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Assessing U.S. 1990s – 2000s China Trade Policy’s Effects on U.S. National Security

Assad Raza is a retired U.S. Army Civil Affairs Officer with deployment experience throughout the Middle East. He holds a M.A. in Diplomacy with a concentration in International Conflict Management from Norwich University, and a M.M.A.S from the U.S. Army Command and General Staff College. He can be found on Twitter @assadraza12. Divergent Options’ content does not contain information of an official nature nor does the content represent the official position of any government, any organization, or any group.

Title:  Assessing U.S. 1990s – 2000s China Trade Policy’s Effects on U.S. National Security

Date Originally Written:  May 23, 2023.

Date Originally Published:  June 5, 2023.

Author and / or Article Point of View:  The author believes that the trade policy between the U.S. and China during the 1990s to 2000s resulted in the growth of China and wider socioeconomic disparities within the U.S. due to the relocation of manufacturing overseas.

Summary:   During the 1990s and 2000s, U.S. trade policies hurt the U.S. middle class as manufacturing jobs moved China. This movement enabled China to become an economic powerhouse and greater military threat to U.S. interests. However, recent policy developments offer hope for rebalancing trade between the two nations and revitalizing domestic manufacturing to fortify the U.S. middle class, as it had been before the end of the Cold War.

Text:  After World War II, the U.S. experienced a significant increase in demand for manufacturing, both in the private sector and the military industrial complex. The post-war population began spending more on a wide range of goods, including new cars and home appliances. Simultaneously, the government invested heavily in military equipment, primarily due to the escalating Cold War tensions with the Soviet Union. This surge in manufacturing activity not only created numerous job opportunities across the nation but also played a pivotal role in fostering the development of one of the strongest middle classes in U.S. history[1]. However, with the conclusion of the Cold War, the United States initiated trade liberalization with multiple countries, particularly China. This shift in trade policies facilitated China’s rise as a global power but had a detrimental impact on the U.S. middle class, as numerous manufacturing jobs were outsourced overseas.

The U.S. failed to foresee the ramifications of opening up trade with China in the 1990s to 2000s, which had a significant impact on the middle class and contributed to China’s emergence as a strategic competitor. U.S. Representative Ro Khanna (D-CA) highlighted these effects in a Foreign Affairs article, stating that “Since 1998, the widening U.S. trade deficit has resulted in the loss of five million well-paying manufacturing jobs and the closure of nearly 70,000 factories[2].” Khanna also emphasized how the decline in manufacturing jobs had a particularly negative effect on Americans without college degrees, limiting their ability to achieve middle-class status. These adverse effects were largely accelerated by a policy passed in 2000 that named China as a permanent free trade partner for the United States.

In the year 2000, the U.S. Congress passed the Permanent Normal Trade Relations with China (PNTR) bill, which aggressively opened up trade with China. The bill received approval in the House with a vote of 237 to 197 and in the Senate with an 83 to 15 majority[3]. However, in 2016, economists reported that the predicted emergence of new jobs to replace those lost did not materialize following the exodus of manufacturing jobs to China as trade relations normalized[4]. While the intention behind this policy was to benefit U.S. economic interests and foster normalized ties with China[5], it came at the expense of the U.S. middle class, as evidenced fifteen years later.

These policies, which prioritized cheaper goods over U.S. middle-class jobs, have played a significant role in driving China’s rapid economic growth. Consequently, China’s economy has the potential to surpass that of the United States and become the world’s largest economy by 2050. Alongside its large population and increased military capabilities, this economic growth positions China as the most significant threat to the United States[6]. The long-term effects of the trade imbalance between the two countries have escalated tensions between the powers and continue to impact the U.S. domestic manufacturing job market. However, it is important to note that the responsibility for these consequences does not solely lie with the United States. China has engaged in various controversial practices to manipulate the situation in its favor, exacerbating the adverse effects of the trade dynamics.

The historical combination of low wages and an undervalued currency in China has provided strong incentives for numerous U.S. companies to relocate their manufacturing operations there. The availability of a large labor force, along with a lower cost of living and fewer labor regulations, allowed Chinese companies to exploit their workers with low compensation[7]. Additionally, the Chinese government over the years has implemented currency management policies, intentionally keeping the value of its currency relatively low in comparison to major currencies such as the U.S. dollar[8]. This combination of factors, including low wages and an undervalued currency, created a significant cost advantage for U.S. companies engaged in manufacturing in China. By shifting production to China, these companies manufactured goods at a lower cost, thereby increasing their profit margins or enabling them to offer products at competitive prices in the global market. These practices, which have caused controversy, are meant to give China an economic edge by producing cheaper exports that add to the U.S. trade deficit and result in fewer domestic manufacturing jobs.

It is worth noting that the United States is taking steps to address the trade imbalance between China and the U.S. This inequality has persisted for over 20 years, and steps are being taken to encourage the return of manufacturing to the U.S. This return will not only help revive the middle class, but also reduce dependence on China, particularly in light of the global supply chain disruptions caused by COVID-19. The U.S. government has introduced several initiatives to achieve this goal, such as the Inflation Reduction Act, which aims to increase domestic energy production and manufacturing by 40 percent by 2030[9]. Another initiative is the CHIPS and Science Act, which offers incentives for domestic semiconductor production in response to the impact of the pandemic[10]. Despite these efforts, the loss of manufacturing jobs to China has already taken a toll on the U.S. middle class, and it may be difficult for them to fully recover to the level it was at the conclusion of the Cold War.

Endnotes:

[1] Pruitt, S. (2020, May 14). The post World War II boom: How America got into gear. History.com. https://www.history.com/news/post-world-war-ii-boom-economy  

[2] Khanna, R. (2022a, December 20). The new industrial age. Foreign Affairs. https://www.foreignaffairs.com/china/ro-khanna-new-industrial-age-america-manufacturing-superpower  

[3] Tankersley, J. (2016, March 21). What republicans did 15 years ago to help create Donald Trump today. The Washington Post. https://www.washingtonpost.com/news/wonk/wp/2016/03/21/how-republicans-helped-create-donald-trump-more-than-15-years-ago/  

[4] Autor, D., Dorn, D., & Hanson, G. (2016). The China shock: Learning from labor market adjustment to large changes in trade. National Bureau of Economic Research. https://doi.org/10.3386/w21906  

[5] Clinton, W. J. (2000, May 24). Remarks by the president on passage of permanent normal trade relations with China: The Rose Garden. U.S. Department of State. https://1997-2001.state.gov/regions/eap/000524_clinton_china.html  

[6] Spillane, J. (2023, March 20). Can China surpass the United States as the next world superpower?. LSE International Development. https://blogs.lse.ac.uk/internationaldevelopment/2023/03/20/can-china-surpass-the-united-states-as-the-next-world-superpower/  

[7] Plekhanov, D. (2017, December 13). Is China’s era of cheap labor really over? The Diplomat. https://thediplomat.com/2017/12/is-chinas-era-of-cheap-labor-really-over/  

[8] Morrison, W. M., & Labonte, M. (2013, July 22). China’s currency policy: An analysis of the economic issues – CRS report RS21625. Congressional Research Service (CRS). https://crsreports.congress.gov/product/pdf/RS/RS21625/70  

[9] U.S. Senate. (2022). Summary: The inflation reduction act of 2022 – senate. Senate.Gov. https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf  

[10] Bennet, M. (2022). Chips and science act of 2022 section-by-section summary – U.S. Senator Michael Bennet. U.S. Senate.Gov. https://www.bennet.senate.gov/public/_cache/files/4/0/40919cb4-ff63-4434-8ae2-897a4a026b30/7BCDD84F555A6B85BEC800514F1D3AFD.chips-and-science-act-of-2022-section-by-section.pdf

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An Assessment of Chinese Mercantilism as a Dual Circulation Strategy with Implications for U.S. Strategy

Patrick Knight is an active duty U.S. Army Officer and has served in a variety of tactical and force generation assignments. He is currently a student in the Army’s Command and General Staff College as part of a strategist training pipeline. He can be reached on LinkedIn or pjknight12@gmail.com. Divergent Options’ content does not contain information of an official nature nor does the content represent the official position of any government, any organization, or any group.



Title:  An Assessment of Chinese Mercantilism as a Dual Circulation Strategy with Implications for U.S. Strategy

Date Originally Written:  October 16, 2020.

Date Originally Published:  October 30, 2020.

Author and / or Article Point of View:  The article is written from the point of view of China towards regional states and the U.S.

Summary:  China has become a dominant regional and global power through its export-centric mercantilist practices. This mercantilism underpins a larger expansionist foreign policy. China has reacted to U.S. and global economic pressure by instituting the Dual Circulation strategy, focusing on domestic consumption markets. U.S. strategies that do not take into account China’s Dual Circulation strategy will not be effective.

Text:  Mercantilism, specifically Chinese mercantilism, is the macroeconomic policy of emphasizing exports and minimizing imports, and relates to the broad long-term economic strategy of Chinese trade and supply chain management. Mercantilism is tied to the broader concepts of Chinese expansion strategy which underpin its foreign policy. That Chinese foreign economic policy is growing and seeks to become a dominant regional and global power has, at the time of this authorship, become a relatively elementary platitude. Chinese economic and larger foreign policy is more complex and nuanced. The 2020 introduction of a Dual Circulation policy calls into question the monolithic approach of mercantilism, and has critical implications for U.S. strategists[1].

For historical background, in 1987, a Chinese economic policy advisor, Yuon Geng, suggested to then de facto state leader Deng Xaopeng the concept of Dual Circulation. In that context, he meant relying on low labor costs within the Chinese labor market to develop export capabilities, building foreign investments which thus improve domestic financial resources[1]. This suggestion began an economic opening of China, and in the decades that followed, China developed into an export centric nation. The Chinese socialist system’s advantage in focusing and underwriting industrial capabilities allows China to, in Deng Xaopeng’s words, “concentrate power to do great things[2].” In this way, China emerged as the commonly understood world’s factory, especially after China’s admittance into the World Trade Organization in 2001.

With the now famous One Belt and One Road Initiative, China has devoted significant financial and diplomatic resources to developing infrastructure and trade relationships with dozens of states in the Indo-pacific region and beyond. This is a foundational tenet of Xi Jingping’s foreign policy.

One could thus assume that China uniformly pursues mercantilism strategy of concentrating all instruments of national power to develop a dominant, yet supporting, relationship in emerging markets and developing states and bolster an export economy.

However, the new reintroduction of a Dual Circulation Strategy adjusts the original meaning of Dual Circulation as intended by Yuon Geng. Here, China seeks to enhance its domestic markets and consumption over foreign investments, markets, and technology. It seeks to ease its dependence on foreign markets in favor of the domestic[1].

China’s policy goals of moving up the value chain, improving the overall wealth of China, and having a resilient economy are working under its export centric strategy, yet there has been an inward shift via Dual Circulation. China policy expert Andrew Polk believes that this inward shift is not a response to internal demand in China as much as it is a reaction to the external environment[1]. External variables have changed significantly in recent years. In one way, the global economy and its state actors have exerted pressure on Chinese technology companies, such as in the case of the semiconductor industry. Second, the massive impact of the COVID 19 pandemic on the global economy has not yet receded. The Chinese export industry has been negatively affected as consumer demand falls. Dual Circulation is a reaction of the vagaries of the external economy that China seeks to remain resilient.

For those familiar with the ways, means, and ends framework of strategic thinking, Chinese economic ends have not changed. The ways, relying on and enhancing domestic economic capabilities, has shifted within the national strategic framework.

Vice Premier Liu He, Xi Jingping’s top economic advisor, has developed the Dual Dirculation concept, and seeks to de-risk the oversupplied industrial sector. This de-risking is reminiscent of his proposed Supply Side Structural Reform strategy of 2015, in which Liu He feared China relied too much on the export industry[2].

Most imperatively, the introduction of Dual Circulation amidst China’s mercantilist tendencies signifies a fundamental inflection point in strategy and macroeconomic thinking. Proximately, Dual Circulation means that China is unified on restructuring its macroeconomic strategy, which directly challenges other high-end manufacturing economies. More broadly, Dual Circulation indicates that China is vulnerable, or at least reactive, to external pressure and environments. This new policy further demonstrates that China estimates that powerful western economies, such as the U.S. and U.K., have focused too much on services and consumer centric industries and have not adequately supported and developed their manufacturing capabilities[2]. China seeks to add the most value by dominating the high-end manufacturing sector in both its domestic and global economy, what Polk refers to as the German economic model of manufacturing.

Lingling Wei of the Wall Street Journal believes that Dual Circulation also exposes key defense industry implications in Chinese policy making. She argues that now is China’s “Sputnik moment” in that the recent U.S. trade war provides an opportunity to make significant policy shifts[2][3]. The Chinese defense industry has been a focus of Xi Jingping’s reforming attention in recent months, moving key political allies with defense industry background. The defense industry focus includes recently installing a new deputy of the National Development Reform Commission. Wei suggests that China acknowledges its exposure in the defense supply chain where competitors like the U.S. can exert pressure.

Dual Circulation is highly relevant to U.S. national security and economic strategists. Since March, U.S. President Donald Trump has increased pressure on China, significantly shifting his policy azimuth. The Trump administration has closed the Chinese consulate in Houston, Texas on charges of espionage, dispatched carrier strike groups to the South China Sea, blocked Chinese technology company activites, increased support to Taiwan, and made headlines with conflict and eventual merger with Tik Tok[3]. Numerous political factors contributed to President Trump’s decisions which are outside the scope of this assessment. However, U.S. and allied leadership needs to understand the degree and nature of the impact from President Trump’s efforts. Strategists use all elements of national power to impact the environment: diplomatic, informational, military, and economic. China has signaled it will adjust its ways, enhancing domestic economic consumer markets, in order to ensure its ends, a resilient and regionally dominant economy, based on the external environment. If China can successfully pivot away from a pure mercantilism economy to a more resilient, self-sustaining economy, U.S. strategists may calculate a diminishing effect of its pressure tactics.

Endnotes:

[1] Center for Strategic & International Studies. Online Event: The End of Chinese Mercantilism? YouTube.
https://www.youtube.com/watch?v=KQnyYbMPrBM&t=1080s

[2] Blanchette, J. & Polk, Andrew (24 August, 2020). Dual Circulation and China’s New Hedged Integration Strategy. Center for Strategic & International Studies. https://www.csis.org/analysis/dual-circulation-and-chinas-new-hedged-integration-strategy

[3] Davis, B., O’Keeffe, K, & Wei, L. (16 October, 2020). U.S.’s China Hawks Drive Hard-Line Policies After Trump Turns on Beijing. Wall Street Journal.

Assessment Papers China (People's Republic of China) Governing Documents and Ideas Patrick Knight Trade United States
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Options to Decrease Trade Tensions Between the U.S. and China

Editor’s Note:  This article is part of our Below Threshold Competition: China writing contest which took place from May 1, 2020 to July 31, 2020.  More information about the contest can be found by clicking here.

Rukhsar Azamee is a graduate student at the school of professional studies, New York University. She can be found on Twitter @RukhsarAzamee. Divergent Options’ content does not contain information of an official nature nor does the content represent the official position of any government, any organization, or any group.

National Security Situation:  The U.S. requires options to decrease trade tensions with China.

Date Originally Written:  July 2, 2020.

Date Originally Published:  October 28, 2020.

Author and / or Article Point of View:  This article is written from the U.S-China relations point of view. It elaborates on how the U.S. and China can decrease the trade tensions and how they can continue their collaboration in the future.

Background:  China’s economic growth in the last decades has started a new chapter in the international arena. After 9/11, America started the fight against terrorism in Afghanistan and Iraq[1] while China kept strengthening its economy. China became the world’s second-largest economy in 2010[2]. Currently, China is considered the world’s largest economy by the purchasing power parity (PPP). China’s Gross Domestic Product (GDP) by PPP is approximately $24.5 trillion, while America’s GDP by PPP is $20.5 trillion[3]. The 2017 U.S. National Security Strategy declared China as a competitor, and as a threat to the United States[4].

Recognizing China officially as a competitor is a policy shift for the U.S., the United States followed the “engagement” policy towards China’s rise under two assumptions in the past.  The first U.S. assumption was that a strong China would serve the interests of America, and the second assumption was that a prosperous China would share American values by fostering regime change. The United States had not considered China a threat to its future[5].

China started modernizing its military by investing in missile and other military technology. From 2005 to 2014, China increased its military spending by 9.5% per year. China invested heavily in cyber operations. The argument is that China has strengthened its military to deter America’s intervention in its neighbors and to resolve Taiwan’s status[6]. China’s president Xi Jinping, unlike his predecessors, seeks to establish China as a Great Power again[7]. The competition is between the U.S. and China, and both countries are trying to prevail.

After the 2016 election in America, professor Yang Qijing of Renmin University stated in his report, “Trump Wins, Immense Challenges for China” implying that President Trump would focus on U.S. domestic economic growth. Yang said that Trump administration would seek a protectionist approach towards China and the U.S. started a trade war with China in 2018 by imposing tariffs on the import of Chinese goods in the U.S.[8] The trade war has hurt U.S-China relations, but it has also damaged the global economy[9]. The International Monetary Fund’s officials encouraged both countries to decrease the trade tensions in its 2019 reports[10].

Furthermore, China’s top talent in artificial intelligence (A.I.) end up working in America. Fifty-four percent of Chinese A.I. students come to the U.S. for their A.I education and research and then stay to work at U.S. firms[11]. Cyberattacks, and A.I theft remain a challenge in U.S.-China relations. A report by the U.S. National Security Agency noted 600 instances of Chinese hackers stealing confidential information from U.S. companies from 2009 to 2013 and a cybersecurity firm named Mandiant presented documents of 115 attacks against the U.S. by the Chinese People’s Liberation Army (PLA) in 2013[12]. The Trump administration decided to cancel the visa of those students/researchers with ties with China’s military in 2020[13].

China is trying to form a new tributary system through the Belt and Road Initiative (BRI) project. Sri-Lanka, as an example, can demonstrate China’s expansionist ambition. In 2017, Sri-Lanka was unable to pay the loan taken from China under the BRI project. Sri-Lanka defaulted and signed a 99-years lease of its port to Chinese state-owned enterprises[14]. On the other hand, the Quadrilateral Security Dialogue among the U.S., Japan, India, and Australia was re-launched in 2017 to counterbalance China’s assertive policies in the indo-pacific region[15].

Significance:  The U.S. and China are the world’s two largest economies. The management of U.S competition with China will affect other countries’ policies towards China.

Option #1:  The U.S. embraces China as a Great Power, promote strategic economic engagement with China, and create frameworks that would regulate A.I and cyberspace for both countries.

Risk:  There are two risks. The first is that Japan, India, and Australia would work hard to stop China from becoming a Great Power[16]. The second is that China might seek global dominance after achieving regional power based on “Chinese dreams” or “great rejuvenation of the Chinese nation” strategy discussed by the Chinese president[17].

Gain:  The U.S.-China competition is different and it sets itself apart in two ways. First, China has not shown desires for global dominance, and while they have been expanding their presence in the neighboring islands in the Pacific, China has not shown an appetite for the use of military force to enhance its influence[18] (in contrast to Russia’s approach to the Balkans for example, or even the supply of weapons to Syria). Second, China is seeking regional dominance through debt diplomacy. Therefore, this option allows China to achieve its goal, and it de-escalates the tension among both countries by being strategically engaged.

Option #2:  The U.S. creates a veto power alliance against China within the Security Council of the United Nations. The veto power could block China’s foreign policies that do not meet international standards.

Risk:  There is a high likelihood that Russia would not join this alliance. Russia is more likely to side with China against the U.S. than join a three-way pact[19].

Gain:  Advanced nations with powerful economies blocking China would isolate it, putting pressure on China to change its foreign policies. Eventually, this option would ensure a peaceful international order by regulating China’s assertive actions, and it set a precedence for any rising powers to be mindful and comply with the international community in the future.

Other Comments:  None.

Recommendation:  None.

Endnotes:

[1] Four Scenarios for U.S.-China Relations and What They Mean for Japan
https://www.tokyoreview.net/2019/05/four-scenarios-us-china-relations

[2] China overtakes Japan as world’s second-largest economy
https://www.theguardian.com/business/2010/aug/16/china-overtakes-japan-second-largest-economy

[3] The world Bank – Open Data- “GDP, PPP (current international $) – China, United States”
https://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD?locations=CN-US

[4] 2017 U.S. National Security Strategy
https://www.whitehouse.gov/wp-content/uploads/2017/12/NSS-Final-12-18-2017-0905-2.pdf 

[5] What Went Wrong? U.S.-China Relations from Tiananmen to Trump- by James B. Steinberg
https://tnsr.org/2020/01/what-went-wrong-u-s-china-relations-from-tiananmen-to-trump

[6] The Chinese Military: Overview and Issues for Congress- Ian E. Rinehart -Analyst in Asian Affairs March 24, 2016
https://fas.org/sgp/crs/row/R44196.pdf

[7] Saving America’s Alliances- By Mira Rapp-Hooper, March/April 2020
https://www.foreignaffairs.com/articles/united-states/2020-02-10/saving-americas-alliances

[8] Towards Economic Decoupling? Mapping Chinese Discourse on the China–U.S. Trade War- by Li Wei
https://academic.oup.com/cjip/article/12/4/519/5650490

[9] US-China trade Dangerous miscalculations
https://www.economist.com/leaders/2019/08/08/dangerous-miscalculations

[10] IMF’s country reports/Article IV consultation 2019, Executive Board Assessment (China and U.S.)
https://www.imf.org/en/countries

[11] A U.S. Secret Weapon in A.I.: Chinese Talent
https://www.nytimes.com/2020/06/09/technology/china-ai-research-education.html

[12] International Law Norms, Actors, Process (Aspen Casebook Series) 5th – Jeffrey Dunoff (State Responsibility: Attributing Malicious Cyber Conduct)

[13] A U.S. Secret Weapon in A.I.: Chinese Talent
https://www.nytimes.com/2020/06/09/technology/china-ai-research-education.html

[14]H.R. McMaster, “How China Views the World,”
https://www.realclearpolitics.com/2020/04/19/how_china_sees_the_world–and_how_we_should_see_china_508340.html

[15] The US-Japan-India-Australia Quadrilateral Security Dialogue: Indo-Pacific alignment or foam in the ocean?
https://www.fiia.fi/en/publication/the-us-japan-india-australia-quadrilateral-security-dialogue

[16] The US-Japan-India-Australia Quadrilateral Security Dialogue: Indo-Pacific alignment or foam in the ocean?
https://www.fiia.fi/en/publication/the-us-japan-india-australia-quadrilateral-security-dialogue

[17] H.R. McMaster, “How China Views the World,”
https://www.realclearpolitics.com/2020/04/19/how_china_sees_the_world–and_how_we_should_see_china_508340.html

[18] Saving America’s Alliances- By Mira Rapp-Hooper, March/April 2020
https://www.foreignaffairs.com/articles/united-states/2020-02-10/saving-americas-alliances

[19] CHINA AND THE RETURN OF GREAT POWER STRATEGIC COMPETITION- by BRUCE JONES- P8
https://www.brookings.edu/wp-content/uploads/2020/02/FP_202002_china_power_competition_jones.pdf

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