Upside Down: Clyde Prestowitz on Reversing US Trade Policy

As the Biden Administration works to forge its own strategy and approach toward China, some experts are arguing for a more dramatic repositioning of US trade posture, including a return to a robust industrial policy – one that mirrors China’s own and attempts to create a more level playing field. The AmCham China Quarterly sat down with Clyde Prestowitz to discuss his new book, “The World Turned Upside Down: America, China, and the Struggle for Global Leadership”, to explore the future of engagement with China and lessons from the past.

Your book takes a realistic look at how rich countries have become rich and explains the early mercantilist, protectionist policies in the US and elsewhere that helped spur economic growth. You note that China is following this well-worn path, but distinguish the China story. Can you expand on this distinction?

Clyde Prestowitz: China has studied all of the previous players. They’ve studied Germany, the US, Japan, Korea, Taiwan, and Singapore. But what China has done is to add on top of that an authoritarian government that is run by a single party. So, in all of the previous cases, the countries that were practicing mercantilism, or “catch up” as the Japanese say, were all working with corporate entities that had a substantial amount of freedom and the ability for CEOs to make their own decisions. In the case of China, it’s much more targeted, and much more disciplined and pervasive – it’s a society-wide program. In some ways, I think that makes it more effective, and makes it run faster. It may also have some tendency to overdo, but it’s a hyped-up new model of the old mercantilist machine.

You note that a couple of decades ago there was an assumption that, by bringing China into global institutions, China would become a responsible stakeholder in the rules-based global order, and that this engagement would effectively liberalize China. Why do you argue that those assumptions were wrong and how should US engagement be redirected?

Clyde Prestowitz: The assumptions grew out of what America took as success. Free countries – the “free world” – had won the Cold War. In the post-World War II period, former enemies Germany and Japan, adopted the free market, democratic road, and that seemed to work pretty well for them. So, among American leaders, I think there was a lot of self-confidence – maybe naive overconfidence – that they had the answer to both growth and freedom. I think it’s also important to understand the extent to which we wanted to fool ourselves. We had a business community and a financial community who saw gold in China. Americans somehow saw China as the mother lode, if we could just get there and make it work. So there was huge pressure from business to get into China. Everybody from the academics to the businesses wanted to tell this great story about how freedom and free trade work together hand-in-hand to build prosperity and peace and so forth. Once business got heavily invested, there was enormous pressure to bring China into the World Trade Organization, in order to get away from the annual congressional votes on “most favored nation” treatment, and so that’s what happened.

Importantly, I think American leaders missed the lesson of Japan. We have adopted the same approach to China as we did with Japan in the 1980s when they were pursuing “catch-up” mercantilist policies, even though it wasn’t a particularly successful approach (because several major industries were lost to Japan that never returned to the US), and despite the fact that the US has a lot less leverage with China. Also, because China has allowed for foreign investment in a way that Japan never did and American businesses became heavily invested in China, we don’t have a united government-business front with China the way we did with Japan. On the contrary, American companies that are heavily invested in China are more responsive to China than they are to the US. I think that’s a big difference between Japan and China.

You argue for complete trade and financial decoupling from China, noting that investments in China feeds the government machine, which threatens US national security and economic stability. Unlike several other experts, you argue that the costs of decoupling are overstated. Can you talk us through this argument?

Clyde Prestowitz: I’m going to begin by turning the argument around. The U.S. Chamber of Commerce just released a big report estimating that the cost of total decoupling in dollars and cents is quite high. But here’s the thing: China just had the Lianghui (Two Sessions parliamentary meetings), and they announced they want to be self-sufficient by 2035. This drive for decoupling is not being driven by the West, by the free world; it’s being driven by China. If you’re a substantial corporate player, like a semiconductor company, China is a big market for semiconductor chips, and you’re making money there and clearly you’d like to hold that as long as you can. But the Chinese are telling you that they’re going to catch up to you and diminish your share in the Chinese market. So it’s not a question of “Will we decouple?”. It’s only a matter of when. So do you want to decouple on their terms or on our terms?

If you are in the business of artificial intelligence (AI), for example, it’s clear here also the Chinese are driving to equal you and replace you. It seems to me it is only good business to think about how you are going to face that down the road. Moreover, if you’re in AI, you know that your product is going to be used in China in ways that are contrary to your values as a company. And so it really gets to be a question of what do you love more – your soul or money? It’s not wise to be very dependent on China in industries and technologies that are central to national security and to the maintenance of a healthy democracy.

You’ve mentioned recent Chinese actions against Australia as foreshadowing the kind of expanding coercive power that China will assert against countries that seek to challenge it. What do you think these recent disputes tell us?

Clyde Prestowitz: I think even sophisticated people in the free world are unaware of the battle for power that is going on all the time beneath the surface. A few years ago, there was an agreement between the US and the Philippines for replacement of supplies, and China didn’t like it. So, suddenly, Filipino bananas started rotting on the dock in Shanghai. Nobody told the Philippines not to send bananas. Nobody went to the WTO. They just didn’t unload the bananas. When a missile detecting radar system was installed in South Korea, the installation took place on property that was owned by a South Korean corporation that had a big business in China. That business dried up overnight to express China’s unhappiness with Korea. If you’re a big country like the United States, you can maybe handle that a bit. But if you’re a smaller, less powerful country, it gets to be very painful and you mute yourself.

In your book, you propose strategies for countering this, and argue that the US should adopt a comprehensive industrial policy, not unlike China’s, with Made in China 2025 providing tips on how to rebuild US industrial policy. What are your top priorities for relevant structural reforms?

Clyde Prestowitz: One of the things I think the US should do is to impose a charge we call the market access charge. There is one product that is only made in America that is in great demand around the world – US Treasuries – and so we should put a charge on that. Any investment coming into the US that is going to build a new factory or something that will really produce, I would not charge it. But if it’s just coming in to buy houses or stocks, put a 3-4% charge on that incoming flow, and then invest that money in domestic infrastructure. That would be a big step toward evening out the balance of trade.

The second important point is that if you look at high-tech industries like semiconductors, it’s hard to understand why there is enormous production of semiconductors in Taiwan, South Korea, and China, but not so much in the US or in Europe. You can’t explain this on the basis of normal free trade theory, because these industries are not labor intensive. We need to create incentives for these high-tech industries to produce in the US. We need to look at the Economic Development Board of Singapore and do what they do. Go to semiconductor makers and say, ‘We’ll give you some land and it’s going to cost $12 billion, but we’ll put in $3 billion, or we’ll give you an easy loan, utilities at half price for 10 years, no taxes for 10 years’, and so on. That is exactly what the competition is doing, so we have to do the same.

How would this actually happen politically? Wouldn’t this be a monumental – and potentially impossible – task to get bipartisan buy-in on the types of reforms you are proposing? Or is there a possibility that fear of falling behind an adversary will be a powerful impetus for bipartisan action?

Clyde Prestowitz: It’s important to remember that industrial policy is not foreign to America. From 1815 until 1948, we were a champion at industrial policy. During World War II, our industrial policy was stronger than any country had ever seen. The US government ran the aircraft, rubber, and steel industries, and dramatically increased production and made technological advances. The semiconductor industry of the US owes its existence to the Defense Advanced Research Project Agency. It was the intervention of the US government in the late 1980s that prevented the Japanese from crushing the US semiconductor industry. There would also be no Boeing as we know it today without an industrial policy. So, we know how to do this – it’s more a matter of remembering. But, yes, every libertarian and dyed-in-the-wool free trader is going to be opposed to any government intervention. So there has to be some push or some springboard for that. In the American experience, that springboard has always been a national security threat. Before it was World War II, or the Cold War Soviets; now China is emerging as a national security threat. I think that we are going to see some serious industrial policy over the next four years.

“The World Turned Upside Down: China, America and the Struggle for Global Leadership” was published by Yale University Press in January 2021.