[SCMP Column] Industry policies

June 18, 2018

Those who credit Donald Trump’s trade policy team with a modicum of strategic intelligence insist that the unfolding trade war is actually nothing to do with tariffs, steel and aluminium or even autos.

They argue that the real aim is to use this highly visible tariff blunderbuss to soften China up for the real challenge – which is to attack barriers to foreign companies competing in China’s internal market, and to slow China’s progress in developing technologies that directly threaten the West’s technology leaders. So the real target is Xi Jinping’s “Made in China 2025”.

The base US case is made clearly by a research assistant at the New York-based Council on Foreign Relations, Lorand Laskai. Laskai starts from the US government’s huge report justifying the Section 301 initiatives against China, calling it “a searing indictment of China’s disregard for intellectual property, discrimination against foreign firms, and use of preferential industrial policies to unfairly bolster Chinese firms.”

He says the “Made in China” policy has “riled governments around the world”, and is “shaping up to be the central villain, the real existential threat to US technological leadership”.

Laskai is definitely onto something here. China is without doubt tackling its structural economic weaknesses, trying to move up the production value chain by bringing more high-value-adding work into the Mainland, and trying to develop strength in seriously high technologies that have until today been the exclusive domain of US and European companies.

For those who need reminding, “Made in China 2025” focuses on 10 strategically and technologically important sectors: next-generation information technology, including 5G networks and cybersecurity; high-end numerical control tools and robotics; aerospace; ocean engineering; advanced railway equipment; energy-saving and new energy vehicles; power equipment; agricultural machinery;  new materials; biomedicine and high-performance medical devices.

To help achieve this the government has established five national manufacturing innovation centres and 48 provincial manufacturing innovation centres, with the aim of setting up around 40 national manufacturing innovation centres by 2025. Subsidies, loans and bonds of around US$1.5bn have been set aside to pursue the “Made in China 2025” objectives, with another US$1.6bn coming from local governments.

But it is at this point that I get cut adrift from Laskai, and the sanctimonious posturing of the US complaint against China’s new industrial policy. As the Washington Post pointed just a couple of weeks ago, these are “standard tools for countries playing catch-up with the richer industrialised West”.

I suspect the Washington Post did not recognize at the time just how standard such tools are. The UNCTAD World Investment Report 2018, released a couple of weeks ago, devoted a large chunk of its report to studying industrial policies across 101 economies. It discovered that at least 84 of them (which account for 90 per cent of world GDP) have in the past five years adopted formal industrial development strategies.

These of course include the US. And it is noteworthy that China’s “Made in China 2025” is explicitly inspired by Germany’s “Industry 4.0” economic rejuvenation strategy. The German think-tank, the Mercator Institute for China Studies” commented that China’s plan was “a forceful and smart challenge to the leading economies of today.”

UNCTAD’s report looks in some detail at a large number of the industrial policies currently in place, ranging from India, South Africa, Bangladesh and Vietnam to Germany, Japan and of course China.

It tracks how most economies are driven to industrial planning by four key forces: reducing unemployment and stimulating growth; responding to intensified competition from other economies; fears of “premature de-industrialisation”; and developing regulations that provide a good environment for global value chains.

While the traditional aim of “picking winners” is “old hat”, governments are increasingly focusing on technological innovation, incentivizing investor behavior and ensuring investment in “essential infrastructure”. That increasingly means digital infrastructure.

The most commonly-used tool of industry policies worldwide is incentives, with most economies providing generous tax holidays, preferential tax rates and tax allowances – almost half of them devoted to the automobile industry.

The US is, of course, in the thick of this, whatever the sanctimonious posturing against China’s 2025 plan. Key components of US activity include the National Strategic Plan for Advanced Manufacturing, and the Making in America initiative aimed at making sure manufacturing accounts for at least 15 per cent of GDP. The US continues to use a wide range of subsidies to support US companies, and the Buy America Act conveniently protects many US companies from foreign competition.

China’s sin, therefore, seems not that it has drafted a large and ambitious industrial plan, but that it is a plan that looks likely to be effective – so much so that it might begin to challenge high-value-adding technologies that until now Americans have regarded as their safe domain.

Unlike the US, I am not inclined to try to capture any moral high ground. I have real reservations about the net benefits of industrial policies, and am certain that a lot of the barriers in place inside China to block foreign companies from competing with local business champions do China’s economy more harm than good.

To attack China’s performance requirements and technology transfer demands is reasonable. But let’s remember that most economies do it, so to single out China as if it were a solitary sinner is naïve and hypocritical.

I would be strongly supportive of international trading partners working together through multilateral channels like the World Trade Organisation or the Asia Pacific Economic Cooperation (APEC) Grouping to pressure China to lower its many behind-the-border barriers. I am confident that China would itself be the main beneficiary of simplifying regulations, making the business operating environment more transparent, and making it possible for foreign companies to compete domestically.

But to huff and puff as US officials are doing over China having the temerity to resort to the “standard tools” of industry policy that are alive and well, at work in at least 84 economies worldwide, strikes me as the height of hypocracy.
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own.

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