling this global threat, some US states have continued to push forward on the issue and are maintaining cooperation with China on mutual climate goals.⁷⁹

In all of these and other areas of priority, Congress can highlight the tensions and opportunities in the US-China relationship and look for ways to boost cooperation between the two countries when possible.

Conclusion

The security and economic challenges in the US-China relationship are considerable, but great opportunity also exists. As both nations increase their trade links, innovate, and create new scientific knowledge, all of humanity can benefit. Given the security and economic stakes involved, especially global health, both governments must think long term. The United States and China can manage disputes and competition through candid diplomacy and ensuring close military-to-military communication to avoid unnecessary escalation that could inflict needless damage to both countries.