The US is winning the tech race – continued tech investment and innovation is key to avert an authoritarian PRC-led economic order that destroys the LIO.

Rather than aiming for the vague objective of slowing China’s growth, U.S. policymakers should pursue two specific goals regarding Chinese tactics: degrading China’s military and technological capabilities and countering its anticompetitive and coercive economic tactics. Fear that these policies will result in slower GDP growth in China should not hold Washington back. Slower PRC growth should already be baked into every policymaker and business leader’s calculus. The strategic importance of taking a strong stand against PRC brute force economics — and rallying allies and partners to pool their domestic market demand to counter the gravitational pull of the China market — outweighs the additional economic pain that those policies could cause on the margins.

Orienting to compete

There are many unknowns surrounding China’s economic trajectory and the path it will follow in the coming years. Irrespective of this uncertainty, leaders in the United States must recognize that China’s strategic intent to “catch up and surpass” the United States as the world’s economic and technological superpower presents significant risks to the U.S. national interest. This is especially the case in light of three factors. First, the global economy is undergoing an industrial revolution headlined by rapid, simultaneous advances in emerging technologies. Second, the PRC is executing a multi-decade, whole-of-nation strategy to achieve primacy in future technologies. Finally, while the United States has initiated a response, in order to prevail in this techno-industrial competition, it must significantly increase and coordinate its investment in American strengths, correct existing economic and financial misalignments, and experiment with new tools that address the dynamic challenge from China.

The unique technological moment is the linchpin for the entire competition. In previous decades, the United States was the first to achieve dominance in miniaturized electronics, the internet, GPS, and software capabilities which ultimately delivered outsized economic, political, and military influence. Today, overlapping progress in artificial intelligence, biotechnology, quantum information sciences, cyber, and space systems are similarly primed to alter the geoeconomic landscape. Geopolitical powers are sponsoring indigenous capability and the race for technological and economic leadership is now a central geostrategic battleground. Nations that lead in the resulting industries will govern decades of economic exchanges, reap commercial benefits, and develop military advantage.

China is singularly focused on the importance of technology leadership. Beijing is executing a multi-decade plan to transfer technology to increase the size and value-add of its economy, increase its research and development (R&D) intensity, and mobilize academia, business, and the government behind grand-scale technology innovations such as quantum communications, genetic engineering, high-resolution Earth observation, and manned space flight, among others. In this pursuit, Beijing is employing a range of mercantilist trading policies to overwhelming advantage, augmented by a full spectrum of licit and illicit transfer of intellectual property. Additionally, through its industrial policy, China prioritizes import substitution which, if successful, will transfer global market leadership to China in many markets such as semiconductors, computer hardware and software, networking and communications, automobiles, and genetic engineering.

Internationally, China is expanding its economic sphere of influence through the Belt and Road Initiative (BRI), which is opening markets for Chinese goods and companies. Nested within the BRI is the Digital Silk Road (DSR), which creates a technology infrastructure to support economic development and power projection. Through a network of cross-border fiber optic cables, coupled with remote sensing, communications, and other satellite services, the DSR aims to enable everything from e-commerce to smart cities, significantly shaped by Chinese companies and interests.

Fortunately, there is bipartisan awareness of the challenges China presents. Leaders in successive administrations introduced meaningful defensive interventions such as sanctions, inbound and outbound investment restrictions, tariffs, and export controls and offensive interventions such as investments in microelectronics and clean energy. Moreover, there is broad agreement at a policy level on discrete technologies that will dictate future competitiveness. These actions are only the start. Over the coming years, the United States will need to make sizeable investments and intensify coordination to accomplish its strategic goals.

The first step is to bolster the ingredients that historically powered U.S. economic strength. Based on the recognition that basic science is the seed for future innovations, the United States should increase federally-funded R&D to at least 2% of GDP, up from less than 1% today. Further, policymakers need to be serious about building a STEM talent pipeline for the future workforce. This implies investing in science, technology, engineering, and mathematics education today, particularly at the K-12 level. Finally, to lead in research and development and to be able to translate prototypes into manufactured products at scale, the United States needs workers with talent at all levels. This implies developing and executing an immigration policy that welcomes a balance of high-skilled and low-skilled immigrants.

To further optimize these efforts, policymakers must correct policy and regulatory misalignments that prevent private actors from investing in and commercializing critical technologies. Two prominent areas that merit scrutiny include the short-term bias in U.S. capital markets and the lack of a trade and investment policy to match trends in technology development.

Currently, U.S. corporations focus on return on capital at the expense of long-term R&D and technology development. A combination of quarterly-earnings pressure and the increased power of activist shareholders shifted corporate attention to short-term profits and capital efficiency rather than balancing these goals with investments for long-term capability development. To strike the right balance, U.S. firms do not have to abandon their market instincts. There are a range of proposals on how to influence financial incentives, extend investment horizons and promote capability development. These include reforming capital gains tax provisions, creating dual-class shares with sunset provisions, enforcing mandatory holding periods, or increasing R&D tax credits. Given the criticality of the private sector in this competition, finding a workable solution amongst policymakers, corporate leaders, employees, and shareholders is an urgent priority.

Similarly, the United States needs a coherent market access policy to ensure that U.S. companies are able to compete globally. Currently, firms are disadvantaged in foreign markets — partly because of U.S. legal constraints governing business practices and partly because they are competing against firms supported by various state-backed mechanisms. Since withdrawing from the Trans-Pacific Partnership, the United States has not created a forward-looking trade arrangement and it is not yet clear whether the Indo-Pacific Economic Framework will create the market access, investment opportunities, and enduring revenue opportunities that firms require to take on riskier technological investments. Rationalizing U.S. policy on trade is essential to preventing public investments from going to waste.

Officials can also experiment with different resources that are relevant to the current domains of competition. One concept worth exploring is informally referred to as the National Capital Stack. While much has been made of the formidable $1.5 trillion of patient capital that China is deploying against deep technologies, the U.S. government has a more robust capability to de-risk investment and activate the animal spirits of the U.S. capital markets. To date, the tools, resources, and authorities are dispersed across various departments and are deployed more as point solutions rather than being combined to take technologies to scale. Recently, however, the Department of Energy (DOE) has demonstrated a pipeline for companies to leverage DOE grants, loans, insurance and tax credits to advance costly energy projects. Similarly, the Defense Innovation Unit and the newly created Office of Strategic Capital at the Defense Department are contemplating tools to catalyze entrepreneurs to take on challenges relevant to national security. This activity could be comprehensively applied across the government, to include tools from Agriculture, Homeland Security, Commerce, Small Business Administration, the Export-Import Bank, and NASA at a minimum. Cohering non-dilutive R&D grants and loans with advance market commitments and procurement capability would signal to the private sector that the government can be a constructive partner at every stage of the technology development cycle.

China’s strategic intent is clear. The PRC seeks to displace the United States economically and technologically, which will have significant ramifications for international rules and norms, military positioning, and ideological competition. The pace and confluence of technology development and resulting economics make the risk of displacement viable. Regardless of China’s economic growth or decline, the United States needs to adequately prepare for a multigenerational techno-industrial contest with a rival. The good news is that the United States has the necessary expertise, resources, and tools resident throughout society. The key will be whether U.S. leaders can orient these endowments to compete.