China and the United States: Promoting Ongoing Engagement while Safeguarding National Interests

Biden’s executive order seeks to secure U.S. intellectual property critical for national security interests. The U.S. should nevertheless promote a free flow of trade, funding and talent in non-sensitive areas such as health, biotech and green technology. Rivalry may benefit America by refocusing investment, realigning national and corporate interests, and reuniting fractious domestic political partisanship.

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In August President Biden issued an executive order proscribing U.S. investment in “sensitive Chinese technologies and products in the semiconductor, microelectronics, quantum information technologies and artificial intelligence sectors that are critical for the military, intelligence, surveillance, or cyber-enabled capabilities.” Biden also acknowledged the benefits of U.S. cross-border investment in other fields. “Open investment is a cornerstone of our economic policy”, which promotes U.S. “competitiveness, innovation, and productivity.”?

As a global technology investor for over thirty years, including in Russia and China, I believe the U.S. should actively promote trade with China while staunchly defending intellectual property and national security interests. This balanced approach navigates a middle course between the open embrace of China that prevailed for most of the past three decades and the current caustic relationship. Balanced engagement requires more nuance and a deft touch, firm on the one hand yet respectful of proud, enduring national heritages of these two great nations.

Through this lens, U.S. Commerce Secretary Gina Raimondo’s recent visit to China was a step in the right direction but lacked a tangible trade measure to balance Biden’s executive order. Trade and investment between China and the U.S. had already fallen 15% in the first half of 2023 prior to Biden’s announcement (see Table 1) and U.S. foreign direct investment in China had fallen to an eighteen year low in 2022. Average foreign direct investment in 2020-2022 declined by 39% compared with average investment levels during the prior decade (see Table 2). While acknowledging ongoing U.S. business interests in China, Raimondo cited a lack of trust following her visit that reinforces these trends.

Table 1: Trade between U.S. and China

Note: Trade volume in US$ millions. 2023 shows annualized trade based on first half data.

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Table 2: U.S. Foreign Direct Investment in China Declines to 18-Year Low

The need to find a balanced approach that alleviates tension between the U.S. and China is timely. Biden’s executive order comes at a precarious time for both the U.S. and China. China is beset by its deepest economic slowdown in over thirty years and the U.S. faces mounting scrutiny domestically on costs supporting engagement in the Ukraine.

The U.S. must avoid confrontation with China over the Ukraine. Yet China may benefit from a prolonged conflict in the Ukraine that diminishes U.S. military reserves and financial position. China’s neutral strategy works only if it can maintain trade with the West and a healthy domestic economy. Both of these economic pillars are eroding, and a weakened Chinese economy increases uncertainty in its dalliance with Putin.

Xie Feng, China’s ambassador to the U.S.,?has blamed its weakened economy to a drop in trade due to changes in U.S. tariffs. ?Economic growth in China dipped to 2% in 2022 and growth forecasts based on the Oxford Economics model suggest flat growth in 2024. Lower exports to the West have reduced economic growth in China by 0.6% and the youth unemployment rate reached 21.3% in June, the highest in decades.

While it is tempting to tip toward protectionism, free trade has reduced U.S. consumer prices and promoted shared interest in an integrated global economy. With global free trade over the past three decades, average annual inflation in the U.S. dropped from 4.3% during the Cold War period from 1947 to 1991 to 2.3% after the Cold War from 1992 to 2015. A 2% annual inflation reduction over 24 years equates to 60% lower average prices for consumer goods today.

The U.S. has also benefited from a surge in innovation since the end of the Cold War. Foreign citations in Russian math journals tripled and the U.S. received an influx of scientists from Russia after 1991[i]. Google, founded by Larry Page and Sergey Brin, emerged from this newfound collaboration. Kerr estimates that about 25% of U.S. patents filed in 2018 were from Chinese, Indian and Russian immigrants.[ii] About 50% of recent U.S. unicorn technology companies were founded by immigrants.

Biden appropriately acknowledges China as a competitor to U.S. national and security interests.? China competes aggressively and has so for decades. China has long blocked domestic access to Internet companies such as Google and Facebook. In 2017, China announced its intent to lead the world in artificial intelligence by 2030. China’s National Intelligence Law of 2017 requires all organizations and citizens to support, assist and cooperate with national intelligence efforts. Since China requires foreign technology firms to operate through joint ventures, any intellectual property availed or developed through these joint ventures is effectively open source on demand.

In both sports and business, intense rivalry improves both competitors. America peacefully yet effectively responded to threats from the Soviet Union and Japan in the second half of the twentieth century. U.S. and China have many shared interests that promote ongoing collaboration.

The US has enjoyed hegemony as the sole superpower for the past three decades. As Paul Kennedy observed in The Rise and Fall of the Great Powers, America must avoid military overstretch and balance guns and butter while investing in long-term economic growth. The emergence of China as a global rival may benefit America by refocusing investment, realigning national and corporate interests, and reuniting fractious domestic political partisanship.

[i] Borjas, G.J., Doran, K. (2012). The Collapse of the Soviet Union and the Productivity of American Mathematicians, Quarterly Journal of Economics 127:3 (2012), 1143-1203.

[ii] Kerr, S. P., W. R. Kerr. 2020b. Immigration policy levers for US innovation and start-ups. Innovation and Public Policy. University of Chicago Press, 85–115.

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