How Should the U.S. Respond To China's Non-Market Practices?

In an interview last week, Treasury Secretary Scott Bessent talked about the Trump administration's response to China's non-market practices. Part of this response, as he presents it, has been for the U.S. to pursue a specific version of state-led industrial policy as a defensive measure. This gives me an opportunity to say a bit more about an issue I've raised before: How should the U.S. government respond to China's practices?

Here is a key part of the exchange between CNBC’s Sara Eisen and Bessent:

Eisen: The other big change on industrial policy from the administration has been around taking stakes in companies that you guys deem strategic and important for the US. I think there have been five now. Are there going to be more of those?

Bessent: I wouldn't be surprised, because, again, many of these, when we get an announcement like this week with China on the rare earths, you realize we have to be self sufficient, or we have to be sufficient with our allies. So when you are facing a non-market economy like China, then you have to exercise industrial policies. So on rare earths for 20 years, anytime ... rare earths are not rare. What is rare is the processing and refining.

Eisen: Which China dominates.

Bessent: Which China dominates. I think they have 70% of the mining, but 95% of the processing and refining. And for 20 years, anytime anyone in a market-based economy stood up a processor/refiner, China came in, cut price and put them out of business. So we're going to set price floors, and have forward buying to make sure that this doesn't happen again. And we're going to do it across a range of industries.

...

Eisen: But what do you say to people who say that sounds socialist? I mean, the government taking stakes in private companies, picking winners and losers. That's not how we do it in America.

Bessent: Well, that's the reason we've got this rare earths problem. That is, again, we're not going to come in and take stakes in non-strategic industries, but we've identified seven industries – if anyone wants to read it, I wrote a paper on this about 15 months ago for a speech I delivered at the Manhattan Institute – and I do believe you're pushing on this in a good way, that we do have to be very careful not to overreach, and we need to go back and examine, okay, have we accomplished our goal? And then you can move on. But we have to be vigilant. We have to be vigilant because for 20-25 years, we haven't been vigilant. The leading Chinese rare earth company used to be owned by General Motors. The Chinese bought it in 1995. CFIUS, which I chair, the Committee for Foreign Investment in the US, mandated that it stayed in the US for five years. Guess what happened? Five years and one day, went back to China. Nobody was watching. Everyone's asleep at the switch. So we're just not going to be asleep at the switch.

The argument from Bessent, as I understand it, seems to be that while they do worry about U.S. government intervention in the economy rising to the level of something that could be characterized as socialism, they think it is necessary here as a response to China's non-market practices.

But is it necessary? Maybe it depends on what your ultimate goals are. In a previous post, I said that my preferred approach here would be to "try to finish the job that was started a long time ago, and continue to push China to uphold the commitments it made when it joined the WTO – and add new commitments as well – so as to move it in a more market-oriented direction." However, I noted, "that approach does not seem to be of interest to U.S. policymakers at the moment." I then speculated on the reasons:

Maybe they don't think it's possible, based on the view that all possible efforts have been made in this regard, and those efforts failed. I disagree, and I think that in fact not enough effort was put into it.

Or maybe they don't think it's even desirable. They don't want the Chinese economy to be more competitive because they think this will be bad for U.S. companies. I'm not sure I've heard anyone say this explicitly, but I've wondered if some people are thinking it.

If either of those reasons is the explanation here, there may not be much room for progress. The U.S. and Chinese positions on trade relations and general economic policies will remain firm.

At the same time, if there are people in the U.S. government (or those who are in a position to influence the U.S. government) who still hold the view that, yes, they would like China to implement its commitments and become more market-oriented, I want to note two things.

First, from the point of view of an outsider like me, it doesn't seem like pushing China to become more market-oriented has been a top U.S. government priority since way back in the 1990s, when China was liberalizing on its own and taking on commitments as part of its efforts to join the GATT/WTO. People who have been on the inside might respond that, in fact, it has been, and I don't doubt that there are people at Treasury or USTR for whom that has been the case for them personally. But from what I can tell, the overarching U.S. government priorities have been elsewhere. It's not that the U.S. hasn't made demands related to market-orientation. Rather, there are always some other things – often it is something related to U.S. foreign policy – that the U.S. government wants more from China than moving in a market-oriented direction. And my guess is that the Chinese government sees the same things I'm seeing, and that may be part of the explanation for why China has moved in the direction it has on its economic policies. Obviously there are other factors as well, but an assessment by China that this is not a top priority for the U.S. has likely played a role. All governments have a domestic political incentive to engage in government intervention in the economy at times, and unless they are being held to their international commitments, they may stray a bit – or a lot! – from market-orientation.

Second, if people do want China to become more market-oriented, the question becomes, how do we get there? The U.S. government has tried various different approaches from 2001 to today, and we can look at what worked and what didn't. The view of the Trump administration seems to be that unilateral pressure is the best answer to this type of question, but that has been the approach for many years now without much apparent progress. In my view, it is time to revisit that.

Summing up, my broad point here is that with regard to the role of markets in China's economy, I think the key policymakers in the U.S. government should consider what it is they want most from China. If it turns out there is support for making it a top priority to get China to move in a more market-oriented direction, that would be a change from the current set of priorities. Given the traditional dominance of U.S. foreign policy in debates over priorities, I'm skeptical that such a change will take place. But it could if enough people thought it was important.