U.S.-China Investments Can Still Work for Americans

The Board of Trade and Board of Investment, the mechanisms for negotiating tariff reductions and cross-border investment, respectively, were meant to turn the 2025 Busan summit between U.S. President Donald Trump and Chinese President Xi Jinping into concrete economic deliverables. So far, only the Board of Trade has developed an agenda, reflecting how difficult cross-border investment has become amid U.S.-China strategic rivalry. The Board of Investment could take the easy route of approving a handful of small, nonsensitive deals. Or it could aim higher, pursuing investments that deliver meaningful gains for both countries. China faces weak demand and fierce competition in its electric-vehicle sector at home. The United States needs more affordable green autos and stronger domestic capabilities in next-generation automotive technologies. At least in theory, some well-designed investment partnerships could help address both sides’ challenges. Yet much of the current debate rests on misconceptions about what makes China’s EV industry competitive and what the United States stands to gain. The popular proposal is that the United States can ask China to transfer its battery technology and that this would be the magic pill for U.S. EVs. But battery tech is the wrong focus, tech transfer is the wrong approach, and U.S. EVs are the wrong target. Access to China’s cheaper lithium-ion battery technology would not be enough to make EVs affordable in the United States. Batteries alone will not suffice. Japan and South Korea once led in lithium-ion batteries, yet that advantage did not translate into leadership in EVs. Chinese automakers came from behind because of their increasingly capable battery suppliers and because they advanced quickly in another, less visible technological foundation: electrical and electronic architecture (EEA), which is the brain and nervous system of an intelligent electric vehicle. Traditional cars rely on hundreds of electronic control units. A software-defined vehicle instead uses a more centralized, zonal architecture in which a few computers coordinate the whole vehicle. Zonal EEA shortens development cycles, simplifies supply chains, lowers costs, integrates intelligent features, and enables a smartphone-like user experience. Tesla pioneered zonal EEA in 2017, but fierce competition pushed Chinese automakers to catch up quickly. Nor should the United States try to catch up with China’s well-known lead in EV manufacturing. The acquisition of Chinese technology for battery-electric vehicles (BEVs) is currently a U.S. policy priority, but a lesser-known fact is that China now leads across a broad range of powertrains, including BEVs, plug-in hybrid electric vehicles (PHEVs), and many others. In fact, going fully electric may not be the best option in the United States. Americans drive roughly twice as many miles each year as Europeans and 70 percent more per passenger car than Chinese, and extending BEV range requires even larger and heavier batteries. China-developed affordable PHEVs can travel about 100 miles on electricity, enough for most daily commutes, while achieving fuel economy of roughly 60 miles per gallon on longer trips. Limited public charging remains a hurdle for BEVs in the United States. Many suburban homeowners, however, can install home chargers that are more than adequate for the smaller batteries in PHEVs and for routine commuting. Competitive PHEVs, one of China’s technological strengths, are a much better option for serving American consumers facing both rising vehicle prices and higher fuel costs. Technology transfer could also be a surprising dead end for the United States. Technology transfer is sensitive, as China is not willing to give away the crown jewels of its technology so easily. But even for legacy technology, there is another challenge. If competitive EVs required only batteries, the main task would indeed be getting battery production technology from China. But making the U.S. auto industry competitive also requires advanced EEA and powertrain technologies. A broader scope of technological domains requires much more than manufacturing know-how; it also requires new supply-chain arrangements and new approaches to research and development. These are beyond the scope of a conventional joint venture, direct investment, or technology license. Asking China to transfer fancy tech is a pipe dream. The correct approach is what we call deep-tech iterative learning. China’s own experience shows why local manufacturing is insufficient for this. When China set out to modernize its auto industry, policymakers assumed that localized manufacturing of advanced products would automatically build domestic capabilities. During the 1980s, China experimented with several forms of partnership with international automakers, including joint ventures and technology-licensing arrangements. The result was a mixed bag, with many producing very little transfer. One example was Volkswagen, which did improve Chinese capabilities in manufacturing, supply-chain management, and quality control, but it did relatively little to build domestic R&D. A second wave of more carefully designed partnerships in the 1990s, especially with General Motors (GM) and Ford, created a more disciplined, step-by-step process for iterative learning in automotive R&D. Over time, the exchange became reciprocal. China acquired technology and engineering expertise. As Chinese partners grew more capable, they helped U.S. automakers improve vehicle quality and reliability while reducing R&D costs after the 2008 financial crisis. Bargaining power for iterative technological gains comes from leverage, incentives that make technology transfer worthwhile for the provider, and the architecture to make it work. The United States must develop these by doing the hard work: starting small, building new capabilities along the way, and making the next, more substantial step in technology transfer a good deal for both countries, so that it can last for the long haul. Back then, China’s main bargaining chip was controlled access to its market. In the early 1990s, officials in Shanghai were frustrated by the limited transfer of R&D capabilities from Volkswagen. They negotiated with more than 10 international automakers and ultimately invited GM, Ford, and Toyota into the final bidding process. China was offering one of the last opportunities for entry before its expected accession to the World Trade Organization around 2001, and Shanghai used competition among bidders to demand strong commitments to localized engineering and R&D. Automakers expected the market to grow multifold to a market comparable to the U.S. one. It eventually became more than twice as big. GM submitted the strongest offer and won. Its centerpiece was the Pan Asia Technical Automotive Center (PATAC), a joint design and engineering center that became the institutional channel for transferring R&D capabilities and technical knowledge from GM’s global operations to Shanghai. Deep technology transfer didn’t happen at once. Initially, PATAC’s work was limited to calibrating existing designs and making cosmetic changes. The incentives changed as China overtook the United States to become the world’s largest new-car market in 2009. China was also a market with distinctive demands. Government and business executives often traveled with larger entourages, creating an unusual demand for premium minivans. Engineers in China also developed a closer understanding of consumers in emerging markets than counterparts in Michigan or at GM subsidiaries in Germany and Australia. Local knowledge about a distinctive, large market eventually propelled GM to move two major R&D projects into China. The first was a Chinese-developed Buick premium minivan that differed fundamentally from aging GM minivans for American soccer moms. With GM’s support, PATAC engineers learned how to design new vehicle architecture for the first time. The second was a project with SAIC, its Shanghai partner, to codevelop small engines for global emerging markets, allowing SAIC engineers to develop engines from the ground up. These two programs have sustained sales of millions of units for GM across the world. Engineers trained through these programs later carried their technological knowledge into numerous Chinese carmakers. With support from central leaders, Shanghai offered foreign automakers a coveted chance to enter a potentially enormous market. China’s distinctive consumer needs, some shared with other emerging markets, gave U.S. automakers commercial reasons to transfer R&D capabilities and know-how. But leverage and incentives produced deeper, long-term iterative learning only when embedded in durable institutions: a manufacturing joint venture and a joint R&D center that could survive shifting political whims. The United States today has a combination of leverage and incentives like those China possessed. Its market is huge and still largely lacking in affordable electrified models. Chinese automakers, facing thin profit margins at home, are drawn to this untapped demand. The U.S. market is also distinctive in its road conditions, urban form, safety regulations, and consumer preferences. Chinese companies cannot simply transplant existing blueprints. To build durable, low-maintenance vehicles suited to American roads, they would need to hire and train engineers in the United States, bring key suppliers, and develop capabilities there, much as Japanese automakers did decades ago. A regulated mechanism such as the Board of Investment could provide the missing institutional structure. Taking baby steps toward transferring some low-hanging-fruit technologies across a broad range, including batteries, EEA, and hybrid powertrains, is neither fanciful nor unrealistic. If the United States does nothing, it will lose out not just to China but to everyone else. Volkswagen, Mercedes, Renault, as well as Abu Dhabi’s CYVN, have all been working with Chinese firms in different ways to tap Chinese expertise in EEA and powertrain technologies. Toyota is likewise testing cutting-edge EV technologies in China rather than Japan. The Board of Investment could organize a competitive bidding process to identify Chinese partners with the strongest capabilities and the clearest commitments to participate. Working with one or more interested U.S. automakers, it could invite qualified Chinese firms to compete on the substance of their offers, as Shanghai did 30 years ago. It would also help if the board devoted more energy to institution-building, including, but not limited to, involving deep industry expertise in assessing and calibrating licensing or joint-venture terms, establishing security guardrails for connected-vehicle technologies, and creating joint R&D institutions modeled on the PATAC so that technical capabilities are continuously channeled into the United States, independent of political favor or goodwill. National security would be addressed at the technical level, regardless of whether it is prioritized politically. Working first with a select group of Chinese firms to develop and produce smaller battery-electric or plug-in hybrid vehicles in the United States and building from there could be an easy first step. It sounds complicated, but it’s nothing new. Amid the U.S.-Japan trade tensions, the GM-Toyota joint venture NUMMI (1984) and Toyota (1977) and Honda’s (1975) R&D centers in the United States brought technological capabilities to U.S. automakers, parts suppliers, and engineers. This is a proven process. U.S. industrial competitiveness, Americans’ everyday quality of life, consumer affordability, and U.S. innovation leadership in general are at stake. Getting it wrong would be tremendously costly.