As the U.S.-China trade war has entered a stalemate, the underlying dynamics of the globe's most important bilateral relationship are nonetheless rapidly shifting. This shift is generally conceived of in terms of power dynamics – the rise of one power versus the fall of another. But there is a more apt conceptualization: the Battle for the Commanding Heights.
Originally a military metaphor, Vladimir Lenin used this term in 1922 to describe his New Economic Policy, especially the need to foster industrial sectors that lead or undergird the broader economy. Back in the 1920s that was primarily heavy industry, such as steel and chemicals, but also infrastructure and financial intermediation to support investments in new leading sectors.
The concept gained further currency in Daniel Yergin and Joseph Stanislaw's 1998 book and subsequent PBS documentary series, The Commanding Heights: The Battle for the World Economy. Here the struggle between government control and free markets – neoliberalism versus state capitalism – stood front and center. But the Battle can also refer to the changing nature of the "commanding heights" as new economic sectors take leadership positions, and the geopolitical competition to control these sectors shifts accordingly.
Few events crystallize this twenty-first century battle better than Trump's initial sanctioning of Huawei in 2019. Trump then signed an executive order that effectively banned the use of Huawei equipment in U.S. networks and added the company to the U.S. Department of Commerce's Entity List. The rationale given was that the company posed a national security threat due to its provision and continued control over telecommunications infrastructure central to modern economies.
The Huawei ban was followed by a ratcheting up of controls on the export of U.S. chip manufacturing equipment to China, especially under the Biden administration. The United States also forced manufacturers domiciled in allied countries, such as Japan and the Netherlands, to follow suit.
With these policy moves a new iteration of the Battle for the Commanding Heights crystallized. Only this time it is less about ideas. The central ideological conflict of the twentieth century pitting the benefits of free market policies against those of state guidance is now in the background. For sure, there are still fervent adherents on either side, but the second Trump administration seems intent on forging a new form of American state capitalism. It has even gone as far as to take stakes in ailing tech companies (Intel) and ask for a share of Nvidia's and AMD's China sales.
No, this time the Battle for the Commanding Heights features almost converging ideologies and policy mixes. Yet it is perhaps even fiercer than a hundred years ago. New leading sectors ranging from biomedicine to batteries are now key to modern economic development. Among these the most central is the emerging confluence of technologies centered on chips, Artificial Intelligence (AI), and robotics. These are the highest of the new commanding heights. They will not only propel economic prosperity, but shape geopolitical ascendency in the twenty-first century.
It is perhaps for this reason – the stakes are so high – that there is increasing confluence of economic approaches by all major actors, especially the United States and China. China clearly has prioritized the use of state guidance, investment, and control to forge a powerful new mode of industrial policy and technological upgrading.
In a recent article in Foreign Affairs, Dan Wang and Arthur Kroeber argue that China's economic model relies on building the deep infrastructures needed to advance technology. This includes a dynamic innovation ecosystem that makes use of a massive workforce with advanced manufacturing knowledge and state-provided electricity and digital networks. They call this an “all-of-the-above technology strategy” and credit it for enabling China to scale new technologies faster than any other country.
Although China's economic problems are serious, they argue that its technological momentum will be hard to arrest. Beijing not only relies on expansive, state-directed industrial policies, but also fosters private entrepreneurship and innovation. The authors suggest this hybrid state capitalism is resilient and could possibly achieve technological supremacy.
Any U.S. government that misunderstands, or even worse, underestimates China's powerful combination of state guidance and private entrepreneurship runs a massive risk. Such underestimation could seriously endanger U.S. technology leadership. Massive long-term investments in infrastructure, human capital, and industrial capacity are required for America to sustain its present advantages.
For the past eighty years, the American technology development ecosystem worked well, fostering world-class corporations while building the technologies of the future. But it now stands at a critical juncture where it could forfeit the Battle for the Commanding Heights. The United States has never faced a competitor practicing hybrid state capitalism on a continental scale. The country also has been resting on its laurels, underinvesting in the future, especially infrastructure and human capital.
Nevertheless, the biggest threat to the U.S. model emanates from the Trump administration's own efforts to practice an American form of hybrid state capitalism. Alas, this state capitalism looks like it might combine the worst of two worlds, mingling crony capitalism with little overall state guidance and investment. In fact, key policies of the second Trump administration, from those tackling the energy transition to immigration, science, and academia, seem almost designed to undermine key planks of the American success story.
This does not imply that the Battle for the Commanding Heights has already been decided. China faces enormous economic challenges. The bottleneck of chip technology now so apparent due to American sanctions could hold back Chinese development of other technologies, chiefly AI. And the United States still boasts some of the best educational and scientific resources on earth, plus the ability to raise capital rapidly for new technologies.
But never in the past eighty years has the Battle for the Commanding Heights been this evenly balanced. China has forged an impressive technology ecosystem that is now a world leader in batteries, green tech, robotics, and Electric Vehicles. On the other side, the United States has enormous initial advantages as it has accumulated leading technological and scientific resources for decades. So, in the race to capture the new Commanding Heights, America holds the advantage. Unfortunately, these advantages could be squandered if Washington policy-makers misinterpret or underestimate the competitive threats posed by the Chinese technology innovation machine and fail to make strategic investments for the future.
