The Case for Getting Much Tougher on China

A provocative new book argues that China is deliberately undermining the U.S. economy.

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It's a sleeper issue in this year's campaign, since the state of the economy is most voters' biggest concern. But U.S. relations with China remain a touchy and even explosive matter, and China may have more to do with the stagnant U.S. economy than a lot of people realize.

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Republican presidential nominee Mitt Romney accuses China of using illegal trade practices to keep export prices artificially low, which robs American jobs. He frequently bashes President Obama for being soft on China and says that adopting tougher policies will be a "Day One" priority if he's elected.

The Obama administration, sensitive to Romney's charges, recently lodged a formal complaint with the World Trade Organization charging China with illegally subsidizing autos and auto parts to undercut American and global competitors. President Obama has been touting that move and other efforts to blunt China's economic power while campaigning in states like Ohio, where thousands of auto workers reside.

Now, a provocative new book argues that both men, despite tough talk on China, may be vastly underestimating the damage China is inflicting—deliberately--on the U.S. economy. In Strategic Capitalism: The New Economic Strategy for Winning the Capitalist Cold War, Richard D'Aveni, a professor at Dartmouth's Tuck School of Business, argues that China's brand of state-run capitalism is trouncing the more laissez-faire variety practiced in America and other developed nations. "The whole country's in denial about the shift of jobs from West to East," D'Aveni told me when I met with him recently in New York. "The United States doesn't have a real strategy for dealing with that."

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Unlike other hard-liners who support a tougher stance against China, D'Aveni—an influential business strategist and consultant--doesn't argue for a fixed set of policies drawn from an established political playbook. Instead, he advocates a series of pragmatic steps meant to counter China's strategic goals and boost or revive American industries. Such policies should change, he says, as circumstances change.

The starting point, D'Aveni argues, is to recognize that American capitalism is poorly suited to the kind of global competition that's evolving today. China's brand of "managed capitalism," he says, allows China to forge capitalist enterprises backed by state power and meant to advance national goals. There's ample evidence this strategy works. China has become the world's manufacturing powerhouse because Chinese authorities established that as a goal, for instance. And China has quickly dominated industries deemed top national priorities, such as wind and solar energy.

The United States, meanwhile, has had a long aversion to any kind of federal industrial or economic policy, and Americans these days seem less supportive than ever of centralized government solutions. The result is ongoing political combat over regulation, focused more on lobbying battles in Washington than on what kinds of policies would genuinely benefit the U.S. economy.

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Big U.S. multinational firms, meanwhile, once a source of national pride, now invest and hire everywhere in the world, whether that benefits the U.S. economy or not. "Our multinationals aren't really ours anymore," D'Aveni says. "They're more like stateless entities with no loyalty to anybody. But the United States rescues them if they get into trouble. There's a problem with that picture."

His solutions begin with an urgent effort to fix Washington's finances and make the nation far less dependent on foreign creditors such as China. Then he'd identify domestic industries that need to be strong in order for the U.S. economy to grow and American workers to prosper. That would set the stage for a new set of policies necessary to support those industries and keep the majority of the wealth they generate in the U.S. economy.

The federal government is probably the only institution that could do this, which puts D'Aveni at odds with many business leaders who dread the notion of an economy guided by Washington. Yet D'Aveni points out that corporations themselves manage their own portfolios of properties and investments with the same sort of centralized strategy he's advocating for the overall economy, instead of letting pure market forces determine the fate of their businesses.

D'Aveni would go one bold step further, by establishing deliberate (though perhaps stealthy) efforts to undermine the Chinese economy. One way to do that, he says, would be to somehow bolster the older factions inside China's Communist Party, since they're more suspicious and fearful of capitalism and inclined to steer China in a different direction than it's going now.

It's a safe bet you won't hear any proposals like that from Romney or Obama. Despite occasional complaints over trade practices, few policymakers or business leaders see China as a direct adversary, the way the Soviet Union was during the Cold War; it's more like a "frenemy" whose trade we value, even if some of its policies are antagonistic. And many China experts disagree with D'Aveni, arguing that the interests of China and the United States are mostly aligned, so that what benefits one often benefits the other.

Yet the U.S. economy clearly seems to be in the midst of a permanent slowdown, with no convincing answers about why it's happening or what anybody should do about it. If it continues much longer, D'Aveni's ideas might start to seem less provocative and more mainstream.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.