Disorderly Conduct

Executive Summary

To gauge the health of the U.S.-China economic relationship, one can turn to the words of Chinese Foreign Minister Wang Yi, who remarked in March 2024 that U.S. “tactics to suppress China . . . [were] reaching a bewildering level of unfathomable absurdity.”¹ Rhetorical flourishes may be the one bright spot in the relationship. As tensions rise over economic restrictions and policies on both sides, economic relations have become a worrisome source of instability in the overall geopolitical relationship. The economic relationship has become increasingly dominated by security concerns, and integration is seen as not an opportunity but a risk to U.S. interests and values. The United States must develop a strong, pragmatic strategy for advancing its economic and security interests within the U.S.-China economic relationship, accounting for the fact that the security competition is now playing out across the economic landscape.

To inform the development of an effective U.S. strategy for the economic relationship with China in the context of rising securitization, the United States must learn from its past attempts to advance its economic and security interests in the relationship. The first section of this report, “Where have we been?” examines past U.S. approaches, along with the challenges of pursuing similar policies in today’s geopolitical context. The second section, “Where are we going?” distills lessons from these past approaches and defines a new strategy for the United States, offering recommendations to implement it.

Broadly speaking, prior U.S. strategies can be divided into two camps. First, the United States sought to bring the People’s Republic of China (PRC) into the rules-based order and incentivize it to be a responsible stakeholder.* When that failed, U.S. strategy pivoted to one of imposing costs on the PRC and taking actions to constrain behaviors that threatened U.S. economic security interests. Within those broad strategies, U.S. policymakers have pursued four main approaches, in differing combinations and intensity, all of which involve associated challenges. They are:

Play by the rules: The intention of bringing the PRC into the rules-based international system was to create external pressure that would align PRC actions with U.S. economic and security interests. Key efforts under this approach included the U.S. support for the PRC’s accession to the World Trade Organization (WTO) and the later U.S. attempts to negotiate a bilateral investment treaty. Challenges for the approach include the fact that rules have a weak ability to constrain state behavior in a geopolitically contested environment where national security risks arise from economic integration.

We need to talk: In light of increasing complexity in the bilateral relationship, U.S.-PRC dialogues were intended to identify and advance mutual interests while providing a regular forum to attempt to resolve disputes. This is seen in the Strategic Economic Dialogue (SED) in the Bush administration and the Strategic and Economic Dialogue (S&ED) in the Obama administration. In other contexts, such as ongoing talks under the Biden administration, dialogues have served primarily to communicate the rationale for U.S. policy actions in an attempt to put a floor under the bilateral relationship.² Challenges to this approach include that commitments made in a dialogue process may not be enforceable, the meeting can become the deliverable, and the dialogue process cannot alter underlying geopolitical shifts.

Defense is the best offense: Defensive approaches relied on domestic U.S. authorities to counter specific harms created by PRC practices and policies. The United States has a wide range of economic tools (e.g., tariffs and trade remedies) as well as national security–based tools (export controls and the Committee on Foreign Investment in the United States [CFIUS] process for conducting national security reviews of foreign investments), all of which have been used with greater frequency over the past decade. Challenges when using these tools include the disruptive and potentially escalatory nature of defensive approaches, and the lack of clear frameworks to assess the effectiveness of defensive policies. Additionally, relying on unilateral approaches can create friction within potential economic alliances. In the United States, defensive approaches have often suffered from a blending of economic, national security, and values concerns, eroding the legitimacy of the national security argument.

Have more friends: These strategies centered on efforts to shape the PRC’s external environment through the negotiation of ambitious trade and investment agreements with major trading partners, with the goal of increasing economic integration with close partners, creating indirect pressure on the PRC to level up to higher standards, and developing common approaches to address concerns with nonmarket economies. Such an approach is challenging because traditional ways of shaping the external environment have not directly addressed securitization of the U.S.-China economic relationship. U.S. domestic political realities impose a considerable constraint on the use of trade policy as a strategic tool.

Defining U.S. Strategy and Interests

The United States must define a new strategy for advancing U.S. economic and security interests within the bilateral economic relationship with China. The objective of this strategy should be for the United States to lead in creating and maintaining a new global economic order in which the efficiency and innovation of open markets are pursued side by side with the establishment of new norms for government interventions related to hard power and resiliency interests. The United States should pursue this objective in varying ways, depending on the U.S. interest at stake.

• Hard power interests: Seek overmatch in areas of economic activity that implicate the balance of hard power between the United States and the PRC
• Resiliency interests: Reduce vulnerabilities in areas of economic activity with impacts on U.S. resiliency
• Commercial interests: Pursue a level playing field for commercial competition

The U.S. strategy should include three pillars: bilateral dialogue, norm building outside of the bilateral relationship, and institution building for economic security purposes.

BILATERAL DIALOGUE ON THE NARROW SCOPE OF MUTUAL U.S.-PRC INTERESTS

The United States should continue to pursue dialogue with the PRC to advance a narrow range of mutual interests. These mutual interests include managing a derisking process that avoids escalation in the overall relationship, promoting global economic stability, and maintaining mutually beneficial commercial ties that do not implicate hard power or resiliency interests. While expectations for specific outcomes from dialogues should be kept low, ongoing dialogues can serve as an important mechanism to gain insights into the PRC’s opaque political system and to maintain the upper hand in international narratives regarding who is to blame for worsening tensions.

NORM BUILDING ON THE APPROPRIATE ROLE OF GOVERNMENT INTERVENTION IN THE ECONOMY IN PURSUIT OF HARD POWER AND RESILIENCY INTERESTS

A central challenge of the current global economic order is the lack of clear norms for when governments should intervene in the economy in pursuit of hard power and resiliency interests, and of a consensus view on which economic activities would implicate those interests. This void risks destabilizing the global economic order, as well as leaving the United States vulnerable to accusations that it acts for protectionist rather than national security objectives. The United States cannot build global norms if it does not have a clear sense of what its own domestic practices and norms are. To build norms at home, it should:

• Make clear distinctions between hard power, resiliency, and commercial interests and the policies that are appropriate in pursuit of each;
• Establish a consistent practice of acting within the expressed norm and avoid transactional or politically motivated actions that deviate from the norm; and
• Build additional domestic policy tools related to U.S. resiliency interests to provide pathways to protect these interests without overusing the current set of national security–based tools.

The United States must also advance the norms-building process internationally. It should:

• Engage in sustained diplomatic, technical, and leader-level outreach to advance alignment with international partners and allies on the desired norms related to the appropriate role of government interventions in the economy in pursuit of hard power and resiliency interests;
• Consider the role of international organizations such as the Organization for Economic Cooperation and Development (OECD) in supporting the norms-building process; and
• Conduct robust public diplomacy to engage stakeholders beyond government counterparts on the importance of norms and to advance U.S. messaging on U.S.-PRC economic and security issues.

INSTITUTION BUILDING FOR A NEW GLOBAL ECONOMIC ORDER

The United States should have a long-term aim of establishing new institutions that support the emerging global economic order as it pertains to hard power, resiliency, and commercial interests. This should complement the norms-building process, or in some cases it may be the outcome of emerging agreement on and desire to institutionalize norms.

The United States must make the best of the WTO, recognizing both its limitations to address core U.S.-PRC concerns and its critical importance to countries that rely on multilateralism as the primary mechanism to protect their economic interests. To this end, the United States should:

• Advance reforms at the WTO to create “off-ramps,” or permissible deviations from WTO rules other than the essential security exception, with the aim of providing governments pathways to advance resiliency interests while minimizing the WTO’s role in disputes related to hard power interests; and
• Channel U.S.-PRC disputes into the U.S.-PRC bilateral trade agreement (a.k.a., the Phase One Agreement) as a mechanism for more effective dispute resolution outside the WTO.

To update or develop institutions that enable cooperation with likeminded countries, the United States must:

• Negotiate a new multilateral regime for cooperation on export controls and investment security policies; and
• Advance economic security agreements that promote integration of critical sectors across close partners and allies, and that involve commitments on positive (e.g., market access) and defensive (export controls) trade tools.

Finally, to reorient its bureaucracy toward economic security objectives, the United States must:

• Establish an economic security strategy; and
• Create a dedicated executive branch office or function for continually evaluating U.S. progress on this strategy, including by assessing the effectiveness of particular economic security policy actions and programs.

Introduction

Economic and national security objectives are continually in tension today. Rather than treating economic and national security issues as distinct tracks, the two areas of policy are increasingly merging. This has profound implications for the U.S.-China economic relationship, which is at once one of the most consequential economic relationships globally and also the most geopolitically complex.

When the process of engagement began in the late 1970s, the U.S.-PRC relationship was in a fundamentally different geopolitical place. At that time, an underdeveloped China was still reeling from more than a decade of internal instabilities and was considered too weak to pose a challenge to the United States. Washington needed Beijing to counterbalance the Soviet Union, and the Chinese leadership under Deng Xiaoping assessed that a sound economic relationship with the United States, combined with gradual integration into the world economy, was the path toward fast modernization. For the next 30 years, despite fluctuations in the bilateral relationship, the United States generally welcomed a growing Chinese economy connected to the established global trade and economic order, while encouraging market-oriented reforms in China.

By nearly any metric, however, the economic relationship between the United States and China has become increasingly securitized over the past decade, as U.S. policymakers have sought to address a growing range of security concerns with the PRC. The PRC’s turn toward hardening authoritarianism at home and more aggressive foreign policy along its periphery began late in former Chinese Communist Party (CCP) general secretary Hu Jintao’s tenure.³ These trends—as well as a particular focus on modernization of the People’s Liberation Army, the PRC’s military-civil fusion strategy, and an industrial policy aimed at dominating advanced technologies globally—all accelerated under CCP General Secretary Xi Jinping. U.S. concerns intensified over PRC aggression toward Taiwan, in the South China Sea, and on a range of other potential flashpoints that could spark a direct confrontation.

At the same time, the bilateral economic relationship continued to grow, as U.S. firms pushed for access to the large domestic Chinese market and Chinese firms became leaders in global export markets. Security risks rose in tandem with economic ties. In response, the United States has imposed an increasing number of national security–based restrictions on the economic relationship, with the goal of ensuring that flows of U.S. technology and capital do not support China’s military modernization or otherwise enable PRC actions against U.S. national security and foreign policy interests. Alignment between the United States and key allies on the risks the PRC presents has fluctuated, as partners seek to manage their own balance of security and economic interests and hedge against perceived volatility in U.S. politics.

The shock of the pandemic and the harsh lessons learned from Russia about the risks of economic interdependence have heightened the urgency of developing new strategies for managing the risks associated with the U.S.-China economic relationship. Prior approaches were largely biased toward openness and integration, with the expectation that deviations in the name of national security would remain exceptional. That dichotomy no longer holds in a geopolitical context when derisking, resiliency, and hard power interests motivate government interventions in the economy at a greater scale. These trends are not limited to China, but it is in the bilateral U.S.-China relationship that they are most acutely felt. U.S. policy must adapt, and this paper seeks to provide a path forward to define a U.S. strategy for the U.S.-China economic relationship that is fit for today’s geopolitical turbulence.