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The bargain that China's top leaders struck with Elon Musk perfectly illustrates why the Trump administration's multi-pronged pushback on Beijing in the areas of trade, technology and security has largely failed. And it also shows why the team coming in behind U.S. President-elect Joe Biden will have to come up with a radically different approach to compete with America's most powerful rival.
To induce the billionaire chief executive of Tesla and Space X to build Giga Shanghai in the middle of Trump's trade war, they showered him with perks and special favors (like tax breaks and cheap loans) and granted his organization extraordinary access to power. Apparently, Tesla's local unit has a channel to President Xi Jinping himself, according to Bloomberg Businessweek. What did Musk get out of the deal? Privileged access to the world's largest electric vehicle market by far—and wealth untold. Thanks in no small part to China, he's now the world's richest man.  Tesla's Giga Shanghai. Photo: Costfoto/Barcroft Media/Getty Images This week in the New Economy What did China get? Leading-edge technology. Musk came in with research and development, not just production lines. His presence forced local competitors to up their game. China's indigenous carmakers never managed to win the domestic market for combustion engine vehicles against American, German and Japanese brands. Now, with Musk's help, the country is on its way to dominating the new era of electric mobility. So much for Trump's trade war: the U.S. trade deficit with China is about the same today as when the Republican took office. At the same time, writes Derek Scissors, a resident scholar at the American Enterprise Institute, U.S. investment in China now probably exceeds $1 trillion, much of it rolling in during Trump's tenure. This is how China is winning the larger Asia competition with the U.S., one that will define the early part of the 21st century. While the U.S. political system unravels, China's leaders are focused on attracting foreign technology, the key to what they call "comprehensive national power," which means economic as well as military might.  A military vehicle carries China's DF-21D "carrier killer" missile in Beijing's Tiananmen Square in 2015. Photographer: Greg Baker/AFP Trump's somewhat more successful attempts to push back against China in the security arena—for instance, U.S. warships now routinely sail by Chinese artificial islands bristling with military installations in the South China Sea—nevertheless still ran up against similar realities to those he faced on the economic front. China's rapid technology acquisition has decisively shifted the balance of power in the western Pacific, a fact that's been obvious to U.S. military strategists for some time. In his must-read book "The Kill Chain," Christian Brose, a former staff director of the Senate Armed Services Committee, describes how the Information Age has bypassed large parts of the U.S. military. To cite just one example, the F-22 and F-35A fighter jets still rely on pilot radio to share basic data; their onboard software programs can't speak to each other. Meanwhile, China is planning fully autonomous swarms of intelligent combat drones while preparing for an "AI arms race," a "quantum arms race" and a "gene editing arms race," one that will produce biologically enhanced warriors for a new military frontier. In all these areas, China is rapidly catching up to or has already left a faltering America in the dust. "The problem is that America is playing a losing game," writes Brose.  Kurt Campbell It is this dilemma that the incoming Biden administration now faces. An essay in Foreign Affairs by Kurt Campbell, Biden's newly appointed Asia czar, and the Brookings Institution scholar Rush Doshi recognizes the immense scale of the challenge. Among its prescriptions are a massive investment in the kind of weapons that China has long deployed, including rockets and missiles; scattering U.S. forces more widely around the region since U.S. military bases are now sitting ducks; and encouraging new military and intelligence partnerships among regional states. In the economic sphere, Campbell and Doshi focus on America's role in reinforcing supply chains, standards, investment regimes and trade agreements. "Negotiating Beijing's role in this order is the most complex element of the overall endeavor," they write, with considerable understatement. Will the Chinese leadership fall in with such an arrangement? Their ultimate goal is to negotiate Washington's exit from the current Asian order—or shove it out—and then establish a new organizing principle based on Chinese preeminence. Beijing's ambition is stoked by the irresistible lure of China's vast consumer markets. Xi's embrace of Tesla is part of China's broader strategy. Of course, there's no guarantee that Musk will succeed in his largest market outside the U.S. It's possible he'll be squeezed out once Chinese competitors catch up to Tesla, or that he'll find himself caught in the crosshairs of U.S.-China tech competition and be forced to choose sides. For now, though, he's all-in. "I love China," Musk gushed at a 2019 meeting with Premier Li Keqiang, who promptly offered him a residential green card. __________________________________________________________ Like Turning Points? Subscribe to Bloomberg.com for unlimited access to trusted, data-driven journalism and gain expert analysis from exclusive subscriber-only newsletters. Bloomberg Money Stuff: As 2021 begins, there's good news for fans of Bloomberg columnist Matt Levine and the popular Money Stuff newsletter. Levine is back from leave and once again providing readers with his daily take on Wall Street and the world of finance. Sign up here. 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