Hoover Institution (Stanford, CA) — Touring a newly opened Build Your Dream (BYD) electric vehicle manufacturing plant in Uzbekistan this year, a former US official got the opportunity to sit inside one of the Uzbek-assembled EVs.
That official remarked that so many attributes of the car, from the user interface to the interior finishes, felt exactly like a US-built and designed Tesla.
Is it a coincidence that BYD, a firm based in China with no connection with Tesla, begins to build EVs that feel remarkably similar to the US company’s models, only a year or two after a Tesla plant opened in Shanghai?
No one can be sure, but the case is just one of countless examples of Chinese imitation of US industry raised at a workshop on economic statecraft at the Hoover Institution. The workshop convened leading scholars, practitioners, and former national security officials to discuss ways to harden and better activate economic statecraft measures such as tariffs, sanctions, export controls, and industrial incentives policies to address the geopolitical challenges that China and other nations pose the United States.
Specific concerns about China include its efforts to wield political influence globally and inside the United States, to modernize its military through intellectual property theft and absorption of US technology, and to coerce countries into economic dependency.
The challenge most often repeated during the event was that of the People’s Republic of China in using economic policies to modernize its military and reshape the global order in its image, drawing on access to American and other foreign technologies while using subsidies to bolster Chinese industry at the expense of the US and its allies.
The discussion on June 14, 2024 is part of an ongoing effort at Hoover led by senior fellows H.R. McMaster and Michael McFaul and visiting fellow Andrew Grotto to develop a three-part study of US economic statecraft. It will include guiding principles, an inventory of economic statecraft tools, and an assessment of US government organization for using these tools in a strategic, integrated manner.
The study is slated for release in the fall of 2024.
At present, China uses a raft of economic statecraft techniques against the US and its allies. They include outright theft of intellectual property through espionage, as well as “dumping” heavily subsidized products such as steel into western markets with an aim to make the domestic industry noncompetitive. They also seek to control the majority of global exports in certain critical products and use that control as leverage over trading partners.
Participants discussed US export policies, import policies, and industrial incentives policies with an emphasis on critical technologies such as semiconductors and how to build resilience into the global supply chain while limiting the ability of China’s military to access these technologies.
One prominent participant summed up the conclusions of the group attending the workshop as the seven “I’s”
They said America must:
- Integrate tools of economic statecraft to achieve well-defined goals and objectives.
- Insulate the US and its allies from acts of economic aggression through combinations of defensive and offensive actions.
- Incentivize free-market solutions to ensure supply-chain resilience, strengthen the industrial base, and maintain critical defense and technological advantages.
- Invest in human capital and research and development to spark economic growth and the development of critical defense capabilities.
- Institutionalize the above actions to ensure that the US government can implement them.
- Interact with adversaries and partners, assess net effects of our actions, and adjust policies and strategies.
- Internationalize our strategy to act in concert with like-minded partners.
The group emphasized that adversaries would continue to develop new statecraft techniques to evade tariffs, export controls, and sanctions. One example is the challenge presented by “connector” or “third” countries in international trade. These countries act as neutral third parties between states or blocs that have imposed sanctions or other restrictions such as technology transfer bans on one another.
For example, to evade sanctions, central Asian states have increased imports from the West. Then with little or no modification, they export those goods to Russia so the Kremlin can maintain its warmaking machine.
To evade tariffs, China exports many incomplete or nearly completed products to Mexico or other third countries, where those products are packaged or lightly upgraded before they enter the US market as a good from that third country.
There are methods to verify the true origins of these goods, but they are time-consuming, expensive, and imperfect.
Many prominent voices have warned of the rise of such connector countries, including International Monetary Fund deputy managing director Gita Gopinath in a recent speech at Stanford.
When discussing import policy, several speakers emphasized the importance of tariffs as a mechanism for correcting the competitive distortions caused by China’s subsidies for its firms. However, several speakers cautioned that tariffs, controlled products lists, and other measures could inadvertently serve to protect inefficient domestic industry instead of supporting competitive players that are facing fair external competition.
Participants also expressed the understanding that virtually all methods employed for economic statecraft—including import and export bans, tariffs, sanctions, and subsidies— generate market distortions. It’s up to policymakers to minimize and mitigate these distortions and ensure that the geopolitical benefit of using an economic tool is worth the price of those distortions.
Another challenge mentioned was China’s efforts to de-dollarize, to develop an alternative to the global SWIFT payments system, and possibly to launch a “BRICS” (Brazil-Russia-India-China-South Africa) currency, all to limit its exposure to future US financial sanctions.
Several speakers nevertheless articulated a need for the US to be much more effective and resolute in the application of sanctions, tariffs, export controls, investment screening, and other measures.
For example, the Chinese liquefied natural gas (LNG) sector has violated sanctions concerning transit of Russian and Iranian gas, yet the US has not added any Chinese LNG firms to its sanctioned entity lists.
For too long in the 2000s and 2010s, US officials clung to the hope that China would play by the rules of international trade and commerce and that as China prospered, the country would liberalize its economy and its form of governance. Participants in the workshop agreed the US must become more assertive in countering China’s weaponization of its statist, mercantilist economic model against the US and other free-market economies.
