China Highlights Imbalance in U.S. Economic Security Strategy

Over the past four years, the Biden administration introduced a series of China-focused trade and investment restrictions to bolster economic and national security. Now that the Trump administration has inherited—and is expected to build upon—this toolkit, it should take stock of how China has acted in response thus far. While attention is trained on Beijing’s swift riposte in the opening salvo of another brewing trade war with Washington, a more fundamental task at hand is to fortify resilience holistically, ensuring that economic retaliations cannot weaken the very supply chains that U.S. defensive measures seek to protect in the first place. The previous administration’s approach to electric vehicles (EVs) provides an illustrative example of this challenge.

Protections on EV manufacturers outweigh those afforded to the rest of the supply chain. While security and trade imperatives led the former president to forbid Chinese-made vehicles, strict rules that buttress a singular part of the industry have rendered other segments easy targets of more pointed retaliation. On Jan. 14, the Commerce Department finalized its rule to prohibit passenger cars equipped with select software and hardware of Chinese origin. This followed the U.S. trade representative’s new Section 301 tariffs on Chinese imports, notably the quadrupling of levies on EVs to 102.5 percent. The two policy instruments work in tandem to close the U.S. market to all Chinese cars, whether they run on batteries or internal combustion engines. 

These measures are intended to forestall security and economic problems that could arise from a larger presence of Chinese auto imports. In 2023, American consumers bought about 104,000 units of Chinese-made vehicles, accounting for only 0.67 percent of the total sale volume in the United States. But it has become difficult to discount possible Chinese interference through digitized transport, such as internet-connected vehicles, given intensified cyberespionage and the securitization of bilateral relations. The Commerce Department’s regulation is intended to preempt the challenge early on in anticipation of these risks. 

Similarly, the tariff hike seeks to proactively safeguard the efficacy of domestic EV investments through the Inflation Reduction Act (IRA). Central to the program’s agenda are the desires to spur energy transition, restore manufacturing jobs in that process, and free strategic goods from undue reliance on China. In the two years since the IRA took effect, qualified auto industry projects received around $14.5 billion worth of federal funding and EV buyers another $1.5 billion in tax credits. In addition, robust public financing has helped turn the U.S. into a more attractive destination for clean-energy capital, catalyzing private investments five to six times the federal expenditure.

Yet an excess of EV supplies in China threatens the utility of this spending. Within the Chinese auto market, curtailed purchase rebates, tepid consumption on big-ticket items, and state-backed overinvestment in EV production have caused profit margins to shrink, reinforcing the appetite to cut costs and sell overseas. Without barriers, underpriced EV imports would presumably squeeze American companies, risking the plight that the U.S. solar industry endured not long ago.

While this hardline approach brings welcome protection to U.S. automakers, other elements of the EV supply chain are less secure—a point made clear by Beijing’s retaliatory embargo of battery-grade critical minerals. China’s economic statecraft has come to rely heavily on restricting midstream metals essential for EV batteries, which the country leads in processing. At the same time, a growing export control regime allows Beijing to start exerting methodical and extraterritorial pressure. 

There should be no doubt about Beijing’s willingness to pull this lever. Without naming the United States, China’s official proclamations increasingly stress the need to “counter sanctions, foreign interference, and ‘long-arm’ jurisdiction.” In recent weeks, the Chinese government proposed adding several lithium refining technologies and battery chemicals to its export control list. China already has an outright ban on U.S.-bound gallium and germanium and has tightened its grip on graphite in prompt response to U.S. chip restrictions. These controlled items share one aspect in common—all are important for EV batteries, whether as inputs for anode or cathode components or as inputs to improve overall efficiency.

Furthermore, a critical mineral deficit would have an extensive impact beyond the EV sector. A wide range of strategic products, including those with military applications, have high dependence on these base minerals. Meanwhile, a supply crunch would call into question the viability of mining partnerships in third countries using Chinese purification methods, some which are eligible for IRA incentives. 

These vulnerabilities carry valuable lessons. Should tit-for-tat coercions escalate, China can now inflict actual costs on U.S. supply chains, with both commercial and national security implications. Previous Chinese responses to U.S. economic pressures were largely symbolic in practice. Other than using market access as leverage, Beijing wielded limited influence on foreign companies. This, however, has changed with China’s growing centrality to refined critical minerals on a global scale, many of which currently lack viable alternatives.

When weighing further interventions, policymakers should better assess repercussions of possible backlash in advance and alleviate foreseeable disruptions. An upcoming test for the new Commerce Department will be restrictions on Chinese-made drones. Chinese entities already account for two-thirds of the U.S. drone market, and China’s role as a premier source of essential drone parts, such as motor magnets, batteries, and critical minerals that feed into these components, makes fertile ground for retaliation. When Beijing blacklisted numerous U.S. drone companies last year, no other sourcing of batteries was readily available at scale—a shortfall that persists to this date. 

To promote balanced use of protective measures, the Trump administration should develop a national economic security strategy. As my colleagues at the Center for a New American Security reasoned recently, a coherent framework is needed to help define core economic security objectives and improve interagency coordination, so that instruments complement, not contradict, each other.

The strategy needs to require periodic evaluations of the many novel economic tools now central to the competition with China. Routine reviews can help identify and forecast unintended consequences, including those from retaliations. Close allies offer models from which Washington could learn. Japan, for example, created a cabinet position for economic security in 2021, and the European Union developed a risk assessment system that looks at both trade dependence and second-order impacts from policy responses. 

Much remains to be done on economic security. Sustainable success calls for more than siloed protections, and the stakes for getting this right are beyond the interests of any