China's Economic Cold War on the United States

Better to fight an economic cold war now than a military hot war later

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Chinese worker bolts tire at the assembly line during a visit by German Chancellor Angela Merkel to the Daimler auto factory in Beijing, shortly after her arrival Thursday, Oct. 23, 2008 starting her official visit to China. She will also attend the seventh Asia-Europe Meeting (ASEM) to be held on Oct. 24-25

Richard A. D'Aveni is Bakala professor of strategy at Tuck School of Business at Dartmouth College. Strategic Capitalism, his fifth book, was just published. Professor D'Aveni is listed in the top 25 of the Thinkers 50, a global ranking of the top management thinkers in the world. See www.richarddaveni.com.

Read the recent report by Congress on China's Huawei Technologies and ZTE Corp. and you could be excused for a sense of déjà vu. It sounds like it came from the U.S.-Soviet era. One passage: "The opportunity exists for ... espionage by a foreign nation-state already known to be a major perpetrator of cyber espionage." 

Many are worried that Congress has gone too far. But the truth is it hasn't gone far enough.

Once the world admitted China to the World Trade Organization in 2001, we welcomed the country into our free-markets. We trusted the global economy would evolve toward free and fair trade. We then set our policies on cruise control, assuming the world would follow the U.S. model.

[See a collection of political cartoons on the economy.]

Instead, China got a hand on the steering wheel: It turned the rules of global business in its favor. We woke up to find a hijacking of our free-market system. China was manipulating its currency, subsidizing its firms, undermining nascent U.S. firms, erecting trade barriers, and stealing intellectual property. China was using its firms as instruments of state capitalism—it even coordinated them to monopolize critical resources such as steel and rare earths.

We are now at odds with China. We are essentially in an economic cold war. The Huawei report—a notable bipartisan effort—documents as much. After hollowing out many manufacturing industries—tires, consumer electronics, auto parts, steel—China has gone after tech-heavy industries like telecommunications.

The report focuses on national-security risks posed by Huawei and ZTE: spying via backdoor software implants, cyber attacks on key networks, and inserting malicious software in security systems. These are serious allegations: Imagine if China used Huawei equipment to shut down American water and electrical systems.

[See a collection of political cartoons on defense spending.]

But if we open both eyes, we can see the sun rising on a new reality: China has invented new economic rules to give it an edge. It is not pursuing Western capitalism. It never plans to.

After the Tiananmen Square massacre, Deng Xiaoping said China should "observe developments soberly, maintain our position, meet challenges calmly, hide our capacities and bide our time, remain free of ambition, never claim leadership." China has taken that approach politically and economically. By hiding its capacities, it had hoped not to wake the sleeping giant.

But the U.S. giant may finally awaken given the report's implications. Let me recast three recent developments to show how they fit the notion of an economic cold war.

[Read the U.S. News Debate: Should Congress Interfere with China's Currency Policies?]

Huawei's and ZTE's expansion. Huawei and ZTE had hoped to expand into the United States from places like Canada and the United Kingdom. This would foster American-style competition. But Congress has suggested Huawei's and ZTE's designs could be a ruse to pierce the integrity of the U.S. telecom system.

Bankruptcy of solar-panel makers. Critics blame the U.S. government for investing recklessly in renewable energy—especially the $527 million of loans to Solyndra. Though justified, the criticism ignores China's strategy to underprice and gut the U.S. solar-panel industry. Whatever its economics today, the industry figures prominently in future U.S. energy security.

Approval of Chinese bank expansion in the United States. The Federal Reserve in May gave unanimous approval for three state-controlled Chinese banks to expand in the United States. This gave China an opening to gather U.S. depositors' money to fund its economy—while gaining access to intelligence on U.S. corporate borrowers and an avenue for cyber warriors to cripple the U.S. banking system.

[See a collection of political cartoons on energy policy.]

It's time to expose China's real plan: To unseat the U.S. as a global leader, a strategy I detail in my book, Strategic Capitalism. The spin masters in China tell Americans otherwise, but we can't ignore recent history. Back in 2001 people thought China, by embracing capitalism, would move toward free markets and democracy. But it embraced what I call "strategic capitalism," a mix of free-market and state-managed capitalism integrated into a strategy to attack the U.S. economically and disrupt our competitive advantages.

Big businesses like Huawei are one result—and often serve, as Congress noted, as state-supported "national champions" for dominating global markets. Such firms defer to internal Communist Party committees, watchdogs that monitor their compliance with government requests.

[See a collection of political cartoons on Congress.]

Many U.S. leaders thought that if we could ride through an uneven patch with these companies, they would mature into American-style enterprises, participants in free and fair global markets. This was naïve. Huawei's proposed incursions are but further moves to weaken the United States.

It's a good thing that Congress has rung the alarm bells. The United States needs a strategic capitalism of its own—and before it's too late. Economic cold wars often evolve into military ones, and China already stirs up more trouble than we care to deal with in Iran, North Korea, Pakistan, and Syria. By fighting an economic cold war now, we head off something worse later: fighting a military one with a much richer and more powerful China.

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