FIRM GROUND
Building effective policy approaches to China, as anywhere, requires an informed perspective of its intentions and capabilities. Intentions are notoriously hard to parse in the context of a great power competition characterized by mixed signals of reassurance and aggression. Still, Xi’s overall direction is clear.
Few can doubt that Xi Jinping seeks to build a strong economy that can resist threatening actions by the United States. His goal is “rejuvenation” of the Chinese economy that combines both mercantilism and globalization. This philosophy goes back at least to Hu Jintao’s policy of indigenous innovation. Xi’s triumphalist tone, now bolstered by policies to develop cutting edge technology in “new quality productive forces,” shows he aims to develop China into a technological powerhouse.
Xi also has sought to enhance the party’s tools to monitor and influence firms, as my work with Meg Rithmire and Kellee Tsai has shown. These tools include: mandating party cells in all firms; blurring the lines between state and private companies; and passing new laws over national security and state secrets. Such moves have alarmed U.S. policymakers and U.S. companies, as they put teeth into the previously vague risks associated with Chinese firms.
Nevertheless, perceived intent does not equal capabilities or outcomes. That China’s party-state continues to have difficulty controlling and incentivizing its firms is unambiguous. China’s government has long produced plans that offer rough guidance, often with subsidies. But Beijing’s restraints on companies fail to rein in problematic behavior; firms often overreact or go their own direction. The plights of the real estate sector and of non-performing loans are only the most recent examples.
Firms, even state-owned ones, often are more dedicated to making money than to following a party line. There is, as yet, little evidence that the party presence in firms has altered how they operate. To depict successful Chinese firms as mere agents of an all-controlling party is naïve, distorts perceptions, and thereby distorts U.S. policy.
Thus, although Chinese economic policy has helped produce major achievements, it often overshoots or even fails. U.S. policy should account for both. It is no secret that China has sought to bolster sensitive industries through policies and subsidies. U.S. vigilance in promoting some domestic industries at home, notably semiconductors that are core to national security and technology, is therefore appropriate.
Elsewhere, however, China’s efforts to build competitive industries are not directed at competing with or weakening U.S. national security, as is often depicted. China’s policy toward electric vehicles, for example, is focused on stimulating a domestic market—an effort characterized by much clumsy and wasteful industrial policy. Even though a handful of competitive Chinese firms are thriving, over 150 have stuck their toes in the market, with many failing. Moreover, it is uncertain how much of these flourishing firms’ success is due to subsidies. Given China’s extremely competitive automobile landscape, it is plausible that its healthy EV firms would have succeeded with minimal funding.
In short, the context of economic competition with China matters for U.S. policy.
