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See also: “Fact Sheet: Limit, Leverage, and Compete”

The greatest geopolitical challenge in the 21st century will be how the United States—and the rest of the world—responds to the rise of China. China’s gross domestic product (GDP), when measured in domestic purchasing power (purchasing power parity), already surpasses that of the United States. It is now, by some measures, the dominant global economic power and is mobilizing that wealth to pursue its own vision for the international system. The central contest of this century will be between the U.S. model of political and economic development and the Chinese model of political and economic development. If China’s vision prevails—if it becomes the dominant power of the 21st century—there is a risk the United States and the world will be less free, less prosperous, and less safe. The United States does not need to engage China in a zero-sum Cold War to avoid this outcome. However, it does need to put its own ideas on the table internationally, advocate for that vision, reassert global leadership, and rectify a pattern of serious missteps at home.

The United States should be well-equipped to address the challenges China is posing, but it has been hindered by decades of strategic inertia. Since the early 2000s—when China joined the World Trade Organization (WTO) and the United States launched wars in Afghanistan and Iraq—the United States has pursued a strategy that is fundamentally flawed. Instead of channeling public resources to support American innovation and invest in American workers, Washington assumed the United States could coast on a combination of natural comparative advantages and status quo technology dominance, much of which stemmed from investments made decades earlier. That approach has not worked. China is investing heavily in emerging technology sectors—such as artificial intelligence and next-generation mobile communication—to successfully chip away at U.S. technology leadership and global market share. However, in the United States, many U.S. workers are unable to find good jobs in the information economy. In sum, the United States has lagged on the very areas of strength it needs to compete against an increasingly powerful China.

Over the past few decades, China funneled trillions of dollars into public education, public infrastructure upgrades, high-tech research and development (R & D), and global diplomacy. At the same time, Washington dialed back investments in those fundamental pillars of national strength—including, most importantly, the American people—and assumed the United States had enough of a head start to maintain its edge without the necessary investments at home.

The Trump administration has identified the growing China challenge and the risks it poses to U.S. security and prosperity. Unfortunately, the administration is pursuing a strategy that weakens and isolates the United States and makes the problem worse. The Trump administration’s approach to China suffers from two fundamental flaws: Economically, it is failing to enact the necessary policies at home to support U.S. workers and set the United States up to compete effectively in new technologies and markets. And, politically, it is withdrawing from its role as a global leader at the same time it is alienating potential allies and partners—who share similar concerns about China—instead of working with them.

If the United States maintains its current course, it will cede substantial ground to China. Economically, China will dominate key global markets and technologies and the high-paying jobs that go with them, forcing the United States down the value chain. China will continue to use its growing economic footprint to pursue political, military, and diplomatic goals that undermine U.S. national security, such as leveraging its role as a next-generation mobile telecom equipment provider to control global communication networks and push an authoritarian governance model for the global internet. On security issues, China’s growing assertiveness will continue to undermine the security balance in Asia, take advantage of new openings that Trump is creating to erode U.S. alliances, and increasingly directly threaten U.S. national security as it shrinks the military capabilities gap. On global challenges such as climate change and global public health, absent renewed U.S. leadership, China will have wide leeway to make minimal contributions while claiming that it is doing more than enough to fulfill its responsibilities as a great power.

To turn this dynamic around, the United States must address U.S. economic challenges head-on and invest in the fundamental drivers of economic prosperity and national security: public education, infrastructure, innovation, R & D, and diplomacy. Instead of acting unilaterally, the United States must reach out multilaterally to lead and build a united front with allies and partners. With those core fundamentals in place, the United States can then execute a strategy that limits China’s ability to exploit its openness; leverages China to contribute its growing capabilities in ways that benefit the global common good; and positions the United States to compete more comprehensively over the long term.

The goal of this strategy is straightforward: advance the country’s national interests and put the United States in the best possible strategic position regardless of how China acts. Ideally, China returns to a more peaceful and collaborative purpose, engaging in fair competition—instead of tilting the field—and using its growing military clout to pursue common objectives that other nations share. But as the United States continues to encourage China to change course, Washington must develop policies that respond to the realities of a more assertive China that is actively undermining U.S. interests around the world.

This report presents a new strategic framework—limit, leverage, and compete—as well as key measures the United States should take to begin implementing it. The first section explains how major political shifts in the United States and China put both countries on a trajectory that led to China’s re-emergence as a global power. It concludes by describing the strategic missteps—including a multidecade period of inertia and two wars in the Middle East—that have hindered the United States’ ability to compete against an increasingly powerful China. The second section lays out an alternative approach to China that will reverse the current trajectory. It recommends a new strategic framework that limits China’s ability to exploit U.S. openness; leverages China’s growing capabilities to address global challenges; and positions the United States to compete more comprehensively over the long term. The section concludes by explaining how this strategic framework—limit, leverage, and compete—will put the United States in a stronger position to respond to the realities of a more assertive China while providing ample off ramps to adjust if China chooses a more collaborative path. The third and final section makes specific recommendations about how each pillar of this strategy should be implemented, prioritizing investments in the United States’ network of democratic allies, its democratic values, and the unlimited potential of the American people.

Pillar One: Limit describes how China is exploiting U.S. openness to distort markets and exert influence over U.S. policy toward China. It offers specific policy measures the United States must adopt to limit Beijing’s ability to exploit open systems for China’s gain.

• Require Chinese firms to disclose their ownership structure and funding sources before entering the U.S. market
• Require disclaimers on direct foreign government propaganda
• Mandate transparency for U.S. educational and civil society institutions receiving Chinese government funding
• Overhaul the U.S. legal framework on foreign interference
• Stop allowing Chinese security services to operate illegally within U.S. borders

Pillar Two: Leverage argues that where China’s strategic intent aligns with U.S. and broader global interests, the United States should seek to leverage rather than limit Chinese initiatives. It offers specific policy measures the United States must adopt to leverage China’s growing capabilities to solve global challenges.

• Leverage China’s Belt and Road Initiative to support regional development needs
• Encourage greater contribution to humanitarian assistance and disaster relief
• Partner on global sustainability efforts
• Push China to meet its pandemic disease responsibilities

Pillar Three: Compete explains how China uses gray-zone tactics to strengthen its global position and exert influence over global rules and norms without triggering a proportional U.S. response. It argues that the United States must shift to comprehensive competition and double down on its own comparative advantages. It offers specific policy measures the United States must take to compete at full strength.

• Launch a national competitiveness initiative
• Fight back on trade in partnership with allies
• Launch a next-generation digital infrastructure initiative
• Network a new Asia-Pacific regional security architecture
• Make the necessary defense investments to ensure effective deterrence and defeat aggression
• Work collectively to uphold and defend democratic values
• Position U.S. policy for success

While China presents the most serious economic and security challenge to the United States in a generation, the good news is that, throughout history, the United States has always excelled and advanced when it faced a strong peer competitor. Although competition with China brings significant downside risks, it also provides a critical strategic opportunity for the United States to get its own house in order. U.S. leaders and lawmakers’ collective task now is to ensure that the United States puts in place a strategy that rebuilds the foundation of American strength at home and denies China easy wins. This report presents key policy recommendations for how the United States should implement each of these three parts of that strategy—limit, leverage, and compete—to advance U.S. national interests and put the U.S.-China relationship on a more competitive and stable trajectory.

When the United States first reached out to China to establish formal diplomatic relations in the 1970s, China was poor, isolated, and unable to project military power beyond its periphery. Washington expected China to grow more powerful over time and assumed the best way to advance U.S. interests was to bring China into the international system and create incentives for China to rise within that system—and abide by its rules—rather than operate outside of it. Washington paired that open-door approach with a beefed-up security architecture designed to deter China from using its growing military power against U.S. allies and security interests in Asia. This “engage and hedge” strategy reached its apex in 2001, when the United States shepherded China’s entry into the WTO. Over the following decade, major political shifts in China and in the United States began to lay the groundwork for the China challenge the United States faces today.

Shortly after China joined the WTO, Beijing began to reassess the nation’s economic path. China’s piecemeal market reforms benefited some interest groups more than others, and by the early 2000s, the losers were getting restless. China’s authoritarian regime does not provide effective channels for citizens to voice discontent; when frustrations are high, citizens join forces for collective protests that, from Beijing’s perspective, could easily spiral out of control. From the mid-1990s to the early 2000s, collective protest incidents rose from less than 10,000 per year to nearly 60,000 per year.¹ Beijing feared the escalating unrest could coalesce into a massive social movement on par with the color revolutions that swept the former Soviet Union.² At the same time, Chinese leaders also began to detect early signs that China’s development model—based primarily on low-value-added manufacturing and heavy-infrastructure investment—would soon run out of steam. The only way to keep growing was to shift into higher-value-added production. In the tech sector, for example, in order to manufacture and sell DVD players, Chinese companies had to rely on core technology from Hitachi, Toshiba, and other foreign patent holders, and they had to fork over one-third of the per-unit sales price in licensing fees.³ Beijing wanted Chinese companies to develop their own technology standards so they could shift from paying royalty fees to receiving them. But developing a knowledge economy based on the Western model—with broad access to information, a strong court system for intellectual property enforcement, and profit-driven financing—would require Beijing to relinquish more control over the nation’s economy and society. Instead of taking that risk, Beijing decided to follow a different path: Reassert state control over key sectors of the economy and use those controls to restructure global markets in ways that would benefit China at its trading partners’ expense.

China’s economic pivot amounted to a rejection of the bargain Washington thought it struck with Beijing when it brought China into the WTO. The United States knew that welcoming a massive developing economy into the global trading system would inevitably pull manufacturing jobs from the United States to China. However, Washington expected that as China developed, the United States would gain new opportunities to export higher-value-added products to Chinese consumers, balancing the initial losses.

What Beijing decided to do in the mid-2000s was to own both ends of this deal: Use the early manufacturing shift to gain access to U.S. technology and then use state funding and preferential regulatory policies—such as forced technology transfer—to help Chinese companies develop their own homegrown versions of higher-end U.S. products.⁴ Once Chinese companies figured out how to replicate what their foreign partners were producing, Beijing then provided financial subsidies to help them sell the products at below-market costs, driving the original U.S. firms out of business. This pattern was particularly prevalent in “strategic emerging industries” where, in Beijing’s view, the gap between China and developed nations was not yet insurmountable.⁵

In the wind industry, for example, Beijing used localization rules to force foreign companies to hand over turbine technology, which China then used to build its own manufacturing sector. In 2005 Beijing issued a notice stating that, in order to “speed up the pace of development of the domestic manufacturing of wind power equipment,” Chinese regulators would no longer grant construction permits for wind farms that did not source at least 70 percent of their content from domestic firms.⁶ To stay in the market, foreign firms—such as Spain’s Gamesa—trained Chinese firms to serve as their component suppliers. The Chinese government then provided hundreds of millions of dollars in subsidies to help newly trained Chinese suppliers gain market share at home and around the world.⁷ In 2005 Spain’s Gamesa had a 35 percent market share in China.⁸ By 2010, after Gamesa trained more than 500 Chinese companies to make turbine components, its market share had decreased to 3 percent in China, and Chinese firms were providing components for 85 percent of China’s domestic market and nearly 50 percent of the global market.⁹

To be sure, smart policy also played a critical role in moving China up the value chain. In addition to pilfering trade secrets from international partners, China’s indigenous innovation initiative also directed trillions of dollars to build up the nation’s education, infrastructure, and R & D capabilities. Smart policy investments in those sectors—the pillars of a nation’s innovation ecosystem—made it possible for China to significantly upgrade its domestic science and technology capabilities. In 2000, China had 1,041 colleges and universities producing 950,000 graduates per year; as of 2017, China had 2,631 colleagues and universities producing more than 7 million graduates per year.¹⁴ Between 1992 and 2011, China spent 8.5 percent of its GDP on public infrastructure—roads, rail, telecommunication, utility, airport, and seaport projects—that improved production efficiency and connected its citizens to the global economy.¹⁵ In contrast, the United States spent just 2.6 percent of its GDP on public infrastructure during that same time frame.¹⁶ Since 2000, China has increased its R & D spending by around 18 percent per year, doubling its gross domestic research and development expenditures from less than 1 percent of GDP in 2000 to 2.1 percent in 2017.¹⁷ In contrast, U.S. spending remained relatively flat—the United States spent 2.6 percent of its GDP on R & D in 2000 and 2.78 percent in 2017.¹⁸

Inertia and the Great Recession

From the beginning, Beijing’s goal was to catch up with and eventually surpass the United States. The United States helped China along by entering a multidecade period of inertia. On the foreign policy front, at the same time China joined the WTO, the United States launched two wars in the Middle East and South Asia that made it harder to invest in economic development at home or focus strategically on forward-looking diplomatic engagement in Asia. Unlike the Cold War, the war on terror did not force the United States to face off against a peer economic competitor, so Washington did not have a foreign policy imperative to upgrade the nation’s domestic economic capabilities. When global manufacturing began to shift to China following its WTO entry—pulling critical jobs out of the United States—Washington did not significantly ramp up domestic investments in education, public infrastructure, or R & D to help develop new, higher-tech industrial sectors and high-paying jobs to replace those lost to China.

For both nations, the 2008-2009 global financial crisis was a major inflection point. On the U.S. side, one-fifth of American workers lost their jobs, and less than half have found new jobs with salaries equivalent to those they had before the crisis.¹⁹ In China, Beijing used a combination of capital controls and a $586 billion stimulus to avoid following the United States and Europe into recession.²⁰ China weathered the crisis so well that many Chinese observers viewed it as an indicator that China’s state-directed economic model was superior to Western-style liberalism. The crisis also convinced many in Beijing that U.S. decline was officially underway, China was ascendant, and it was time for China to step forward and play a much bigger leadership role at the international level. After Xi Jinping took over as China’s top leader in 2013, he made expanding China’s global influence a top priority.

The United States was slow to recognize the degree of change underway in China. Three factors muddied the waters. First, China was beginning to leverage its new capabilities to support global objectives the United States shared, such as joining forces with the Bush administration and other G-20 nations to prevent global economic collapse in 2008 and working with the Obama administration to secure the Paris climate agreement and the Iranian nuclear deal in 2015. Those successes produced positive examples of U.S.-China partnership that, at a macro level, counterbalanced some of the concerns growing in other areas. Second, for U.S. businesses, the picture was mixed. U.S. exports to China grew 86 percent between 2007 and 2017, and those exports support 1 million U.S. jobs.²¹ For every U.S. company sounding the alarm about Chinese malpractice—such as American Superconductor Corp., which spent years pursuing restitution after China’s Sinovel stole its wind turbine technology—there was another company describing China as a land of opportunity.²² Third, there was—and continues to be—a divide in China, with many experts and even senior party and government officials calling for more liberal economic reform. In November 2013, Xi Jinping released a sweeping 60-point economic reform blueprint that promised to let “market forces play a decisive role” in the economy.²³ There were many hopeful reformers inside China reading that plan as an indicator that Xi’s escalating political crackdowns were primarily aimed at breaking up powerful interest groups blocking liberal economic reform. Those hopes were dashed in 2015 when China’s stock market crashed and the new leadership responded with heavy-handed interventions. These included banning major shareholders from selling their stocks and threatening to arrest those who did not comply; arresting journalists who shared negative information about the market; and using more than $200 billion in state funds to prop up the market through ad hoc purchases.²⁴ Anti-market voices in Beijing utilized the crash to silence liberal reformers, arguing that market forces bring unacceptable political risks and the Chinese Communist Party (CCP)—not the markets—must play the decisive role going forward.

By 2015, alarm bells were sounding on multiple fronts.²⁵ On the economic front, U.S. businesses were facing a host of new Chinese market regulations that imposed new barriers and tilted playing fields to favor Chinese firms over foreign competitors. Beijing released the “Made in China 2025” plan, which called for Chinese firms to supplant their foreign competitors in China and in global markets and provided financial and regulatory support to help them do so. Beijing also implemented a new cybersecurity law requiring foreign firms to store data on mainland Chinese servers and hand over proprietary source codes and other trade secrets to pass a new national security review process—measures that exposed U.S. data and intellectual property to potential misuse and theft.²⁶

On the security front, there was growing evidence that China intended to exercise its strength in destabilizing ways. The United States and the world began to pay sharper attention to China’s actions in the South China Sea.²⁷ China had made significant progress constructing a massive man-made island in disputed waters, and those images served as an impossible-to-ignore metric for China’s military ambitions.²⁸ When the Philippines exercised their legal rights under the U.N. Convention on the Law of the Sea (UNCLOS) to contest China’s behavior, Beijing worked to undermine the U.N. tribunal adjudicating the case.²⁹ In the East China Sea, China increased its air and maritime operations around the Senkaku Islands. The United States also uncovered two massive Chinese cyberattacks in 2015: an attack on the U.S. Office of Personnel Management, in which China obtained 4 million federal government personnel files, and an attack on health insurer Anthem Inc., in which China obtained private data on 80 million Americans.³⁰

On the political front, Beijing adopted a new foreign nongovernment organization (NGO) management law that requires U.S. think tanks, business associations, and other NGOs to apply for a permit from the Chinese police before visiting China for meetings and other “temporary activities.”³¹ These changes unfolded against the backdrop of a much broader domestic political tightening, in which the CCP enacted sweeping new controls over Chinese society, reducing the space for Chinese citizens to voice or hear independent views.

When U.S. officials tried to push back against these measures, they discovered they did not have effective tools to do so. The U.S.-China Strategic and Economic Dialogue (S&ED) proved to be much more effective at highlighting areas of agreement than addressing disagreement. Annual S&ED meetings produced hundreds of Chinese commitments to address U.S. trade and investment complaints, but there was no formal mechanism to track implementation or to hold China accountable.³² Beijing made the same promises year after year, convincing many U.S. officials that China primarily saw the S&ED as a mechanism for keeping Americans running on a hamster-wheel of meetings, diverting energy they might otherwise use to pursue retaliatory actions that could impose real costs on China. U.S. companies could pursue anti-dumping or countervailing duty remedies through the U.S. Department of Commerce, but those remedies only apply to Chinese goods sold in the U.S. market. Companies could also petition the U.S. government to pursue cases against China at the WTO—something individual companies cannot do themselves—but that approach is slow, costly, and risks Chinese retaliation. Beijing frequently threatens to kick companies who file formal trade cases against China—or even just voice their complaints publicly—out of the Chinese market. To avoid that, many do not bother, choosing instead to accept their losses as a cost of doing business in China. Over time, those losses add u