What A Real Anti-China Trade Strategy Would Look Like

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Of course, this problem is even more acute for America's allies, like Japan and Korea. Smaller countries compensate by finding highly specialized niches to be competitive in. But this leaves their supply chains and defense-industrial bases at a disadvantage; China, because it's so huge, can more easily create a fully self-sufficient manufacturing ecosystem (which it has, in fact, spent the last two decades trying to do).

The only possible way for China's rivals to match it in size is to gang up. And in this case, what“gang up” means is to form a free trade zone amongst each other, with zero trade barriers between them.

If the US had zero trade barriers with Europe, Japan, Korea, India and the countries of Southeast Asia, those countries wouldn't become exactly like one huge“domestic” market. There would still be language barriers, geographic distance, exchange rate fluctuations, and national regulatory differences that end up accidentally restricting trade.

But it would go a long way toward allowing American manufacturers - and European, Japanese, Korean, Indian, and Southeast Asian manufacturers - to attain the sort of economies of scale and supply-chain networks that China enjoys within its borders.

Basically, to balance China, you'd need to start thinking of“Non-China” as a single vast economic entity. If this sounds familiar, well, it should.

Two trade treaties, the TPP with Asia and the TTIP with Europe, would have gone a long way toward creating this sort of common market among non-Chinese manufacturing nations. Both were killed by Trump. But in any case, if you want to economically balance China and reduce economic dependence on China, this is the first thing you'd do.

Tariffs on Chinese intermediate goods, and data collection on supply chains

The next thing you'd need to deal with is supply chain vulnerabilities among non-Chinese nations. The ideal would be to make sure that non-China has the ability to make everything it needs to make, so that A) non-China can be self-sufficient in case of a major war, and B) China can't dominate the nations of non-China by exerting pressure on key supply chain vulnerabilities (like it's doing right now with rare earths).

One thing you need here is targeted protectionism. The idea is to prevent China from being able to put non-China manufacturers out of business with a sudden flood of subsidized exports. For example, suppose China decided to destroy the American, Japanese, Korean, and Taiwanese chip industries by unleashing a massive flood of subsidized computer chips. The only way to prevent this strategy from working is protectionism.

So you need the ability to put up targeted trade barriers very quickly, in sectors that China is making a bid to conquer. Note that this is very different from Trump's tariff policy - it's far more targeted in terms of industries, it's only on China, and it has nothing to do with trade deficits or other macro imbalances. It's more like the tariffs Biden put on some Chinese products.

But there's a problem here, which is that standard tariffs don't hit intermediate goods. If China makes a phone, takes it apart, then ships the pieces to Vietnam, where Vietnamese workers snap it back together and sell it to America, our tariffs think that this phone is“made in Vietnam.”

If laptops made in Mexico and sold in America contain Chinese chips, those chips aren't subject to the tariff rate on Chinese goods - they're only subject to the tariff rate on Mexican goods. Stephen Miran recognizes this fact in his 2024 note .1

The solution to this is to apply tariffs not based on the country where something was finally assembled but to the countries where the value was added. Doing this would allow us to put tariffs on Chinese intermediate goods like computer chips and batteries, in addition to final goods like phones and cars.

Of course, applying tariffs in this way would require much better data collection. We'd need to figure out where the components in each imported good originated. This would require, among other things, a small army of bureaucrats.

Industrial policy for strategic industries

In order to give Non-China a self-sufficient, robust manufacturing ecosystem, we'd need to do a lot more than just stop China from poking new holes in that ecosystem. We'd have to fix the existing holes as well. For example, China already makes most of the world's batterie and processes most of the world's rare earths . Those are vulnerabilities that need to be dealt with.

The way to do that is industrial policy - we need to start making things that we currently don't make (or that we make very little of). Maybe given the right long-term incentives, those industries would reappear in non-China on their own, but giving them a helping hand fixes the problem much more quickly.

And sometimes, industrial policy can help create robustness within non-China as well. For example, if Taiwan gets invaded or bombed by China or struck by a massive earthquake, the world's chip supply could be seriously damaged because most of the factories of TSMC - the world's dominant chipmaker - are in Taiwan. Thus, it makes sense to pressure or cajole TSMC into moving some of its factories to safer locations - the US, Japan, and elsewhere.

This was the cornerstone of Biden's approach to industrial policy, with the CHIPS Act for chips and the Inflation Reduction Act for batteries and renewable energy tech. But this was just an exploratory phase - just two sectors out of many.

Other industrial policies should be added for other sectors - drones, electric motors, machine tools, robots, telecom, and of course rare earths and mineral processing. They don't have to be as big and splashy and expensive as the CHIPS Act and IRA, but they should be in the mix.

Of course, it's not known whether Biden's approach to industrial policy - which is similar to China's, though smaller in scale - is the best one. In an interesting post , Balaji Srinivasan suggests an alternative strategy based on government-organized industry consortia like SEMATECH in the 1990s . This is similar to how Japan did many of its industrial policies during its boom years.

In any case, industrial policy should make a comeback if the US and the broader Non-China world wants to compete with China.

Smart pro-investment policies here at home

There's one more big reason China is such a manufacturing superpower - it has structured its government policies around building lots of factories. That pro-investment policy has introduced macroeconomic distortions, but it has also allowed Chinese manufacturers to iterate quickly, to expand the ecosystem of suppliers, to scale up, and generally to do all the other things that make manufacturing work.

I'm not suggesting that the US allow wholesale pollution of its rivers or kick millions of people off of their land in order to build factories to compete with China. But over the past half century, the US, even more than other rich countries, has thrown up a vast thicket of procedural barriers that block the building of new factories. Simply eliminating many of these barriers would go a long way toward making American manufacturing competitive again.

To its credit, the Trump administration has actually been making some moves in this direction. For example, Trump has issued executive orders eliminating a bunch of rules regarding the implementation of NEPA, one of the biggest procedural barriers to development in the US Experts on the harms of NEPA are optimistic that this change could mean a significant weakening of NIMBYs' ability to block factories, housing, and other development projects.