Will spy balloon derail Biden’s China strategy?

Invest, align, and compete

Blinken outlined the Biden Administration’s much anticipated China strategy in a public speech in May last year. Blinken articulated an approach to China built on three prongs: invest, align, and compete.

A mismatch between words and action – otherwise known as ‘hypocrisy’

Hypocrisy, either among individuals or countries, is rarely constructive. The effectiveness of Biden’s China strategy has been undermined by frequent instances in which the words spoken by US officials diverge from actions and policy measures.

This has been especially true when it comes to rallying (i.e., aligning) third countries behind the US approach. Blinken and other senior administration officials have consistently proclaimed that the US has no interest in forcing third countries to “choose” between the US and China. Yet it has become obvious that this is precisely what the US is doing. Countries which choose Huawei to build 5G networks or other telecom infrastructure find themselves with a more complicated relationship with the US. Countries which choose to facilitate China’s access to cutting-edge semiconductor tools or technologies will jeopardize their own access. The Dutch and Japanese governments probably felt that they were forced to choose between sales in China for ASML and Nikon or smooth relations with Washington.

US officials have also been vociferous in criticizing the various ways in which China’s trade policies have run roughshod over World Trade Organization rules and undermined the integrity of the rules-based global trade system – which the Biden policy pledges to defend. Most of the US’ criticisms are valid. Yet these same officials apparently see no contradiction when the US ignores unfavorable WTO rulings or takes unilateral actions outside the WTO framework.

To be clear, the real problem is not necessarily the US approach. The US assessment that the WTO is incapable of remedying China’s most egregious trade practices is accurate. But if the US is ignoring the WTO, criticisms of China for its WTO-compliance shortfalls will only smack of hypocrisy. Self-righteousness over the WTO is not helping the US cause. Far better to make the case for why the US feels it has no alternative but to forsake the organization it was instrumental in creating.

The US has taken or is considering a series of executive or legislative actions to counter what it sees as the threat from China. Fair enough. As a sovereign entity, the US has every right to do so. But the US has gone considerably further by attempting to have some of these measures – particularly export controls on sensitive technologies – applied on an extraterritorial basis.

The US effort to persuade, entice, or threaten partners into applying US rules on China may or may not ultimately succeed. In any case though, this extraterritoriality is abrasive to countries that the US is otherwise attempting to woo. Jointly developing policies rather than presenting partners with a “take it or leave it” fait accompli would go over a lot better.

Can US industrial policy succeed?

Perhaps the boldest policy initiative of the Biden Presidency thus far has been its full-on embrace of industrial policy. The CHIPS Act provides billions of dollars in subsidies to encourage the establishment of semiconductor facilities in the US. The comically mistitled Inflation Reduction Act subsidizes the development of green industries in the US. These programs are the most tangible manifestation of the “invest” prong of the Biden administration’s China strategy. These programs insert government bureaucrats – along with their checkbooks – into the heart of industries that will largely determine the US’ economic future. There are sharp divergences of opinion over whether this is smart.

In the view of its opponents, subsidization on this scale will be nothing other than a pork-barrel bonanza that will result in deeply damaging production and investment inefficiencies. Production of semiconductors is an immensely complex undertaking which by definition requires the participation of multiple countries. Attempting to wall off the US will only result in a compromised ability to innovate, and lost sales and competitiveness for US companies. Its primary achievement will be expanding the US budget deficit – something which will significantly hamper the US’ ability to successfully compete with China. Furthermore, according to this view, these massive subsidies are creating significant frictions with the US’ most important trade partners. Even if the policy succeeds, will it be worth the cost if it creates a major breach with the European Union? So much of Biden’s China strategy depends on the US working hand in glove with the EU.

The only thing proponents and opponents share is a complete inability to know whether or not the policy will succeed. Either way, the US-China competition will be significantly shaped by the US foray into industrial policy.

Perhaps the most salient takeaway from the spy balloon saga is that neither side feels it is in a particularly strong position at the moment. Attempting to calm the seas – at least for now – serves the best interests of both. The spy balloon triggered a spate of subsequent observations and takedowns of “unidentified aerial phenomena” in American skies. Unless these “phenomena” prove to be China-related and further inflame tensions, expect the Blinken visit to be rescheduled as soon as is practical and for the focus to be on reestablishment of a more “constructive” tone. It would be a mistake however to draw overly optimistic conclusions from any positive atmospherics. Nothing has materially shifted in the fundamental dynamics that have set these two countries on a confrontational path.

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