When two opponents in a fierce, zero-sum competition resort to the same playbook, it is unlikely to work equally well for both of them. This increasingly seems to be the case in the US-China rivalry. Presidents Joe Biden and Xi Jinping have both prioritized national security in their relationship, willingly forgoing the benefits of open trade and investment.
Underlying their parallel stances is the logic of economic attrition: By taking actions certain to harm oneself but likely to hurt one’s opponent even more, both Beijing and Washington are betting that they can afford their policy more than the other can.
Despite recent tentative thaws in their tense relationship, neither side appears ready to abandon this strategy. China has just announced a partial ban on products made by US semiconductor maker Micron Technology Inc., citing unspecified risks. Security concerns have motivated the Biden administration to consider limiting US investment in China and to adopt policies such as the Inflation Reduction Act, which seeks to exclude some Chinese clean energy products from US supply chains.
Xi appears to be gambling that predicted trends of growth are still sufficiently favorable for China to close the gap of economic output with the US in the coming decade. He surely knows that a more security-focused economic strategy will depress Chinese growth as it loses access to Western markets and technology. But the US and its allies are playing the same game and will bear similar costs. Consequently, their growth rates will also decline.
As productivity in China is still much lower than in the US, there’s more room to raise it, boosting Chinese growth rates. And, as long as China outgrows the US by a certain margin, it will gradually gain the upper hand.
The Congressional Budget Office has projectedthat the US economy will grow at an average rate of 2.4% between 2024 and 2027 and 1.8% between 2028 and 2033. Projections of future Chinese growth vary significantly. A research team at the Chinese Academy of Social Sciencesestimates, optimistically, that Chinese growth will average between 5% and 5.5% in this decade and around 4%-4.5% in the 2030s.
Although we do not know whether Xi shares their optimism, past statements suggest he is convinced that China will grow faster relative to the US in coming years. Even if the Chinese economy grows at 3% in the coming decade — an attainable goal — and the US chugs along at 2%, the trend lines will be positive for China.
However, the costs of a security-centered development strategy are likely to be much higher for China than for the US.
Signs abound that China has significantly underestimated the costs of its focus on security. The euphoria following the end of Covid Zero policy has given way to deep disappointment. After a healthy reboundof 4.5% GDP growth in the first quarter this year, the economy lost steam in April, with industrial output growingat half the expected speed.
A principal reason for China’s faltering recovery is deep pessimism among private investors about the tense geopolitical environment. Aware that China’s leaders are unlikely to prioritize economic growth, private investors have held back. Official data show that private investment has risen only 0.4% in 2023. As China’s private sector accounts for 60% of GDP, those numbers spell long-term trouble.
Xi’s obsession with security will make it increasingly hard for foreign companies, too, to do business in China. Investigations of foreign consultancies and due diligence firms for possible violations of national security regulations and the promulgation of a revised espionage law have created a climate of fear, further depressing investor sentiments.
The recent crackdowns reveal the Chinese system’s proclivity toward excess. Even though Xi has urged a balance between development and security, Chinese officials know full well that even a minor lapse in security could get them into deep trouble, while they will not be held responsible for unrealized economic potential. The Chinese incentive structure encourages its officials to be far more zealous in chasing threats than promoting growth.
This is in sharp contrast with the US system, often derided by hawks as too focused on profits. The political influence of corporate America constrains potential excess in Washington. The differences in how democracy and autocracy operate mean that the US is far more likely to achieve a better balance between security and the economy than China is.
The premise of Xi’s trade-off between security and growth thus bears reexamination. Chinese actions to strengthen its economic defenses will likely be far more costly than their US equivalents, hurting China substantially more than the US. This will inevitably depress China’s growth potential and thwart its ambition to catch up to its rival.
At the moment, both Beijing and Washington seem confident that they can win with a strategy of economic attrition. One of them has to be wrong — and it is probably China.