The hyper-competition of U.S.-China trade relations

Neil Thomas and Kate Logan on information overload, industrial strategy, and trade

With the launch of President Trump’s trade war this week, few countries are more at risk than China. Faced with a sudden and massive expansion of tariffs as well as changes to the de minimis parcel rule, the export-led development model that has led China to great wealth is now under serious threat. What should we learn from the past of U.S.-China relations in order to understand their future?

Joining host Danny Crichton and Riskgaming director of programming Laurence Pevsner are Neil Thomas and Kate Logan of the Asia Society Policy Institute. Neil is a fellow and researches the elite politics and political economy of China, while Kate is director of the China Climate Hub and Climate Diplomacy. They have written extensively on China’s industrial strategy and foreign relations, and even more notably, they both participated in the launch of our Chinese electric vehicle Riskgaming scenario Powering Up in Washington DC back in December.

We talk about their experiences playing the game, and why processing information overload is a crucial skill, particularly in competitive markets like cleantech. Then we talk about the lessons of China’s manufacturing rise, why America ignored its industrial strategy for so long, and how U.S. policymakers and business leaders can approach the future of the most critical trade relationship in the world.

This Q&A has been edited for length and clarity.

For more of the conversation, please subscribe to the Riskgaming podcast.

Danny Crichton:

Both of you joined us in early December for our Powering Up Riskgaming scenario focused on the China electric vehicle market. In this game there are six players, three of them play automakers — one from the United States, one from Europe, one from China — and two play cities, Shanghai and Chengdu. The sixth person plays a consultant who tries to connect all the dots.

If I recall Neil, you played the U.S. auto company. And Kate, you played the consultant.

I'm going to start with you Kate, because we've never had the consultant talk through their experience of the game. I’m curious how it went?

Kate Logan:

So as the foreign consultant, my primary goal — or only goal, rather — was to collect as much social capital as possible. So I had to work with everyone else in the game and didn't have a specific allegiance. Basically I'm just trading in information and trying to leverage it to get that social capital.

Part of the game is that you're flooded with so much information and have a very short amount of time to absorb it. My strategy going in was basically, how can I get access to information about things that are coming down the pipeline that the companies or the mayors would find useful? I was given very complex information and had to distill it into very short concrete insights to inform the companies of the game on their strategies.

But overall it was an interesting angle to say, look, I really don't have an allegiance here. I'm just trying to figure out how I can leverage this information that I have so that I can get more social capital.

Laurence Pevsner:

I think I was your game leader and I remember showing you, “Hey, here's how the formulas work for generating revenue” and things like that. And you'd be like, "Can you explain this to me?" I was like, "I actually can't." The design construct of the game is that it's supposed to be this overwhelming set of materials, and the real skill is being able to condense that information into something sticky.

One of the things we've noticed playing these games is that, to your point, the consultants who end up doing very well don't have an allegiance, but they almost make it seem like they do. They'll say, "Hey, I've got something that's really special for you, Shanghai Car Company. You should probably talk to me because I know something."

Kate Logan:

That's exactly right. And I remember trying to decide early on who to sell information to. We have the EU, the Chinese, the American car companies, and which one can I get the most out of in terms of social capital.

Laurence Pevsner:

Did you end up using your comrade here, Neil, who you work with at the Asia Society? Did you end up selling any wares to him?

Neil Thomas:

She did, and they were occasionally useful and occasionally not. But that's also true to life. The point about information overload is a really good one. In the conversations you have with other participants who are also not totally informed, you develop certain assumptions that you think are maybe part of the game, but they're actually not.

I came to the conclusion that it would be good for me to hold on to a lot of the information tokens that I had, but those didn't really count for anything at the end. I could have gotten more leverage or done some better deals if I'd used them. The chaos of the game really does help to get you towards what it's like to be in the boardroom, to be in meetings, to actually be doing this in real life.

Kate Logan:

Yeah, I was just going to add to that. And as you're learning the game, the rounds speed up so they get faster and shorter as the game goes on. So basically just as you're getting the hang of what's going on, the rounds just start going by really, really fast. That was very realistic, too.

Danny Crichton:

One thing we saw when we were running this game in Tokyo, is that, among the Japanese players, they didn't do any transactions in the first two scenes because they were trying to understand the game. To your point about this rapid iteration, one of the challenges for them was that the game had already walked away from them. The economy was sort of leaving them behind, which you can take as either symbolic of the Japanese economy or just the players who were in the room.

The second thing I thought was interesting is that you, Kate, came in number two in the game, so two out of six, and Neil, you were three out of six. The Shanghai Car Company, though, was number one and quite a bit further ahead. How did they get so far ahead? Did you build a joint venture with them?

Neil Thomas:

Not until the very end. And that was a classic example of, I think, present bias in my decision-making. The current conversation in DC is very much focused on the ways in which the Chinese state and its enterprises have got the better deal out of many joint ventures, and are now out-innovating and outpacing some of the private companies that are their main competitors in Europe, United States, and around the world.

But I really missed out on a lot of points by not pursuing an early joint venture with the Shanghai Automotive Corporation. Joint ventures are how a lot of American car companies and companies in other industries made most of their money — and made a lot of their initial inroads in China in the 70s, the 80s, the 90s.

Danny Crichton:

Going beyond the Riskgaming scenario, both of you have worked on these exact issues for more than a decade apiece. I'm curious, how much did the game actually represent what you have seen in these spaces in the last couple of years? What was inaccurate about it?

Kate Logan:

Obviously it's a whirlwind experience, but like Neil was saying, it felt pretty accurate in terms of the way that it played out over time.

Working on the climate side and having lived in Beijing from 2013 to 2018, one thing I've been thinking about is whether the rest of the world could have had the foresight to see China's current clean technology dominance coming. Today, you have the Xin Shen Yang, the three new technologies of solar, EVs and battery technologies that China's just absolutely dominant in. When I think back to 10 years ago and my time living in China, would the rest of the world have predicted this?

Playing the game was a really good simulation of how difficult it is to pick up on those early signals, but also to realize that there are signals there that if you're watching closely.

Neil Thomas:

One of the accurate parts of the game was the competition between the two Chinese vice mayors. Different provinces and cities compete for the big contract with General Motors. But at the same time, the game had only one Chinese state-owned enterprise. Another part of that competition within China is that different state-owned enterprises also compete against each other to partner with foreign firms.

That dynamic is still alive today, particularly as China's economy struggles. People on the ground doing business in China are saying that they're being lobbied from all sides to move their business registration so that someone else gets credit for it. Maybe introducing another state and enterprise to compete with the Shanghai Automotive Corporation would've just added to the realities.

Laurence Pevsner:

Yeah, I think that's exactly right. We're obviously limited by the number of players we can have and how much complexity we can build in. But we make the same point with the mayors too. There are obviously more cities than just Chengdu and Shanghai. In this game, they can theoretically cooperate, but it's really hard to do so if you have multiple mayors at the same time.

You can imagine Chinese car companies competing internally or maybe working together, but overall the game often ends with the Shanghai Car Company winning. We're trying to prove it didn't have to be this way, but this is where we are now. This is the situation we're in.

Players are often surprised to hear this. We think the story is kind of over. I'm curious if you guys agree?

Kate Logan:

This is obviously really salient to where we are right now.

Taking a step back, and as Neil alluded earlier, there's this hyper competition within China. So much so that there's over capacity, which is causing prices to drop so low that firms are no longer competitive. So China has all this excess capacity and is looking for markets for its goods just as most developed economies close their doors, with tariffs, bans for security-related concerts, and other measures.

I think the big question for China is this: You have over 50% of new vehicle sales going to new energy vehicles, so you have increasingly saturated domestic markets. Are there still global markets outside of China that can absorb that excess capacity? And what does that look like in practice?

This has huge implications for the global energy transition. The uptake of electric vehicles in China has already caused China to peak its demand for gasoline and likely for oil products overall by 2027.

Your broader point was whether countries should try to compete in areas where China has a competitive advantage or if they should instead invest in innovation in new technologies where there is some hope of leapfrogging. If I were in a position of greater policymaking power, I would not focus so much on trying to subsidize technologies where it'll be extremely difficult to dislodge China’s advantages. I’d invest instead in things like battery technologies, solid state batteries, electrolyzers for producing hydrogen, which is a clean substitute for liquid hydrocarbons, and other technologies where there's still a lot of room for innovation and the market really hasn't been cornered.

Neil Thomas:

I think that's right. The United States and Europe have been wasting trillions of dollars trying to build a solar panel industry that is going to be cheaper than China's at scale. But why not use those resources to invest in biotechnology, AI, nano materials, all these kinds of frontier spaces that may not define the next few years, but will define the next few decades.

The other side, though, is that the Chinese market is still big, and it's still growing. That's what all of the businesses who are still in China are saying. There aren't many new entrants from abroad into the market, but everyone who's there already is staying because they still sell a lot.

The key, of course, is you don't want to give away the technological crown jewels. Some companies have really lost out, but smart ones, companies making these real apex technologies, including chips, turbofan engines, commercial airliners like Boeing, they always had one eye out. And many of them have managed to balance the concerns in a way that proved effective. Part of that balance is also sensible regulation from DC and other governments.

Danny Crichton:

So if I had to summarize, you are saying you can't take the water out of the bathtub. We've lost some industries, we've moved on. We're not going to win solar panels. It's done. GM has taken off Volt, others have pulled back as well.

I guess the question is whether we have learned the lesson of some of these former industries? You just mentioned turbofans, which China's aircraft manufacturer is working on right now and is trying to build an indigenous platform. We see this with chips, whether it's SMIC or Yangtze or a bunch of others. Yes, they all have technological leaps to make, but clearly China wants to own all of it.

So how do you protect the next generation of industries? Is it just continually trying to beat the scientific frontiers? Is it developing different types of lock-in?

Neil Thomas:

China of course wants to be at the technological frontier. I mean, who wouldn't, right? If you have the capabilities, then it makes a lot of strategic sense to try and seize those grounds.

It's certainly the case that we in the West took our eye off the ball in terms of the importance of industrial policy. It's not central planning, it's just having the government play a constructive role in supporting emerging industries in the case where they are in critical sectors.

There is a familiar list of industries — semiconductors, AI, biotech — that are pretty widely recognized as being pivotal for the next few decades. When it's that obvious, it does make sense to have incentives, to have subsidies, to have support for these emerging industries. And that's something that the United States hasn't done as well as China in the last few decades.

We saw some significant moves in that respect in the last few years under the Biden administration with the CHIPS Act. I think there's concern that support for that approach might be wavering with the new administration, but the results of that approach are a pretty strong argument to keep it going.

Kate Logan:

When I think about these things, I am trying to think about how we can accelerate the energy transition at speed and scale while also aligning the transition with economic development and political incentives. Climate policy isn't sustainable if you don't have those pieces. That means knowing what battles we shouldn't be fighting.

One point Neil already made, which I think is really important, is the role of FDI in the United States in technologies where China already has a competitive advantage. Is there room for reverse tech transfer in some of those industries? I’ll call out a recent paper by Professor Michael Davidson at UC San Diego making the case for it, which I think is worth a read.

A second piece is the role of R&D versus the role of diffusion. On this, I would point to some of the work by Jeffrey Ding, who is a professor at GW who's written specifically on this issue. He looks at some historical cases where one country may have invested in R&D for a specific product, but it's really the process of diffusion that ultimately determines who has a competitive advantage and wins out in the long term.

And the third piece, from a clean energy transition perspective, is the fact that with a lot of these technologies, even though one country or company might corner the market, there will be a massive market. Hopefully we'll be able to develop a strategy that will enable US companies to gain a piece of the market share rather than be squeezed out.

Danny Crichton:

Well, it sounds like we need another Riskgaming scenario going forward. But Neil, Kate, thank you so much for joining us in DC a couple of months ago and for joining us on the podcast.