China Shock 2.0

The Commission That Cried Wolf (And Was Right)

For 25 years, the U.S.-China Economic and Security Review Commission (USCC) has been Washington’s designated China hawk, and its most ignored oracle. Founded in 2000 as a consolation prize for skeptics of China’s WTO accession, the Commission spent two decades producing rigorous, alarming reports on the CCP’s industrial ambitions that gathered dust while the establishment preached engagement. In an era of “End of History” triumphalism, USCC was like a skunk at the garden party.

Times have changed. As bipartisan consensus on China hardened, the Commission has moved from the advisory margins toward the center of economic statecraft. And its latest annual report to Congress, released last week, does something rare for a government document: it admits total strategic failure. The Commissioners write that (A) America’s patchwork statecraft failed to arrest China’s technological rise, and (B) Beijing successfully built “interlocking innovation flywheels” that market mechanisms alone cannot counter or contain.

Two Shocks, Two Logics

1. China Shock 1.0 (c. 2001): The post-WTO flood of labor-intensive goods (textiles, furniture, toys) hollowed out factory towns but subsidized American consumers. The tradeoff was politically legible: concentrated pain, diffuse gain. We could tell ourselves this was comparative advantage working as designed.
2. China Shock 2.0 (now): A state-directed flood of capital-intensive capabilities. Beijing deploys massive overcapacity to drown global markets with underpriced solar panels, EV batteries, rare-earth magnets, and critical electronics. The logic isn’t profit maximization, but industrial commons capture. Win one strategic sector (EVs), and you may inherit adjacencies up and down the stack (batteries, sensors, autonomy).

The Commission’s verdict on Made in China 2025, now in its final year, is that the PRC now possesses a “hyper-charged, state-directed manufacturing base without historic parallel,” that is systematically deindustrializing the West.

The Prescription: From Compliance to Command

The Commission tells its Congressional handlers that incrementalism has failed, and proposes a radical restructuring of the federal government:

1. An Economic CIA: Washington’s authority over export controls, sanctions, and investment screening is fragmented across Commerce, Treasury, State, and the Pentagon, a bureaucratic archipelago that’s no match for Beijing’s lockstep integration. The proposed fix is a “consolidated economic statecraft entity”: a superagency, of sorts, with hard enforcement powers and, crucially, integration into the Intelligence Community.
2. You’ll Own Nothing (And Be Happy?) Rather than selling silicon that disappears into adversary supply chains, the Commission proposes a licensing model that would make chips above a certain computing threshold accessible exclusively via the cloud. This would keep hardware under American/Allied jurisdiction while (in theory) preserving revenue streams, and in effect would grant Washington a “kill switch” to cut off inference if a user is detected doing something off limits (e.g., training military models or violating KYC). Whether sovereign buyers would accept such dependency is unclear, but the concept inverts the current paradigm.
3. Over-the-horizon technologies: The Commission identifies two general-purpose technologies where it sees American strategy drifting.
   1. On quantum, it urges a “Quantum First by 2030″ national goal to secure computational advantage in cryptography, drug discovery, and materials science, before adversaries break current encryption standards.
   2. On biology, it reframes the sector from healthcare to an industrial platform that could produce up to 60% of the global economy’s physical goods by mid-century, and calls for the buildout of a national bioeconomy industrial base.

Hamilton Gets the Last Laugh

For ~40 years, “industrial policy” was a dirty word in Washington. The reigning orthodoxy held that markets were neutral arenas where the most efficient allocator wins. We wanted the home team to win but fashioned ourselves more as a passive referee vs. an active fighter in the ring. But the 21st century has made all too clear: the invisible hand cannot parry a state-directed fist. Strip away partisan coding and past transgressions and you’ll see it across U.S. power centers: what’s emerging now, across Wall Street, Silicon Valley, and both parties in Congress, is a return to the factory settings of the American Republic. The new consensus holds that political independence is downstream of industrial capacity. But this is not a new idea. A Founding Father wrote it down 233 years ago!

Not only the wealth, but the independence and security of a Country, appear to be materially connected with the prosperity of manufactures. Every nation, with a view to those great objects, ought to endeavor to possess within itself all the essentials of national supply.

— Alexander Hamilton, Report on Manufactures (1791)

Updated for the present: if you can’t build your own ships, forge your own chips, or synthesize your own drugs, you are a client state with a large credit card limit.

Washington is beginning to metabolize this. But restacking the American hierarchy of needs, from an economy optimized for convenience, consumer surplus, and capital efficiency to one built for strategic autonomy, is economically and politically painful. Sovereignty is inflationary. Forgetting or losing it has a price: we pay premiums for ore mined in Nevada, chips fabbed in Arizona, or AP1000s made in Georgia. But technology is deflationary, and hope springs eternal: we’re optimistic that a properly focused, motivated, and unleashed American industry can crush learning curves in due course. For its part, the Commission’s message is clear: it’s time to shift from a defensive crouch (fragmented, reactive, compliance-focused policy) into an offensive footing of economic statecraft.