Better than Tariffs: Addressing China’s Geo-economic Challenge

China is not a market economy, and is becoming ever less likely to become one. The Western response to the geo-economic challenges posed by China’s industrial strategy and the export of its surplus capacity has been led by trade policy. The latest example of this is the divisive US ‘reciprocal tariffs’ approach. This may be diverting attention from the fact that China’s assertive foreign policy and emerging dominance of crucial technologies relies on the ongoing willingness of Western investors to finance national development on China’s terms and conditions. Cutting off this capital would exploit a crucial vulnerability that has been enhanced by rising levels of domestic public and private debt in China’s post-property-bust economy. These capital flows could be reallocated towards more open trading and investment partners within global value chains, and towards much-needed infrastructural and productivity-enhancing investments in Western economies.