Pursuing Strategic Competition: Relative Competitive Position Matters
By Scott Kennedy
Last month I attended a private conference on mobility technology in the mountains between Silicon Valley and Santa Cruz, California. The discussion offered a surprising kind of reality check about both the challenges of technological progress and the implications for economic statecraft.
I wanted to be there because of my ongoing interest in China’s advanced auto sector. I’ve written two reports about the EV sector, in 2018 and 2020, and a short commentary about autonomous vehicles (AV) in late 2021. When I was in Shanghai last Fall, I had an opportunity to visit an AV equipment maker Momenta, and take a short ride in one of their vehicles on the city’s raised highways. I’ve been generally skeptical of China’s efforts to leapfrog Western automakers because of the unbelievably huge amounts of subsidies the Chinese government has had to shell out – and continues to spend – to support this sector; but I have to admit that this risky gambit has paid off, if not yet for the environment, then for China’s position in this sector.
Everyone besides myself at the recent conference in California was either a tech entrepreneur or an investor. I heard a lot about the amazing technologies they are working on, from recycling electric vehicle (EV) batteries, which would reduce the need for extracting raw minerals and processed materials, to short-range electric airplane taxis, which would radically reduce the time needed to cross large metropolises.
But there was also a heavy dose of realism in the discussion. There’s been a lot of progress in battery technology and U.S. industry is rolling out more EV models than ever, but EVs still only account for a small percentage of total U.S. sales. Even though the U.S. and Europe are on the cutting edge of advanced technologies in the sector, the U.S. lacks sufficient battery production capacity and a ubiquitous charging infrastructure, and EVs are still far too expensive for most households. The distance to having advanced autonomous vehicles (AV) on the road is even greater, as there are still major technological, legal, and market challenges. One participant stressed that the very expensive 5G network that telecom firms have installed is insufficiently secure or stable to support a full-scale AV system. There has been progress with electric and hybrid airplanes, but this is still a period of creating demonstration aircraft, and business models and systems that might be ready for commercial use are still years away.
A Shanghai-based auto sector analyst and I provided the China entertainment, which was even more sobering to those gathered. My counterpart went through the China numbers: Chinese dominance of raw materials, processing and EV battery production; 6.9M EVs in 2022, 26% of all vehicle sales; a rising percentage of sales from domestic makers and brands; China’s sudden emergence as the world’s #2 vehicle exporter (and largest, going by the Q1 2023 figures, if one includes Teslas shipped from China); and loads of R&D investment into batteries, hydrogen fuel cells, AV, drones, electric airplanes, and more.
I then poured more cold water on the discussion by discussing the ways in which the U.S. is responding. Its “promote” agenda to advance EVs is broadly positive but has generated opposition from firms from countries in Europe and Asia with strong auto sectors of their own, because of very high local-content requirements and potential discriminatory subsidies for U.S. automakers. Chinese brands have avoided exporting to the U.S. so far, but may try soon, and if so, Washington could very well push back with fair-trade remedies (anti-dumping, countervailing duties, or safeguards) and to the extent these vehicles are “smart” or have autonomous capabilities, it is quite possible the U.S. would come forth with national security-based restrictions. Leaving aside the restrictions on TikTok, the U.S. has already placed substantial restrictions on Chinese-made drones, electric buses, and subway cars.
While some sort of restrictions may make sense, the conference got me thinking about the difficulties of a technology denial strategy in differing commercial circumstances. In semiconductors, where the U.S./West has a distinct lead and leverage over China, a strategy of restrictions can make sense, as there is a clear logic of denial to maintain one’s advantages. And the U.S.’s dominance and the obstacles for followers to catch up are quite high. That said, there are risks for technology leaders: how the lost sales and collaboration could depress U.S. sales and innovation, and the impetus this gives for China to innovate and move to the top of its own technology hierarchy.
What about in a sector like EVs, where because of the move from internal combustion engines (ICE) to battery-based propulsion systems-a disruptive technology if there ever was one – Chinese are already near technological parity and ahead in terms of commercialization and market penetration? A strategy of denial and restrictions most likely means isolating oneself from the world leaders, reducing innovation and revenue opportunities, and slowing down one’s own progress.
The conference highlighted to me that U.S. policy needs to take into consideration the global technological and commercial landscape of specific sectors and that a one-size-fits-all approach won’t work.
The Biden Administration and Congress do not yet have a clear answer to this issue. Treasury Secretary Janet Yellen gave an important China-specific speech at SAIS on April 20th, and National Security Adviser Jake Sullivan gave another on American economic leadership at Brookings a week later. Their speeches broke constructive new ground in trying to place some boundaries around the reasons justifying national security-based restrictions as well as how those efforts should be distinguished from industrial policy initiatives to strengthen America’s commercial competitiveness. But their frameworks did not directly grapple with how policy should change based on the different architecture and relative competitive balance in across industries.
One potential conceptual answer is to conclude that when the U.S. is ahead, it should focus primarily on a strategy of denial and advancement to maintain its lead, and that when behind (or at parity), it should focus first and foremost on “resilience” and catch-up to reduce the U.S.’s dependencies. But even this kind of delineation needs to come with a whole set of caveats. Industries are typically more complicated than this division implies; moreover, a strategy of denial, even when one is far ahead, comes with its own major economic costs and potential national security risks.
Although the conference did not yield a clear solution of what should be done, it clarified why U.S. strategy needs to vary substantially sector-by-sector based on their global structures and relative commercial balance of power. And as a result, the gathering was valuable in helping potentially reframe some of the problems policymakers in the United States and its friends are trying to solve.
Related Trustee Chair Activity
Scott Kennedy, "China Is the Wrong Industrial Policy Model for the United States," CSIS Commentary, August 9, 2022.
Scott Kennedy, "Careful Connectivity: Responding to China's AV Drive," CSIS Commentary, October 15, 2021.
Scott Kennedy, "China's Uneven High-Tech Drive: Implications for the United States," CSIS Report, February 27, 2020.
Scott Kennedy, "China's Risky Drive into New-Energy Vehicles," CSIS Report, November 19, 2018.