China’s Statist System Is No Match for Free Markets

A video screen in Beijing shows President Xi Jinping’s address to the Communist Party Congress, October 25, 2017. (Tyrone Siu/Reuters)
But there is much room for improvement in the effort to prevent China from using the open nature of the U.S. economy to its advantage.

Editor’s Note: The following is an excerpt from the book Battlegrounds: The Fight to Defend the Free World by H. R. McMaster. Copyright © 2020 by H. R. McMaster. The book was published on September 22, 2020, by Harper, an imprint of HarperCollins Publishers. Reprinted by permission. Part I of the excerpt is here.

The CCP views its centralized, statist economic system as bestowing advantages, especially the ability to successfully coordinate efforts across government, business, academia, and the military. And it views America’s and other nations’ decentralized, free-market economic systems as rendering them unable to compete with China’s centrally-directed strategies, such as Made in China 2025, OBOR, and Military-Civilian Fusion. That is why the United States and other free-market economies need to demonstrate the competitive advantages of decentralization and unconstrained entrepreneurialism while defending themselves from Chinese predation. Here, the private sector plays a vital role. Companies and academic institutions at the forefront of developing and applying new technologies must recognize that China is breaking the rules to take advantage of our open societies and free-market economies. A first step toward preserving competitive advantage is to crack down on Chinese theft of our technologies. Although there have been significant reforms in national-security reviews of foreign investments, another effective defense would be to enforce requirements that U.S. companies report investment by China-related entities, technology transfer requests, and participation in the CCP’s core technology development or PLA modernization programs.

There is much room for improvement in the effort to prevent China from using the open nature of the U.S. economy to promote not only its state capitalist model, but also to perfect its surveillance police state. Many universities, research labs, and companies in countries that value the rule of law and individual rights are witting or unwitting accomplices in the CCP’s use of technology to repress its people and improve PLA capabilities. For dual-use technologies, the private sector should seek new partnerships with those who share commitments to free-market economies, representative government, and the rule of law. Many companies are engaged in joint ventures or partnerships that help the CCP develop technologies suited for internal security, such as surveillance, artificial intelligence, and biogenetics. Others accede to Chinese investments that give the CCP access to such technology. In one of many examples, a Massachusetts-based company provided DNA sampling equipment that helped the CCP track Uighurs in the Xinjiang region. Google has been hacked by China, used by the CCP to shut off the Chinese people’s access to information, and refused to work with the U.S. Department of Defense on artificial intelligence. Companies that knowingly collaborate with CCP efforts to repress the Chinese people or to build military capabilities that might one day be used against those companies’ fellow citizens should be penalized.

Tougher screening for U.S., European, and Japanese capital markets would also help restrict firms’ complicity in helping the CCP’s authoritarian agenda. Many Chinese companies directly or indirectly involved in domestic human-rights abuses and violation of international treaties are listed on American stock exchanges. Those companies benefit from U.S. and other Western investors. There are more than 700 Chinese companies listed on the New York Stock Exchange, about 62 on the NASDAQ Composite index, and more than 500 in the poorly regulated over-the-counter market. One company that is a candidate for delisting is Hikvision, a company responsible for facial-recognition technology that identifies and monitors the movement of ethnic Uighurs. Hikvision produces surveillance cameras that line the walls of Chinese concentration camps in Xinjiang. Together with its parent company, the state-owned China Electronics Technology Group, Hikvision is on the U.S. Commerce Department Entity List (what many call “the Blacklist”). Free-market economies like ours have far more leverage than they are using because they control the vast majority of the world’s capital.

Defensive measures, however, are inadequate. Free and open societies need to become more competitive through reform and investments. China here has a clear advantage in the adoption of new technologies. Its centralized decision-making system, government subsidies, underwriting of risk, the relative lack of the kinds of regulations and bureaucratic hurdles typical in the United States and other democratic nations, and the lack of ethical impediments (e.g., in the areas of biogenetics and autonomous weapons) all foster fast application of technologies in the civil sector and the PLA. Although the United States and other nations should not compromise their ethics, many of the weaknesses relative to China are self-imposed. For example, the U.S. national-security institutions suffer from chronic bureaucratic inertia. The slow, inflexible nature of defense budgeting and procurement in the United States has long been studied, with little effective change. But the stakes are now too high to tolerate the lack of predictable multi-year procurement budgets, convoluted procurement systems, and deferred defense modernization. The sheer difficulty of doing business with the Department of Defense discourages the most innovative small companies from contributing to defense capabilities and makes it difficult to innovate within the life cycle of emerging technologies. The old model of multi-year research and development to design and test a capability is no longer valid. The U.S. Department of Defense and military services risk exquisite irrelevance as the PLA develops new capabilities and countermeasures that vitiate longstanding American military advantages. Reducing barriers to collaboration between the private sector and national-security and defense-related industries could release the potential of free-market innovation in this critical area.

But even streamlining bureaucracy will prove insufficient to compete with the vast investments China is making in emerging dual-use technologies that will advantage its data economy and its military capabilities. That is why government and private-sector investment in technologies in the areas of artificial intelligence, robotics, augmented and virtual reality, and materials science will prove crucial for the United States to maintaining differential advantages over an increasingly capable and aggressive PLA. Defense cooperation across the Indo-Pacific region should extend to multinational development of future defense capabilities, with the ultimate goal of convincing the CCP that it cannot accomplish objectives through the use of force. Multinational cooperation in the development of space and cyberspace capabilities could also deter Chinese aggression in these contested domains. And Taiwan’s defense capabilities must be sufficient to ward off China’s designs for what would be a costly war with the potential of expanding across large portions of East Asia.

H. R. McMaster is the Fouad and Michelle Ajami Senior Fellow at the Hoover Institution and author of Battlegrounds: The Fight to Defend the Free World.


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