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How to Beat China—America’s Way

Washington, Sep 24 -

By Rep. Andy Barr and Rep. Ann Wagner

Leaders of the Chinese Communist Party (CCP) are engaged in an organized, coordinated effort to usurp the United States as the world’s preeminent economic, military and technological power.  Defending against these advances is one of the most significant geopolitical challenges in a generation.  However, we cannot beat China by becoming like China. 

Strategies to counter China’s global dominance are only effective if they focus on America’s strengths and leverage America’s economic might to counter malign Chinese activities. A case in point is U.S. leadership of the global financial system, which the Chinese have long envied but failed to dislodge. For this leadership to continue, Washington cannot force institutions of government to take on problems they weren’t designed to solve. We should focus on our strengths and the frameworks that do work.

For example, just take the Federal Reserve as a cautionary tale. For the Fed to remain preeminent in the global financial system, it can’t be all things to all people. A credible Fed is an accountable Fed that gets the basics right, from meeting its legal mandate on inflation and employment, to continually improving the payments system and supervising banks. The Fed had its hands full with these obligations even before it was enlisted for COVID-19 relief, but some Democrats now want to drag it into additional pursuits, from assessing climate risk on banks’ balance sheets to solving inequality and bailing out local governments. Though the Fed enjoys capable leadership under Chairman Jay Powell, conjuring new dragons for it to slay will set the Fed up for failure, politicize it endlessly, and signal to the world that it’s unserious about its core mission. China will sit back and cheer.

Nor is the Fed the only institution that risks being pulled apart in all directions. America’s capital markets, the envy of the world, are also being eyed as a cudgel to be wielded in the name of every conceivable social agenda. This includes using securities disclosures to advance foreign policy goals, which can be counterproductive.  Adding excessive reporting and compliance burdens not based on information that is material to investors’ investment risk calculus typically undercuts companies’ ability to expand, innovate, and generate jobs. In some cases, it may even backfire with tragic results for the most vulnerable that the crafters of disclosures intend to protect. Firms and investors flock to U.S. exchanges not just because they’re protected by American laws, but because the design and application of those laws is purposeful, coherent, and careful.  Ill-considered use of U.S. investment disclosure rules to accomplish an overbroad range of policy goals compromises the strength and credibility of American capital markets, disincentivizes companies from going or remaining public, and limits access to investment opportunities for retail investors and retirement savers.

The strength of the U.S. economy and our capital markets is key to our effectiveness abroad, because if push does come to shove with China, the U.S. can wield its leverage to get results. That is why our sanctions regime is so powerful. Sanctions are an important aspect of our foreign policy and provide the U.S. with a key tool to deny adversaries the resources to continue their illicit behavior and to compel them to change undesirable behavior. Administered through the Office of Foreign Assets Control (OFAC) at the U.S. Department of Treasury, financial sanctions provide targeted means to deprive bad actors of their funding mechanisms. OFAC has a decades-long track record of identifying and addressing national security risks.  Policy solutions to limit the economic viability of malign Chinese actors should leverage OFAC.  Our allies respect the judgment of OFAC, creating a force-multiplying effect as they follow our lead.  

The world’s trust in our financial system helps make American sanctions so forceful, and it means that U.S. growth and stability is essential to others’ success. As the U.S. seeks out international coalitions to confront Chinese policies, those coalitions will form more easily if the U.S. remains indispensable for the global economy to function. That requires Washington to focus on advancing our strengths.

The U.S. must ensure its position on top of the global financial system. It should continue to facilitate capital flows that spur rising living standards, set international rules of the road to maintain financial stability, and shore up confidence in the dollar so that America’s sanctions retain their bite. But all of this relies on a single-minded commitment to governing from the top of that order responsibly. It’s not enough to hope that China will stumble on its way up.

And China does hope to ascend. From internationalizing the renminbi, to providing more investors access to Chinese assets, to its forays into a digital yuan and new payment system, Beijing isn’t standing still. Some of these efforts may fall short, some may be abandoned, and others may be derailed by China’s ham-handed diplomacy. But a self-confident U.S. won’t stake its future on Chinese leaders somehow tripping over themselves; it will instead redouble government’s focus on sober economic leadership.

Sun Tzu in the Art of War mused that it’s best to achieve victory in battle without fighting. While we must not back down from China as it seeks to challenge the U.S.-led order, thoughtful governance of the financial system can allow the United States to extend the dominance of its markets and the dollar. China knows this. However, policymakers must employ these tools how they should, not necessarily how they could. The United States should look beyond fighting and set its sights on winning.

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