‘Made in China 2025’ is not unique, as US hawks insist, except in its effectiveness

  • David Dodwell says China should not be demonised for implementing an industrial policy, especially one that invests billions in technology, such as clean energy and electric vehicles, that could benefit the planet
PUBLISHED : Saturday, 12 January, 2019, 10:01am
UPDATED : Saturday, 12 January, 2019, 10:02am

Before you set out to demonise an opponent, you must first create a straw man – a crude stereotype with enough snippets of truth to make the unreasonableness of the opponent seem plausible.

So it is that US President Donald Trump’s trade team has set out to demonise China’s distinct and – over the past 30 years – successful economic model.

The characteristics of this particular straw man are built around autocratic, centralised political control by the Communist Party, state-owned enterprises and mass exploitation of subsidies to subvert the market-driven efforts of international competitors.

The straw man is embellished with manipulation and theft of intellectual property, industrial espionage on a mass scale and insurmountable barriers for foreign companies to compete effectively in the China market.

How China is finding new ways to hurt US businesses

As with any straw man, there are threads of truth here. But the complaints are not as clear cut as the stereotype suggests, nor are China’s transgressions unique. Every economy – including the US’ – has large numbers of local companies with “special” influence on government decision-making, preferential access to huge procurement business and privileged control of local monopolies or oligopolies.

Industrial espionage and IP theft are as old as the hills, and China’s transgressions are only visible because of the many in the West who are well-coached in the craft. These are an ugly and widespread reality rather than sins committed only by China.

As for industrial policies, a UN Conference on Trade and Development report says at least 84 countries worldwide have such policies – including the US. China’s is based firmly on Germany’s Industry 4.0 policy, and is distinctive not because it has an industrial policy, but because it seems to have been unusually successful in delivering results.

Local authorities no longer required to work on ‘Made in China 2025’

Every government uses subsidies, often on a massive scale, to shove economic development in a particular direction and to support industrial policies. Ask any US carmaker how many billions of dollars it has received from federal and state governments as inducements to open a plant in a particular city – or to agree not to close a plant – and the number will be larger than you think.

This does not mean that Beijing’s extensive use of subsidies is fully justifiable. I’m sure Chinese officials are just as able to waste taxpayer money as any other team of bureaucrats. But the policy is not distinctive in the way many US officials claim.

On the contrary, the way China has developed and implemented its “Made in China 2025” strategy seems quite savvy, focused on escaping from unskilled low-end manufacturing roles in globalised production chains, and building a middle class with the skills and earning power needed to underpin basic consumer comforts.

The list of 10 key hi-tech manufacturing sectors, in which state-owned enterprises and leading “private” companies have been urged to become more self-reliant and set minimum market share targets of between 60 and 90 per cent, shows great sense in the priorities set. There has been significant progress in how they have been implemented.

‘Made in China 2025’: Beijing has big plans for 5G – if the world lets it

I have no qualms about the billions poured into supporting the development of wind and solar power, for example. While other economies have talked, China’s engineers scaled up production across its economy and developed bigger and more efficient turbines. This has reduced its reliance on hugely polluting coal power plants, and, in turn, transformed the potential of renewable energy worldwide.

More recently, the subsidies focused on developing the electric vehicle industry, estimated by the US-based Centre for Strategic and International Studies at US$58.8 billion over the past decade, have made China the world leader in this field. As a result,  around half of all battery and plug-in hybrid vehicles due to be sold this year will be sold in China. Shenzhen’s taxis and buses are now all battery powered.

Total numbers of electric vehicles on the road are still small in global terms – about 668,000 in 2017 out of a world total of 82 million cars sold, according to automotive intelligence group JATO Dynamics. But Beijing targets 2 million electric vehicles by 2020, with numbers almost doubling annually after that. While others talk, this subsidy policy has already begun to make a difference in terms of street-level pollution, and global carbon-dioxide emissions.

Can China’s electric car market grow if Beijing pulls the plug on subsidies?

Contradicting the straw man mythology, subsidies have not been reserved for a small number of state-owned enterprises, nor only for Chinese companies. There are today over 100 electric vehicle manufacturers competing fiercely across the mainland, 30 alone making electric buses.

Underpinning these, over 60 companies are competing to supply lithium-ion car batteries, including foreign companies, often partnering with local firms. Beijing has also invested billions in solid-state batteries and over US$12 billion in hydrogen fuel-cell technology.

Made in China 2025: Clearing the way for a global new energy vehicle industry

Rather than relying on state-owned monoliths, Beijing has consciously spawned competition across the sector, expecting significant consolidation over the coming decade. Requirements to qualify for subsidies are being progressively tightened. Subsidies for lithium-ion batteries are expected to be phased out by 2020 and for hydrogen fuel cells by 2025.

This massive use of taxpayer funds may be hard to justify in the US or Europe, where car manufacturers have migrated away from the internal combustion engine only reluctantly, but if China’s industry policy can wean the world’s vehicle markets away from fossil fuels, we will all have a lot to be thankful for: transport accounts for around 14 per cent of greenhouse gas emissions, and with around 35 billion tonnes of carbon dioxide currently being pumped into the atmosphere every year, converting even half of all vehicles to run on batteries or hydrogen would slash emissions by around 2.45 billion tonnes a year.

Trump’s trade team claims China’s distinct model constitutes an existential challenge to the liberal market economy built over the past century. What I see from here in Hong Kong is much more tooth-and-claw competition than Trump’s men admit, and an industrial policy that is different only because it is being effectively implemented. Forget the straw man, and there is something to learn from that.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view