Pushing Beijing's economy to the brink will also hurt America
This week, Joe Biden’s hawkish China policy went a step further. According to a new executive order, the administration will ban US investment into China’s quantum computing, advanced chips and artificial intelligence sectors as part of its plans to prevent the country from accessing American technology.
At a minimum, Biden’s actions imply containment. More ominously, they suggest an increasingly aggressive attempt to isolate China and to hobble its economic progress. That might buy Washington time to protect its industry advantages, but the downstream effects of such an approach could be deleterious. Indeed, there are increasing signs of China’s own economic weakness, with the economy slipping into deflation and consumer prices falling for the first time in more than two years amid weakening demand.
China may be a “strategic competitor”, but it is also an increasing source of global demand, so a recession in China will have serious consequences for the entire global economy. If that recession is accompanied by a Chinese banking crisis, that too would have knock-on effects globally, something that should also concern the US, given its own recent banking crisis.
While hawks on both sides of the aisle may laud Biden for prioritising national security considerations over untrammelled foreign investment flows, these are not the actions of a confident superpower. There is nothing wrong with the President’s efforts to re-shore, but Washington needs a well-designed industrial policy that focuses on the creation of quality private sector jobs capable of profitably supporting workers with solid middle-class incomes. These must be accompanied by social policies on immigration, environmentalism and trade that do not simply treat worker displacement as an unfortunate by-product (“negative externality” in econ-speak), cast on the scrap heap of “progress”.
By the same token, workers should not be viewed as “deplorables” if and when they understandably object to disproportionately bearing the restructuring costs as the economy moves toward greater environmental sustainability. De-growth is an indulgence for the rich, not a solution for working class Americans, let alone a formidable competitor across the Pacific, now struggling with deflation and higher unemployment.
As far as alliance-building to counter China goes, a country at “war” needs a strategy, and the US cannot win a new great-power contest by itself. Although Washington would appear to have natural allies in Europe and the other developed democracies around the world, the corrosion of America’s own democracy, along with an economic nationalism that works against Europe’s own interests, undermines the prospects of a stable alliance of democracies.
Far from supporting “friendshoring”, America’s Inflation Reduction Act puts Washington in direct competition with Brussels. And if we do get a recession, that “every man for itself” mentality could well overcome the stated strategic goal of a united Western liberal democratic alliance.
For now, recession appears unlikely in the US, largely because the interest rate tool used to slow down economic activity (and hence inflation) is diffuse: for every borrower hurt by rising rates, there are savers who benefit from the additional income derived from said higher rates. That paradox could well encourage the US Federal Reserve to raise rates further, which will increase costs for businesses (which they in turn will try to pass on to consumers), and discourage the domestic investment required to engender more reshoring as part of a new industrial policy.
The once dominant view that Beijing would over time become more democratic and therefore follow a model like South Korea or Taiwan now appears quaint. But even as the awareness that China’s geopolitical interests are dramatically diverging from the West have grown, policies in both Washington and Beijing are exacerbating conflict rather than alleviating it.