‘Made in China 2025’ is only following the path beaten by the US and its allies

Winston Mok says the US, Japan and Korea are among the many countries that industrialised successfully on the back of government support. So why does the prospect of a Chinese industrial policy provoke outrage?

PUBLISHED : Friday, 12 October, 2018, 2:02am
UPDATED : Friday, 12 October, 2018, 2:34pm

Why is Made in China 2025 so offensive to some US leaders? Few countries, the United States included, achieved successful economic development without some form of industrial policy. In the contemporary context, it is often associated with the East Asian model – which generated the most notable post-war economic successes.

From steel to shipbuilding, from automotive to consumer electronics, Japan and Korea would not have achieved strong positions in these industries without significant state coordination, protection and subsidies. After Japan, Korea, Taiwan and Singapore all adopted some form of industrial policies in their development processes. 

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So, why a different standard for China? Japan and Korea were US allies in the cold war, the Korean war and the Vietnam war. They received significant US aid and were under US tutelage. In contrast, China is perceived as a rising threat.

China did not adopt the East Asian model of industrial development. Instead of nurturing infant industries with a closed domestic market, China was more open to foreign investment from the start. Although the playing field is not level for some industries, the China market – where foreign brands are much more prominent – is more open than the Japanese market once was.

Lacking capital and the requisite institutions, China just did not have the resources to pursue effective industrial policies. Smarting from disastrous state “planning” in the decades before economic reforms, Beijing was less convinced of the wisdom of state intervention. Instead, it effectively leveraged overseas capital, initially from Hong Kong and Taiwan in particular – the latter which is obviously not beholden to Beijing’s will.

China is simply too large for Japanese-style industrial policy coordinated by the central government. It has pursued economic decentralisation where regions compete against one another. Beijing’s past attempts at industrial policies, in the context of such internal rivalry, resulted in overcapacity more often than world-class national champions.

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For example, China’s steel industry is large but not strong. Even Baosteel, perhaps China’s best steel company, cannot match Korea’s Posco in productivity and quality. In the rare cases where China succeeded in industrial coordination, such as in telecoms equipment and high-speed rail, national services are operated by state-owned enterprises, which can use procurement to support domestic suppliers.

Japan did not invent industrial policy. Germany and the US used industrial policies to catch up with the UK in the 19th century. The foundations of most successful industrialisation were effective industrial policies.

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From the founding of the US, Alexander Hamilton advocated reducing economic reliance on Britain. To such end, the state played a role in planning, promoting and investing in economic activities. From the mid-19th century until the 1930s, the US market was protected by selective high tariffs.

It was under this American school of economic philosophy against free trade that the US surpassed the British empire and emerged as the world’s leading economy. Only in the decades after the second world war, when the US became the world’s dominant manufacturing power, was it increasingly in its interests to promote free trade.

The US now pursues industrial policies in more subtle ways. The myth that the US economy thrives just from the market’s invisible hand was debunked in books such as The Entrepreneurial State and America Inc.?. The US government has supported innovation through funding the riskiest early-stage investments, followed later by more risk-adverse venture capital.

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Without US government-funded innovations, Apple would not be where it is today. Without the huge research funding of the National Institutes of Health, the US pharmaceutical industry would not have attained and maintained its global leadership position. The US military-industrial complex is another key element in its system of innovation.

Inspired by Germany’s Industry 4.0, Made in China 2025’s chances of success are uncertain at best. Unlike Germany, China does not have an effective banking system supportive of private companies with long-term financing. The country also lacks the business culture of quality, precision and long-term orientation.

Even if successful, Made in China 2025 may only make China better at incremental innovations

With a poor track record in industrial targeting, Beijing’s financial support is just as likely to be wastefully dissipated as productively channelled. Even if successful, Made in China 2025 may only make China better at incremental innovations, like Germany, while the US remains the unrivalled leader in radical innovation.

The attempt by the US to stop Made in China 2025 is overreaching – denying China the right to do what America and its allies did in their paths to successful industrialisation. In much of its history of nationhood, the US embraced industrial policy, and the country was perhaps its most successful practitioner ever.

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The US’ economic structures successfully evolved through a series of deliberate redesigns by its government. It can cling to the past or seize the future. With the right policy instruments, Washington can leverage China’s economic upgrades to help the US economy evolve to the next frontier of even greater innovation.

Winston Mok, formerly a private equity investor, is a private investor