by markus_zhang | 2026-02-13 16:28:49+00:00
A few weeks ago in New York, I was sitting at a dinner organized to discuss American trade when the conversation swiftly turned to China. Well-credentialed experts took opposite stances: Some supported President Trump’s muscular, aggressive positions, while others pushed for a less confrontational, more conventional approach.

I am no expert on trade, but I have made investments in China for years and had just returned from a weeklong visit. Eventually summoning my nerve, I suggested that neither approach would work. China is just too formidable as a rival — as well as a critical manufacturing powerhouse — to be reined in by diplomacy or an aggressive shift in policy. The only real solution is to get our house in order and beat China at its own game.

The need to do so is only growing, because the commotion of Mr. Trump’s first year back in office has set America back. In addition to manufacturing, China is threatening America’s pre-eminence in a range of fast-growing sectors, including artificial intelligence and pharmaceutical drug development. While he has tried to cut our spending on important government functions like basic research, China has made them national priorities.

China’s progress in A.I. has been stunning. While it still lags the United States in terms of cutting-edge semiconductor chips, China has an abundance of another key ingredient of A.I. success: power. It has more than twice as much generating capacity as we do, and some of its data centers pay half as much as ours for power.

That has helped it develop products like Manus, with exceptional speed. An A.I. agent with performance rivaling ChatGPT’s, it was sold to Meta for more than $2 billion shortly after my visit.

Human capital is a key ingredient of China’s success. I met with innumerable young entrepreneurs whose energy and intelligence at least matched that of their Silicon Valley counterparts, including one billionaire who still sleeps in his office.
For all of Mr. Trump’s tariff bluster, we are not winning this trade war. The Asian goliath powers on as the world’s largest exporter, its trade surplus having notched a record $1.2 trillion last year. That overall increase suggests that many Chinese goods are simply passing through middleman countries before reaching U.S. shores. Tariffs or no, everybody needs Chinese goods.
Consider cars. During my trip, I toured Xiaomi, a smartphone and electronics manufacturer that announced its entry into the electric vehicle industry just five years ago. In a sprawling facility almost devoid of humans, hulking mechanical creatures that look like robotic dinosaurs effortlessly nudged aluminum panels into place as cars moved down the line. In the lobby sat a yellow sports car that could easily be mistaken for a Porsche.

I visited a robotics company where what looked like plastic children’s toys scampered across the floor, demonstrating the firm’s progress toward building humanoids that could replace humans in certain tasks. (In 2024, China installed nearly nine times as many industrial robots as the United States.)

After a visit, Ford’s chief executive, Jim Farley, last summer pronounced China’s in-vehicle technology “far superior” to American models’ and described Chinese progress as “the most humbling thing I’ve ever seen.” Coincidentally — or not — Ford recently stopped production of its F-150 electric truck and took a huge $19.5 billion write-down on its electric vehicle efforts.

Then there’s drug development. Just a few years ago, China was still licensing many of its pharmaceuticals from companies overseas. Now it licenses more drugs to other countries than it licenses from them, and it has surpassed the United States in its number of clinical trials.

Of course, China still faces challenges. The consequences of a still deflating property bubble continue to ripple. Partly as a result, consumers have yet to open their wallets. With slowing growth, youth unemployment surged to nearly 20 percent (and has backed off only slightly). Investment has fallen.

That adds up to the fact that there are two Chinese economies: a sluggish domestic economy and the colossus that dominates global manufacturing while making extraordinary progress in fast-growing, technology-oriented fields that have long been American led.

China has achieved this success in part via its model of state-directed capitalism. When the government realized it was losing the A.I. race, it made clear that catching up was a national priority and backed that up with money, regulatory relief and the development of huge amounts of electricity-generating capacity. We can see the results.
Competing against China will be difficult under the best of circumstances. Clearly we need to rethink our industrial policy — the way we can deploy our government resources to support strategically important industries, which is our version of state-directed capitalism. Unfortunately, the Trump administration’s incoherent policies are creating a truly bad set of circumstances.

For starters, we need to reverse the cuts that Mr. Trump has made to investments in science and other areas.
And while I’m plenty skeptical about the ability of a democratic government to pick winners, we no longer have the luxury of confining Washington to the sidelines. In particular, we should focus on industries of the future, many of them technology related, and tone down Mr. Trump’s emphasis on traditional metal-bending manufacturing. For example, thanks to the CHIPS and Science Act passed under President Joe Biden, huge semiconductor fabs are under construction in Arizona and elsewhere.
Redirecting government goes beyond spending. We lack critical minerals not because they are rare but because securing permits for new mines and processing facilities is so difficult. We can surely find a way to develop our mining capabilities without compromising reasonable environmental standards.

What Mr. Trump should learn — as should everyone else — is that we are not going to beat China by imposing tariffs or by attempting to negotiate trade agreements that China would probably violate. (Importantly, sound industrial policy does not mean taking stakes in companies or demanding royalties, as the Trump administration has been doing.)
Outpacing China has to begin at home, by getting our own economic house in order, a challenge that also should motivate Mr. Trump to rethink a large range of his policies.