Outcompeting China to “Win the Future”

Outcompeting China to “Win the Future”
Remarks at the Metropolitan Club of Washington, DC

Ambassador Chas W. Freeman, Jr. (USFS, Ret.)
Visiting Scholar, Watson Institute for International and Public Affairs, Brown University
5 May 2022

About five years ago, the United States decided to set aside previous efforts to cooperate with China.  Instead, we proposed to confront it and compete with it “from a position of strength.”  This administration, like the last, calls for “a whole-of-nation” effort to “outcompete” the Chinese and “win the 21st century.”

How are we doing at this?  The short answer is poorly.  If we don’t shape up, we’re going to lose.

China is almost the same size as the United States, including Alaska and Hawaii.  But geography and history have given Chinese and Americans very different societies and ideologically favored systems of government.  China has land and sea borders with nineteen countries.  For about six hundred of the past thousand years, it was ruled in whole or in part by foreign invaders.  China has ample reason to want to keep foreigners at bay.  By contrast, our borders are mostly ocean and openness to foreigners and their ideas is what made us great.

We established our settler society on an isolated continent of unexhausted abundance.  China has had severely limited per-capita natural resources for millennia.  It has about four times our population but only two-thirds the arable land and nine-tenths the water that we do.  Despite this relatively meager endowment, China produces about five-and-a-half times as much food as the United States.  But it has nothing like the margin for error we have.  Chinese want a can-do government.  Americans want one that leaves us mostly alone.

As both Sunzi and Socrates advised, to compete we need to know ourselves as well as our competitors.  Frankly, we are not now bringing our best game to the playing field.  Our politics are polarized and dysfunctional, we are in chronic fiscal deficit, our infrastructure is collapsing, our educational system is increasingly mediocre, our social fabric is fraying, our international prestige is declining, and we are more divided internally than at any time since our civil war.  We appear to have achieved herd immunity to strategic reasoning.  We pay lip service to the need to reinvigorate our economy and its technological advance but in practice focus instead on hamstringing China.

This is the equivalent of smoking pot in a hot tub and fantasizing about tripping up competitors in track events, while they are out training and trying out new equipment.  It’s conceivable that China will stumble and fall, enabling us effortlessly to “win the future,” but it is imbecilic to count on this.  Delusional complacency and reliance on dumb luck or divine intervention will not enable us to outperform China or any other rising power.

We are not exactly in economic fighting trim.  Our balances of trade and payments are in chronic deficit.  We no longer even try to balance our budgets.  So far this century, our annual exports of nondefense capital goods, excluding aircraft, have fallen about 10 percent.  Our imports of capital goods now exceed our domestic production of them.

We’ve lost the industrial surge capacity that enabled us to win in World War II.  The U.S. share of global manufacturing has fallen to about one-sixth.  Industry now contributes only 8 percent of value added to our economy while finance, insurance, real estate, rentals, and leasing account for one-fourth.  Eighty percent of recent IPOs have been in the financial sector, 10 percent in healthcare technologies, and 6 percent in technical services.

Ironically, issues of ownership aside, China’s economy has recently been ruled by something much more like capitalist free market competition than ours, which is now dominated by rent-seeking oligopolies.  In our country, price competition between small and medium-sized businesses has been largely replaced by administered pricing by large corporations.  Our biggest businesses seem more interested in share buybacks, mergers, acquisitions, and outsourcing than in investing here at home.  In 1990, we had 51 major defense contractors.  Now we have five.

China has plenty of problems but, contrary to our complacently self-congratulatory national image, the United States is no longer in most respects ‘number one.’  We are 12th in the world in per capita GDP.  Our students rank 31st out of 35 countries in math competence and 13th in reading.  We have fallen to 27th in social mobility.  We spend almost twice as much per capita on health care as other countries like us but rank 49th in global life expectancy and 178th in infant mortality.

Inaccurate self-perceptions and obsolete assumptions can be fatal.  We need to be realistic about both ourselves and China if we are to rise to the challenges we face.  To be sure, China had a bad century or so, but four decades ago it picked itself up and got moving.  It seems to be on the way back to the planetary preeminence it enjoyed for most of human history.

In the fifty years since President Nixon first visited Beijing:

  • Our economy has nominally grown 18-fold, while China’s is now 130 times larger than it was.
  • China now accounts for almost one-third of global manufacturing – roughly twice as much as we do.
  • China’s share of world exports of goods has grown to 15 percent while ours has fallen to 8 percent.
  • In 1972, China’s per capita GDP was 2 percent of ours. Now it is about one-sixth, having grown about 80 times.

In military power, the United States is still unquestionably number one.  After all, we devote almost half of discretionary federal spending – about 3.7 percent of GDP — to our defense budget and then hide another 2 percent or so of military-related spending in other federal budgets.  We invest more in our armed forces than the next eleven countries combined.

Our focus is the fear that China’s growing economic, technological, and diplomatic role in world affairs will dethrone us from global and regional primacy.  But if all you have is a hammer, everything looks like a nail.  So, our response to the challenge from China is mainly military and largely irrelevant to non-military challenges.

China is without a doubt a potential military peer competitor.  It may devote much less than half as much of its GDP to its military as we do, but it’s able to fund hefty annual increases in its defense spending.  And its personnel and equipment are a lot cheaper than ours.  In terms of purchasing power, China’s economy is already one-fifth larger than ours.  Chinese pay for their military from current revenues.  Our spending on our military is about the same as our federal government’s annual deficits.  China’s national debt amounts to about 45 percent of GDP, while ours is already 100 percent of GDP and set to hit at least 113 percent within a decade.

Defense spending is much less of a burden or a constraint on China than on us.

And China’s military remains focused on homeland defense, while ours seeks to project power to every corner of the globe.  There are no Chinese forces anywhere near our borders.  But our navy and air force test Chinese defenses several times daily, and we are planning to pivot still more forces to China’s periphery.  Power projection is expensive.  Defense is much cheaper.  Advantage: China.

Geography favors the Chinese military.  The most plausible battlefields (Taiwan or the South China Sea) are 100 to 1,000 miles from major Chinese bases but 3,000 to 10,000 miles from U.S. territory.  In the event of war, almost the entire Chinese navy and half of the air force could engage immediately, whereas U.S. forces could take weeks to arrive.

The military balance in the Asia-Pacific region continues to shift in China’s direction.  There is no reason to expect this trend to reverse.

  • China now has the world’s biggest shipbuilding industry, its greatest number of shipyards, and its largest navy.
  • The Chinese navy’s 360 frontline ships are newer and outnumber the U.S. Navy’s global complement of less than 300 ships, only about one-fifth of which are within relatively easy reach of Taiwan, with the rest dedicated to missions elsewhere. These numerical and regional imbalances in favor of China are likely to increase.
  • China’s air force now fields about 2,000 advanced combat aircraft, over 1,000 of which are stationed in range of Taiwan. Its bomber fleet is already the world’s largest and its aerial refueling capabilities continue to grow.
  • Chinese antiaircraft missiles cover Taiwan’s entire airspace. Its antiship and air-to-air missiles outrange ours.  China’s rocket forces can mount precision strikes on U.S. bases in Japan within range of Taiwan, as well as on Guam, Hawaii, aircraft carriers within 2,500 miles of the Chinese coast, and the continental United States.
  • China is heavying up its intercontinental nuclear forces to deter or retaliate against the U.S. A war with China would now clearly risk not just conventional but also nuclear strikes on our forces abroad as well as on our homeland.

This is not the time or place to rehearse the entire, evolving Chinese order of battle.  Nor am I the person best qualified to do that.  Suffice it to say that, in all the simulations our defense department has undertaken to forecast the outcome of a war with China over Taiwan, Taiwan’s democracy and prosperity are destroyed and we get clobbered.

For almost five decades, effective diplomatic management of the Taiwan issue between Beijing, Taipei, and Washington made active Chinese military threats to Taiwan improbable.  But the framework we crafted in the 1970s to keep the peace has now collapsed.  The danger of war is rising.  There is no non-violent endgame in sight.

We need to find a way to replace escalating military confrontation with the renewed prospect of a peaceful settlement of the Taiwan issue by the two sides of the Strait.  Doing so would reveal that the real challenges we face from China are economic, scientific, technological, and commercial.  At present, the trends in these arenas do not favor us.

  • By 2025, China will have more than 31,000 miles of high-speed rail lines, serving 95 percent of its smaller cities. We will still have none.  The subway lines in China’s major cities will have grown by one-third.   China’s expressways will total 120,000 miles to our 47,000.
  • Seven of the world’s largest and most modern ports are in China. Chinese companies own over 100 ports in over 60 foreign countries and are investing heavily in their expansion.  China is by far the leading manufacturer of shipping equipment.  If we want to upgrade our own inefficient and overburdened ports, we will have to turn to Chinese companies to help.
  • China already has nine times more 5G base stations than we do and will triple their number by 2025. Huawei, which we have tried to smash, holds 60 percent of the world’s patents for 5G.
  • China’s remarkably high savings rate generates the capital to take its cutting-edge infrastructure technologies abroad. As China connects to the world, the United States is doing its best to disconnect from it.  It’s hard to see how this does not put us at a disadvantage

China’s advantages in technology development begin with an unparalleled pool of data drawn from the largest and most plugged-in domestic market in the world.  They include a culture that considers individual education and excellence the keys to national as well as family success.

Chinese universities now graduate at least four times as many students as the United States in science, technology, engineering, and math (STEM).  They are on track to educate twice as many PhDs in STEM by 2025.  In that year, China will have more STEM workers than the thirty-eight member countries of the OECD combined.

  • Even at nominal exchange rates, China now outspends us on R&D, with a significantly higher percentage going to basic scientific research rather than marketing-related product improvement.
  • Sixty percent of the workforce in U.S. artificial intelligence (AI) labs is foreign-born, about half from China. The number of domestic-born PhDs in AI has not increased since 1990.  Current U.S. visa and domestic security policies reflect xenophobia rather than a strategy to recruit and retain foreign talent.  We are driving such talent away.
  • China’s share of global semiconductor manufacturing has risen from less than 1 percent in 1990 to 15 percent today, while America’s has fallen from 37 percent to 12 percent. China is only a year or two behind the U.S. in chip design and it’s rapidly closing the four to five-year gap with Taiwan in chip fabrication.
  • Ironically, given the new dominance of financial capitalism in our economy, China has become the world leader in “fintech.” It is also a world leader in electric vehicles, solar, and wind power and a contender for leadership in materials science, chemistry, nuclear fusion, quantum communication and computing, and genetic engineering among other fields.
  • China has a strategy for setting global and regional industrial and consumer standards to build and consolidate its market share abroad. We don’t.
  • China is restructuring its public health system to deal with the next pandemic. We have great medicine but are lousy at preventing disease, as we’ve just shown by having a higher death rate from COVID than any other Western country.  True to current form, we aren’t doing anything about this.

China has been a convenient foil for Americans who wish to blame anyone but ourselves for our problems.  In practice, our political leaders bloviate about Chinese and other foreign competition but protect uncompetitive economic actors here at home.  Instead of incentivizing domestic investment, favoring immigration by the highly educated and skilled, reforming labor-management relations to encourage the retraining of redundant workers and reduce outsourcing, or reinvigorating free-market competition to “win the future,” they dole out tax cuts and subsidies to vested interests.  This is an approach that enables mediocrity, raises production costs, erodes competitiveness, sheds jobs, and fosters unjustified income disparities.  Whining isn’t competing.  The failure to take a hard look at our own shortcomings and doing something about them, not China, is the main threat to our global leadership.

The key to outcompeting China is not to out-blather it about democratic values or outdo it at “wolf warrior diplomacy.”  It is to rise to the very real challenges that China’s rise has exposed.  China is not the Soviet Union.  It is outdoing us at what it calls ‘socialism with Chinese characteristics’ and everyone else calls capitalism.  Populist parodies of Cold War containment policies are more likely to harm us than the Chinese.  Cost-plus military Keynesianism may boost a few jobs in congressional districts.  It will not make our economy more competitive with China’s or anyone else’s.

The key to outcompeting China is to fix our system so that it once again yields better outcomes and greater prosperity than China’s.  To do that, we must make a determined effort to address the weaknesses that now impair our performance.  We need to:

  • Repair our broken political system.
  • Return to pay-as-you-go government.
  • Revamp our physical and human infrastructure.
  • Raise standards in our educational system.
  • Resume the identification and adoption of foreign best practices.
  • Reopen ourselves to foreigners and their ideas through immigration reform.
  • Reinvest in scientific research and development.
  • Reenforce antitrust policies to reduce market concentration and restore competitiveness to our markets.
  • Reform our tax structure to support national rather than vested interests and to reward domestic investment rather than outsourcing.
  • Recover our modesty and redouble our efforts to set an example to the world.

Our weaknesses are structural.  If we can’t address them structurally, we are going to fall behind.

Four decades ago, an ailing China got its groove back by doing things that parallel what we must now do.  We have a lot more going for us than the Chinese.  We need to stop making excuses and get to work.  Katharine Tai, the U.S. special trade representative, is quoted as saying, we need “to turn the page on the old playbook.”  Whatever China does, she argues, “we need to start doing things on our side [such as] the reshoring and the rebuilding of our manufacturing base.”  I agree.  But it isn’t going to happen if we preserve the strange combination of hubris, denial, and complacency we currently exhibit.