Executive Summary
Under the guidance of paramount leader Xi Jinping, the Chinese economy has steadily weakened. It can no longer support the level of growth the nation came to expect in the three decades prior to his regime. Consequently, the People¡¯s Republic of China (PRC) can no longer muster the financial resources it needs to stimulate sustained growth that would pull it into the ranks of advanced economies.
China has severe structural problems: demographic decline; underfunded social welfare programs; severe pollution; and reliance on imported fuel, food, and mineral resources. Because of his suspicions, Xi has undermined key private sectors, industries, and prominent executives, and these actions have inhibited the Chinese Communist Party¡¯s (CCP) ambitions to achieve self-sufficiency in advanced technology industries. His attack on key digital service industries hinders a transition to a services-based economy. A severe crisis in China¡¯s crucial real estate sector threatens the financial stability of its banks and public finances.
High youth unemployment, the collapse in a real estate sector that harbored 70¨C80 percent of family wealth, Xi¡¯s growing authoritarian surveillance state, failure to address structural problems like inadequate education and social services, and the post-Covid global economic slowdown threaten Beijing¡¯s ability to maintain popular support.
Poor social services and faltering real estate contribute to low consumption as Chinese people save more, which compromises consumers¡¯ ability to stimulate growth. Because China produces too many goods and consumes too little, the country dumps products on global markets, so trading partners enact countermeasures to limit Chinese exports.
Globally, Xi¡¯s attempts to undermine the post¨CWorld War II Bretton Woods order have not proven economically successful. Along with his sustained mercantilism, his turn toward military aggressiveness has spurred pushback from the United States, an increasing number of Western allies, and some developing countries in his neighborhood.
China¡¯s accumulation of economic and geopolitical problems presents opportunities for the US and its allies to counter Xi¡¯s trade and geoeconomic programs to incentivize change and deter his efforts to displace the West-dominated, rules-based order.
This report analyzes and recommends deploying programs and tools that can affect China in its weakening economic and geopolitical situation, including in the following areas:
- Trade policies: Such measures include the sustained deployment of tariffs, antidumping and countervailing duties under US trade law and the rules of the World Trade Organization (WTO). Trade measures target key industries important to the US economy and national security.
- Investment policies: The US should expand controls over inbound direct investment for dual-use technology sectors and outbound direct and portfolio investment into China. These include new and expanded coverage for sensitive areas, such as dual-use and military sectors and high-technology industries that benefit from anti-competitive Chinese subsidies. Expanded disciplines include limits on equity investments in industries and companies of concern, especially those on the Department of Commerce Entity List or selected firms on the White House List of Critical and Emerging Technologies.
- Export controls: The report suggests that the US should more rigorously scrutinize Chinese efforts to develop or illicitly acquire sensitive technologies and more extensively deploy export controls to limit Beijing¡¯s ability to access these technologies.
- Financial sanctions: Investigations increasingly implicate China¡¯s banks in money laundering for the illicit drug trade on a global scale and circumventing US sanctions and trade restrictions. They also find that Chinese firms operating abroad engage in tax evasion. Many prominent banks are involved in businesses that employ forced labor and otherwise abuse internationally recognized human rights. The report urges targeted and selective use of sanctions under Section 311 of the Patriot Act or other money laundering regulations, including severing implicated banks from the SWIFT and CHIPS clearance systems, to combat and deter these practices.
- Combatting China's efforts to build alternatives to Bretton Woods: Through its own trade groupings, such as the Shanghai Cooperation Organization (SCO) and BRICS (a grouping that includes Brazil, Russia, India, China, and South Africa), or through financing institutions, such as the Asian Infrastructure Development Banks and the Belt and Road Initiative (BRI), and the development of an alternative trade settlement, clearing system, and digital currency, the PRC is systematically building an alternative to the Bretton Woods Western order. WTO reform to better counter Chinese mercantilism and reform of the International Monetary Fund (IMF) and World Bank is unlikely to succeed due to the WTO¡¯s rigid rules for change and outright opposition from China, its allies, and some developing countries. The report suggests building alternative networks of trade agreements that exclude China, such as rejoining the Trans-Pacific Partnership (now known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP), opening the US¨CMexico¨CCanada Agreement (USMCA) to new entrants, and expanding the use of bilateral trade opening agreements. Strengthening alternatives to BRI and BRICS through coordinated development assistance with allies and maintaining stable currencies and open economies are other responses.
Altogether, the various proposals work to weaken China¡¯s attempts to reinvigorate growth by relying on increased trade, attracting more Western capital, and acquiring technology illicitly to increase competitiveness in industries of the future. These proposals will limit Chinese access to Western capital, which the PRC needs for its faltering financial sector and government balance sheets. The measures will also hinder China¡¯s access to Western technology while limiting the PRC¡¯s drive to displace Western industry in global markets.