Why Made in China 2025 should scare Donald Trump less than those betting on Chinese tech dominance

Shang-Jin Wei says the US president’s attacks on China’s strategic plan might lead to more intervention by Beijing, to the detriment of the country’s economy

PUBLISHED : Wednesday, 27 June, 2018, 1:33pm
UPDATED : Wednesday, 05 September, 2018, 11:31am

In announcing a second round of tariffs on imports from China, US President Donald Trump singled out the Chinese government’s “Made in China 2025” plan as a threat to US economic growth and a clear example of “unfair” trade practices. Is there any merit to Trump’s claim? And is the plan good for China and the world?

Made in China 2025 is a strategic directive issued by the Chinese government in 2015 to upgrade the country’s economic structure and growth model over the next decade. The plan comprises five key priorities – accelerating innovation; improving the quality of products and services; boosting environmentally sustainable production techniques and renewable energy; promoting the structural transformation of industries and firms; and, investment in human capital and talent development.

Both US and Chinese policymakers have become increasingly mindful of what Graham Allison of Harvard University has called the “Thucydides trap”, which suggests that when a rising power like China meets a hegemon such as the US, military conflict is hard to avoid.

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Many Chinese interpret US accusations of “unfair trade practices” as an excuse for the US to do what it was going to do anyway: block China’s rise to global economic predominance.

Made in China 2025 is essentially an industrial policy, but industrial policies are not necessarily incompatible with World Trade Organisation rules. The very concept of state-guided development was practically invented by the US over 200 years ago, when Alexander Hamilton, the country’s first Treasury secretary, called for more government support of manufacturing.

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Since then, US governments have channelled massive subsidies through the treasury, defence and energy departments, as well as the National Science Foundation and other institutions, to fund innovation. The German government’s Industry 4.0 Strategy is a direct inspiration for the Chinese plan.

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The Chinese government’s 2015 directive stated that the first “basic principle” of Made in China 2025 is “for the market to lead and the government to guide”. There is no explicit mention of governmental discrimination based on firms’ nationality, nor of forcing foreign companies to transfer technology to Chinese firms.

What matters is how the policy is implemented. The plan calls for the development of hi-tech sectors deemed to be important for future growth and establishes numerical targets for 2015, 2020 and 2025. These benchmarks include research and development expenditure as a share of revenue, the number of patents registered, broadband coverage ratios, automation diffusion rates, reductions in energy intensity and carbon dioxide emissions, and so forth.

The history of such economic directives in China suggests that the authorities often miss the mark on many of these targets. My own research shows that the government’s industrial subsidy policies are not particularly efficient.

If the government were to intervene less and allow domestic private firms to compete on an equal footing with both state-owned enterprises (SOEs) and foreign-invested firms, innovation would accelerate. However, if the government insists on being very active, the pace of economic catch-up with the US will be slower.

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In principle, well-designed industrial policies can correct certain market failures and help countries achieve higher efficiency and more equitable social outcomes, which is why the WTO does not prohibit them. But the WTO does prohibit differential treatment for domestic and foreign-owned firms.

As long as Made in China 2025 supports certain sectors, regardless of participating firms’ nationalities, it can be compatible with WTO rules.

If China suspects that other countries are pursuing a containment strategy to impede its technological development, its resolve to follow through with Made in China 2025 will strengthen. Moreover, the government will be more inclined to favour firms over which it has greater leverage, such as SOEs. The result will be less efficient outcomes and less innovation for both China and the world.

Shang-Jin Wei, a former chief economist of the Asian Development Bank, is professor of Chinese business and economy and professor of finance and economics at Columbia University. Copyright: Project Syndicate