Henry Paulson: A smarter China approach

Henry M. Paulson, Jr. was U.S. Treasury Secretary from 2006 to 2009 and is now the Chairman of the Paulson Institute.

America’s midterm elections have brought a change in Congress. But there’s one thing that won’t change: the broad consensus between Republicans and Democrats that America must compete with China and push aggressively for a de-Chinafication of the U.S. economy. There is no doubt that a tougher China policy is warranted. But a smarter approach is imperative.

A realistic starting point for U.S.-China strategy is to plan for the permanence of China as a formidable strategic competitor and an integral part of the global economy. Like it or not, China is here to stay — and it’s not the China of 20 years ago. As China has grown economically, it also has grown in stature. China is now the largest trading partner for the vast majority of the world, a position that the U.S. held just 20 years ago.

This is why American actions have been largely concentrated in the economic realm. Beyond tariffs that raise the cost of goods, the principal U.S. tool for economic statecraft has become weaponizing regulatory levers in often unprecedented ways. Take for example the Commerce Department’s Entity List, which requires a license for doing business with any listed Chinese or other foreign entity, then imposing a high burden for receiving one.

When I served as U.S. Treasury Secretary, this Commerce list restricted goods that could be used to advance China’s military. But in recent years Washington has broadened the definition of “national security” to encompass items that could make China more economically competitive. Many Chinese firms’ key emerging technologies are now in the crosshairs. Those in other critical technology sectors seem likely to be similarly listed absent a strategy reassessment.

Then take the Foreign Direct Product Rule, an expansive export control that U.S. regulators wielded to restrict doing business with China’s telecom giant Huawei. This rule has likewise been used to restrict sales of advanced semiconductors to many entities in China, even those used for strictly commercial purposes.

For its part, China has used its own coercive tactics and anticompetitive policies. Beijing has long compelled foreign firms to transfer technology and knowledge as the price of doing business. And it has prevented many foreign technology firms from seriously competing in the China market. China’s economic policies have become progressively less market friendly, less open to foreign competition, more statist, and more protectionist in many important industries.

We must withhold technologies that are vital to our national security and make difficult decisions on how to handle emerging technologies — decisions which will be critical to our global economic leadership and competitiveness. It is time to carefully and pragmatically rethink how we manage a China decoupling process, so we optimize our economic strength. It is also essential that policymakers consult closely and frequently with American companies to ensure their decisions are based on facts not fear and misunderstanding.

Policymakers also need to understand what, if any, comparable technologies are available to China from other countries and the economic impact of unilaterally sequestering them. America’s allies are assessing their economic linkages with China, seeking to reduce their China risk in strategically important areas, and working constructively with the U.S. to withhold the highest technology. But as Europe and others face a recession and energy crunch, there will be intense global competition for jobs, trade and investment. China’s economy, even if slowing, remains an attractive market. None of our allies will be looking to decouple as broadly and with as much purpose as the United States.

When we restrict trade in American technologies, we are leaving a void which our allies will eagerly fill. This disadvantages American companies and workers. Even more troubling, we risk isolating ourselves from the rest of the world and losing our traditional role in setting standards on technologies of the future as they are commercialized.

The United States needs to play to its strengths. Despite America’s challenges, our system is superior to a black box, closed loop system, where problems are hidden. No nation has more competitive companies and innovates at the level of the United States and it’s important our government works closely with them.. But this competition won’t be determined by ideological posturing or by lecturing others on the benefits of democracy. The determining factor will be results — which system is more successful in generating jobs, attracting capital, and providing a safe, stable, open environment for its citizens and projecting strong economic leadership globally.

In an effort to stymie China, we must ensure America’s policies do not harm the U.S. while enhancing China’s long-term competitive position with the rest of the world. We need a new framework for managing the US-China relationship which recognizes that we are strategic adversaries in some areas and strategic competitors in others.

The world will be a very dangerous place if we can’t find ways to communicate, coexist, and find common ground when it is in our shared interest to do so. I am hopeful there will be an upcoming Biden-Xi summit on the margins of the G20 meeting so that the two leaders can begin a dialogue for ongoing communication in several areas:

• Establishing communication channels from the highest levels of both nations right down to fleet commanders. This will help to prevent sleepwalking into war through a combination of miscalculation, miscommunication, or escalation.
• Exchanging views regularly on macroeconomic issues in each of our nations and the world. Global financial markets are inextricably connected, and our countries must be prepared to coordinate, particularly if there are major financial disruptions.
• Coordinating and negotiating on areas of mutual benefit and concern, including trade. Climate change negotiation is also essential, beginning — but not ending — with shared research in methane reduction practices and technology.

U.S.-China relations have devolved to a perilously low level, but major conflict is not inevitable. I am hopeful that our leaders will recognize that the bottom is near and must be avoided. Shared interests, stability and peace, and the global order are all at stake.

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