US political leaders have long tried to counter Chinese industrial policy
. Now they seem to have decided the best way to do that is to emulate it, but their agenda betrays a lack of understanding of the unique challenge posed by China’s coupling of an authoritarian political regime with a dynamic market economy.
Millions of Chinese firms, including some of the world’s most innovative, are occasionally asked to serve the regime’s political objectives
– an unprecedented marriage of pioneering private companies and a Leninist one-party state. Western countries cannot match it and should not begin to try.
Much of the US economic policy response to China is misdirected. For example, the United States wants to curtail China’s support for state-owned firms
, despite evidence that such assistance starves private Chinese businesses of resources. The real challenge to America comes from private companies such as Huawei and Alibaba.
It does not come from state-owned firms such as aircraft manufacturer Comac, which has prevented the emergence of a private-sector Chinese equivalent of Boeing. In fact, the private firms that dominate the Chinese economy
took off only after former premier Zhu Rongji closed or privatised hundreds of thousands of state-owned companies
in the early 2000s.
The closures released capital to private firms and cleared the way for them to grow. Does anyone seriously believe the Chinese economy
would be stronger if policymakers were to undo Zhu’s reforms and revive all the old loss-making state enterprises?
Consider the US obsession with the Chinese government’s “ Made in China 2025
” plan, which channels subsidies to private firms in strategic sectors such as semiconductors. The jury is still out on whether the billions of yuan spent to support such industries will prove effective, but the evidence is not encouraging.
The dominant global semiconductor manufacturer is Taiwan Semiconductor Manufacturing Company
, not Semiconductor Manufacturing International Corp (SMIC), based in Shanghai. Up to now, the huge sums Beijing has ploughed into this sector have resulted in spectacular failures such as Hongxin Semiconductor
and the emergence of tens of thousands of new companies
that have no technological expertise but are seeking to capitalise on the subsidies.
Such outcomes are all too common when governments subsidise industrial sectors, perhaps owing simply to a lack of accountability. After all, who is held responsible when billions have been wasted and the officials who allocated the funds have moved on to other posts?
The growth of China’s business sector has been fuelled not by support for state-owned firms or industrial policy but by powerful local governments’ backing of private firms.
“The commercial goal of selling more GM Buicks and Chevrolets in China becomes a political and economic campaign to enhance the power and might of the city of Shanghai,” one observer of China’s car industry said in Michael J. Dunne’s book American Wheels, Chinese Roads. “Think of it as Shanghai Inc., with the mayor as the chairman and CEO.”
The support of local governments is particularly crucial for private Chinese firms. For example, the East Hope Group became the largest private aluminium producer in China with the support of the small city of Sanmenxia, in Henan province, despite the fierce opposition of the state-owned giant Chinalco
Chinese local governments also compete to attract business, a crucial factor in allowing private firms to grow. This reflects the rivalry between the Communist Party’s powerful local secretaries
, many of whom become members of the Politburo. In contrast, the central government ministers who run industrial policy and state-owned firms almost never break into the party’s top tiers.
If the US forces China to dismantle its support for state-owned firms and roll back its industrial policy, it would succeed only in removing the shackles on the private sector. This would make it more likely that other innovative private companies, supported by local party secretaries, would emerge to challenge US businesses.
Although US consumers would benefit, these Chinese firms – regardless of their intentions – have no choice but to comply when asked to advance the party’s political goals.
But US strategy, instead, seems focused on emulating the worst aspects of Chinese industrial policy. One example is the Facilitating American-Built Semiconductors Act, which would provide investment tax credits to US chip manufacturers. This follows the US Senate’s approval in June of a US$52 billion investment in the sector as part of the US Innovation and Competition Act
It is easy to understand why the US semiconductor industry would welcome US$52 billion. But besides the questionable equity of subsidising wealthy US firms that use chips, the measure will produce the same result as the billions that China has poured into semiconductors.
It will spawn companies that specialise in obtaining free money instead of investing in new technologies and products, causing the US semiconductor industry to fall further behind the leading global players.
What should the US do instead? Late in his life, the US diplomat George Kennan said that “the best thing we can do if we want the Russians to let us be Americans is to let the Russians be Russian”. His advice also applies to US policy towards China today, with the added complication that the current authoritarian superpower also has a market economy.
The real business-related challenge the US faces vis-à-vis China is the trade-off between national security and the benefits of economic exchange, not China’s support for state-owned firms or its industrial subsidies. The worst thing America could do is to enact industrial policies of its own.
Chang-Tai Hsieh is Professor of Economics at the University of Chicago Booth School of Business. Copyright: Project Syndicate