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U.S. firms are outsourcing more and more of their core manufacturing activities to companies in lower-cost countries such as China. However, U.S. policymakers and businesspeople often do not fully understand the complex relationship among outsourcing, corporate sources of competitive advantage, and U.S.-Chinese geo-economic and strategic relations. U.S. companies often must surrender key technologies to Chinese partners and suppliers in order to gain access to the Chinese market. This knowledge transfer helps spawn Chinese rivals that are likely eventually to compete with foreign companies in the global market. This article considers some of the long-term implications of outsourcing on China’s regional development and on U.S. competitiveness and national strategy.