Understanding China’s Industrial Policies

As China’s industrial policies are the major cause for the Trump administration to launch its tariff war, it is important to understand what Beijing’s policies are and what they seek to accomplish. For example, the Made in China 2025 (MIC 2025) policy—especially Beijing’s specific targets in using state administrative power to outcompete and displace Western companies in sectors long dominated by developed countries—has been an important justification for President Trump to launch the trade war. This is because Washington believes MIC 2025 could erode the crown jewels of America’s economy: the high-tech sector. Additionally, the White House believes that Beijing’s industrial policies have encouraged Chinese firms to engage in the theft of American intellectual property and technological know-how.

Just like the United States during the nineteenth century, the goals of industrial policies have been based on government support for particular industries deemed vital to national security and long-term economic competitiveness. China’s industrial policies are no different, but they occurred under an international environment where these policies could go against the World Trade Organization’s (WTO) rules and post-1990s international trade consensus. From the perspective of realpolitik, China’s industrial policies also run counter to American strategic interests. 

Theoretical Background

According to German economist Fredrich List, the ultimate goal of national politics is to strive for national self-preservation and empowerment, which involves the development, protection, and cultivation of domestic industries. He writes “the working of which [domestic industrial sectors crucial to national survival and empowerment] much outlay of capital in building and management, much machinery, and therefore much technical knowledge, skill and experience, and many workmen are required and whose products belong to the category of the first necessaries of life,” and consequently “national independence.”[i] Therefore, sovereign states need to “restrict the importation of foreign manufactured goods'' in order to promote domestic industries, so the “growth of the national industry” would become “the growth of the national freedom.”[ii]

American Founding Father Alexander Hamilton agreed with List in arguing that the early Republic should engage in “an exercise of central power” to protect nascent American industries against Britain, while some American industrialists engaged in outright theft of British technological know-how. According to List and Hamilton, Britain’s promotion of free trade in the nineteenth century was only possible because an open international trade system would allow the already developed British manufacturers to outcompete all latecomers.

What’s the Matter with China?

In the case of China, by 2003, President Hu Jintao and Premier Wen Jiabao realized that the country had been dangerously stuck in the low-value rung of the global industrial supply chain dominated by labor-intensive final assembly. Additionally, China’s entry into the WTO placed new restrictions on technology transfers and local-content requirements. As a result, the Hu-Wen administration concluded that China’s status as a low-skill assembly house could become a national security risk, as China became dangerously dependent on foreign suppliers for high-tech products critical to the country's security and economic competitiveness.[iii] In essence, China’s “growth of the national freedom” could be jeopardized if its “technical knowledge, skill, and experience” remained limited.

Thus, in 2006, the Hu-Wen Administration turned to “techno-industrial” policies with a long-term nationalistic goal of creating China’s “independent technological capabilities.” Under the 2006 medium- to long-term “indigenous innovation” policy, Beijing set up 16 specific megaprojects for domestic firms to absorb critical foreign technologies and innovate based on these acquisitions. One of the successful megaprojects has been nuclear reactors. In 2007, U.S.-based Westinghouse signed a contract to supply its most advanced reactor—the AP1000—to China. Westinghouse agreed to transfer its reactor technology to China so that Chinese firms could eventually innovate based on the American “technical knowledge, skill, and experience.” In return, Westinghouse got to sell at least four of its most advanced commercial reactors to arguably the most lucrative nuclear reactor market in the world. The case of Westinghouse fits into Beijing’s technology for market access approach in absorbing advanced foreign technologies to  achieve high-tech autonomy.

In addition to the 2006 “indigenous innovation” policy, the MIC 2025 industrial policy set specific targets for China to achieve full indigenous innovation and manufacturing capabilities in ten strategic sectors with the goal of China becoming a leading manufacturer in these sectors by 2049. To this end, the Chinese government has required many foreign high-tech suppliers to enter into joint ventures (JV) with Chinese state-owned companies, allowing Beijing to leverage its position as a major purchaser to press for technology transfers in these ten sectors. Advanced rollingstock and high-speed rail (HSR) equipment have been the most successful examples of such transfers. In the aforementioned Listian tradition, Beijing hopes to nurture the growth of its high-tech sectors in order to enhance its “national independence,” meaning autonomy in these critical manufacturing sectors.

Under the Long-Term Railway Network Development Plan, Beijing planned to build more than 16,000 kilometers of HSR by 2020. Subsequently, the former Ministry of Railway facilitated China’s two state-owned train manufacturers—the China South Locomotive & Rolling Stock Corporation (CSR) and China North Locomotive & Rolling Stock Corporation (CNR)—to enter into JVs with Alstom (France), Siemens (Germany), Bombardier (Canada), and Kawasaki (Japan).[iv] Under the JVs, a technology transfer for market access program required the four foreign firms to assemble high-speed electric multiple units (EMU) in China, provide their Chinese partners with technical know-how and blueprints, and train Chinese engineers. By 2017, Beijing rolled out its first indigenous Fuxing high-speed EMU. CSR and CNR also merged to become the China Railway Rolling Stock Company (CRRC), which enjoyed 55% of the global market share for HSR in 2017. Just like nuclear power plants, the case of high-speed rail shows Beijing’s willingness to use market access as leverage for technology to achieve its goal of absorbing advanced foreign technologies to acquire not just high-tech autonomy, but also long-term economic competitiveness. In the HSR case, Beijing eventually displaced its foreign suppliers domestically and globally.

Conclusion

In this analysis, both the 2006 “indigenous innovation” and MIC 2025 policies are considered standard practices for late-comer states hoping to achieve high-tech autonomy. However, the problem with China’s industrial policies is that they occurred after Beijing joined the World Trade Organization, which prohibits China from explicitly setting targets to replace foreign suppliers with domestic ones. Additionally, China’s industrial policies and attempts to move up the industrial value chain put Beijing in direct competition in high-tech sectors long dominated by American and Western firms. Thus, U.S.-China commercial relations will likely remain turbulent in the near future. 

Non-Digital Works Cited

[i] Friedrich List, The National System of Political Economy (London: Translation by Sampson S. Lloyd, MP, 1885), 75-77.

[ii] Ibid, 132.

[iii] Barry Naughton, The Chinese Economy: Adaptation and Growth (Cambridge: The MIT Press, 2018), 378-379.

[iv] Zhang Weihua, Dynamics of Coupled Systems in High-Speed Railways: Theory and Practice (Beijing: Science Press, 2019), 10-11.