ITIF: economic nationalism is not the right response to China

President Trump is right that China is flouting global trade rules to the detriment of the U.S., says the Information Technology and Innovation Foundation (ITIF), which includes Cynthia Hogan (pictured), Apple’s vice president for public policy for the Americas on its board. However, economic nationalism is not the right response, the tech-policy think tank argues in a new report out today. 

Instead, ITIF — an independent, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy — contends that the U.S. must pursue a new doctrine of constructive, alliance-backed confrontation, where policymakers put “America First”—as the leader of an international coalition that pressures China to stop rigging markets and start competing on fair terms.

“China’s systematic mercantilism represents a threat not just to the U.S. economy, but also to the very soul of the global trading system,” says Robert D. Atkinson, ITIF’s president and the report’s lead author. “The U.S. response can’t be more flaccid appeasement, because the status quo is untenable. And it can’t be a retreat toward economic nationalism, because that would cede the global playing field. We need a new doctrine of constructive, alliance-backed confrontation—a version of ‘America First’ where America stands at the vanguard of an international coalition defending the norms of democratic, market-led capitalism against the mercantilist tactics of the top-down, state-led model. We should refuse to accept empty ministerial dialogues while China flouts trade rules. We have to insist on concrete results, and we have to be prepared to apply real pressure if China doesn’t change its behavior.”

The ITIF report explains that China has positioned itself as the main economic rival of the U.S. through a mercantilist economic approach of both defensive protectionism and offensive efforts to achieve global dominance across a wide array of advanced-technology industries that are key to U.S. economic and national security interests. Its tactics include stealing competitors’ intellectual property, making market access contingent on handing over proprietary technologies, lavishly subsidizing Chinese enterprises, and more.

The U.S. government has tried for more than two decades to counter China’s pattern of flouting global rules and norms by engaging in regular diplomatic dialogues, but China has only accelerated its efforts to overtake U.S. leadership in advanced industries. Absent a change in U.S. policies toward China, America will likely lose even more U.S. jobs in advanced industries over the next 20 years. So ITIF argues it is time for a new approach—but economic nationalism won’t do.

“Engaging in dialogue in the hope that the Chinese government will listen and change its ways has not worked,” says Atkinson. “But simply slapping a tariff on Chinese goods will only make it harder for the United States to compete globally, because so much of what America exports involves pieces and parts originally imported from China. Economic nationalism would leave the global playing field wide open for China to shape a trading system to its own interests and pressure other nations who would have no choice but to cut flawed deals with the world’s new economic superpower.”

To enact a doctrine of constructive, alliance-backed confrontation, ITIF urges the Trump administration to assemble an international coalition of market-based, rule-of-law economies that together move beyond legalistic, “meeting-by-meeting” engagement with China toward a more results-oriented approach. This should entail holding China to specific goals, such as reducing its forced technology transfer and IP theft, as well as procedural goals, such as demonstrating a shift from predominantly export-led growth to growth generated chiefly by raising productivity in the country’s non-traded sectors. 

And if China does not comply, this coalition must hold China responsible, says the think tank. The report lists an array of specific actions the administration can take if needed, including ceasing scientific cooperation with China until its use of innovation-mercantilist practices dramatically declines and establishing a zero-tolerance policy for Chinese imports that are counterfeit or otherwise illegal.

The report warns that the Chinese government has demonstrated a willingness to fight back against legitimate efforts to stop it from manipulating the global trade system. As such, ITIF says the Trump administration needs to make it clear that it is not trying to hold China down; any punitive actions should be temporary and only kept in place until the Chinese government makes needed reforms to restore rules-based trade.

“When countries compete on equitable terms—according to global rules for market-based trade—it is a win-win for everyone,” says Atkinson. “We have to unite around this goal, because a system predicated on innovation-mercantilist tactics is untenable for the U.S. economy and the global economy.”