Blog Post

Is China’s innovation strategy a threat?

What’s at stake: A number of recent contributions accuse China of acquiring technology from abroad without respecting international rules. This blog reviews the current debate that focuses on China’s supposed push to modernise its industry and the challenges for advanced economies. By leapfrogging to high-tech manufacturing products, the strategy threatens the competitive advantage of the US and the EU. The international rules-based order is put to a test facing large-scale government support to high-value added sectors and anti-competitive behaviour.

By: Date: April 3, 2017 Global Economics & GovernanceInnovation & Competition Policy Tags & Topics

Rob Atkinson et al. recently called for a united front led by the United States to establish a doctrine of constructive, alliance-based confrontation in reaction to Chinese innovation-mercantilist policies. The background of the paper is the Chinese government’s innovation strategy of modernising its industry and achieving global dominance in a number of high-tech industries. The authors criticise innovation-mercantilist practices which aim to domestically supply high value-added manufacturing products while maintaining access to global markets for Chinese products and effectively distort a level playing field.

Besides the violation of fundamental free market tenets, the report highlights national security implications emerging from a diminished domestic industrial base, compromising US military supply chains and reducing capability to manufacture military systems. Atkinson et al. recommend a strong stance to contest Chinese practices on the US side while reinvigorating the market- and rules-based global trading system in close collaboration with allies (possibly G19) but led by the US.

The Chinese government’s strategy has most recently been laid out in the “13th Five-Year Plan for Science and Technology” and the “Made in China 2025 Strategy”. In a synonymous report, the German think tank MERICS explores the cornerstones and context of the strategy and criticises its “techno-nationalist” aspects. The aim of “Made in China 2025” is to turn the country into a global leader in manufacturing of high-tech industries such as automotive, aviation, robotics, medical devices and information technology. It is the government that aims to improve the competitiveness of its enterprises on domestic markets and fuel global expansion. Ultimately, this would lead to technological catch-up and import substitution in sectors crucial for long-term growth.

While increased demand for high-tech manufacturing products and growing innovation capacity from China is good for the global economy, the MERICS report stresses that this is conditional on China abiding by the principles of market- and rules-based trade. The authors point out that China’s leadership systematically intervenes in domestic markets to disadvantage foreign competitors and facilitate economic dominance of Chinese enterprises. This puts pressure on countries in which high-tech industries contribute a large share to the industrial output, such as Germany or South Korea.

The authors at MERICS expect that the strategy is likely to succeed in elevating a small number of Chinese manufacturers to international frontrunners, but will fail at promoting a broad-scale technological upgrading across the Chinese economy. The strategy’s effectiveness is reduced by the mismatch between industry needs and political priorities, inefficient allocation of funding, a lack of bottom-up initiative and investment as well as the current economic downward pressure in China which might cause job losses among less skilled workforce.

Both the US Chamber of Commerce and the EU Chamber of Commerce in China have recently voiced concerns in reports on China’s strategic reorientation. Moreover, the European Commission and the High Representative of the Union for Foreign Affairs and Security Policy published a joint communication to the European Parliament and the Council on Elements for a new EU strategy on China which points out a lack of reciprocity and market access and seeks an agreement with China on combatting IP theft.

Among the most reported examples of anti-competitive behaviour are government-subsidised acquisitions of technology firms. These cases seem alarming not least because of their national security dimension according to Atkinson. A Stratfor analysis piece reports that Washington has expressed concern about Chinese involvement in the high-tech sector because the US views China as a potential adversary in the Pacific Basin.
The failed attempt by Fujian Grand Chip Investment to buy German semiconductor company, Aixtron, is a recent case.

As described by the New York Times, Aixtron began looking for a new investor after the retraction of a major order from a Chinese client caused its shares to drop. Through intermediaries, the National IC Fund offered to provide a loan of 500 million EUR for the deal. The US government blocked the sale of the company’s US assets leading to the cancellation of the deal. The US administration stepped in because of an alleged national security risk relating to military application of Aixtron’s technical body of knowledge.

Germany has become the top destination for Chinese investment in high-tech industries in Europe according to G. Chazan at the FT. The article mentions the case of Kuka, one of Germany’s most innovative robotics companies, which was acquired by Chinese appliance-maker, Midea, with the goal of expanding Kuka’s presence in the Chinese market. The value of Chinese FDI in Europe has more recently been discussed in the MERICS publication “Record Flows and Growing Imbalances”:

J. Delcker at Politico writes that European officials, business leaders and lobbyists still widely welcome Chinese investment in Europe. This is despite warnings of former German Economy Minister Sigmar Gabriel that Germany was sacrificing “its companies on the altar of free markets”. Similar opinions have been expressed by G. Öttinger, European Commissioner for Budget and Human Resources. European companies will benefit in the early stages of the “Made in China 2025” strategy, but Mauro Petriccione, deputy director general in the European Commission’s trade department is sceptical of future development according to Politico.

T. Moran at the Peterson Institute quotes the German State Secretary at the Ministry for Economic Affairs and Energy in the title of his article, “Can Europe be open but not stupid on foreign acquisitions by China?”. The EU and its member states have no mechanism to screen foreign acquisitions of EU companies unless they involve sensitive military and defense contracts. For this reason it was not possible for Germany to block the Aixtron acquisition without intervention from the US. Moran supports the idea of creating an EU body that corresponds to the Committee on Foreign Investment in the United States (CFIUS). This institution would be tasked with screening foreign acquisitions regardless of sector but with a narrow focus on national security.

The report “Two-Way Street: 25 Years of US-China Direct Investment” by Rhodium Group and the National Committee on US-China Relations puts FDI numbers into perspective and highlights that the US FDI footprint in China is still about four times larger than Chinese FDI presence in the US. Flows from China are at a low level. Yet, FDI from China is increasing fast and targets high-tech industry.

The Information Technology & Innovation Foundation lists further anti-competitive practices in its annual publication on “The Worst Innovation Mercantilist Policies” and Rob Atkinson’s report “Enough is Enough”. Among them are:

  • IP and technology transfer or local production as a condition of market access: Foreign airplane sales into China are contingent on transferring technology to the Aviation Industry Corporation of China;
  • theft of foreign IP;
  • curtailment of access to Chinese markets;
  • manipulation of technology standards and
  • special benefits for state-owned enterprises (SOEs).

In terms of economic implications, Autor et al. estimate the effect of increasing import competition from China on innovative activity in US manufacturing. The authors find that the effect of import exposure on the change in patents produced is strongly negative when accounting for pre-existing trends. Reduced profitability expectations in the affected sectors are a possible explanation they put forward.

The WTO has followed Alice to Wonderland, assesses Scott Kennedy, looking into the international dispute data since the Chinese accession to the WTO in 2001. Compared to the share in total global trade, the number of cases filed against China is smaller than against the US. China is a special case, however, regarding the focus of disputes – targeting largely abuses in advanced manufacturing – and compliance. Fear of retaliation and an opaque policy system in China challenge the international rules-based order.

In 2012, Noah Smith classified articles on Chinese innovation into three categories, those questioning China’s ability to innovate, those alarming about a wave of Chinese innovation and those calling for rapid innovation in America to stay ahead. However, the real question in his view was how much China will innovate, steal and force foreign companies to transfer technologies in exchange for market access.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

IMG_20151119_103626

Do we understand the impact of artificial intelligence on employment?

Artificial intelligence is already transforming the world of work, but the future is hard to predict. Some see most jobs at risk of automatisation, while others argue robots will only take on a narrow range of tasks in the coming decades. Nevertheless, we need a broad debate to prepare the appropriate economic policy response to the new industrial revolution.

By: Georgios Petropoulos Topic: Innovation & Competition Policy Date: April 27, 2017
Read article More on this topic More by this author

Opinion

Marek Dabrowski

What are China’s global economic intentions?

At this January's Davos meeting, Chinese President Xi Jinping announced to a surprised audience that China would be the world’s new champion of globalisation. Bruegel scholar Marek Dabrowski agrees that a functioning global trade system is in China's interest.

By: Marek Dabrowski Topic: Global Economics & Governance Date: April 25, 2017
Read about event More on this topic

Past Event

Past Event

Protecting the privacy of electronic communications: getting the next steps right

Do the European Commission's recent initiatives put us on the right path?

Speakers: Nicholas Blades, Orla Lynskey, J. Scott Marcus, Alexander Whalen and Jeremy Rollison Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 25, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

The decline of the labour share of income

What’s at stake: at odds with the conventional wisdom of constant factor shares, the portion of national income accruing to labour has been trending downward in the last three decades. This phenomenon has been linked to globalisation as well as to the change in the technological landscape - particularly “robotisation”. We review the recent literature on this issue.

By: Silvia Merler Topic: Global Economics & Governance Date: April 24, 2017
Read article More on this topic More by this author

Blog Post

André Sapir

Trump’s U-turn on trade with China is good news, but the EU should not be complacent

President Trump has so far been softer on China than his campaign promises predicted. This is welcome. However, the EU has a lot at stake, and should be ready to steer a tactical course between its two main trade partners.

By: André Sapir Topic: Global Economics & Governance Date: April 19, 2017
Read article More on this topic More by this author

Blog Post

Lagarde picture

Building a more resilient and inclusive global economy

Curtain raiser speech ahead of the 2017 IMF Spring Meetings delivered at Bruegel by the Managing Director of the International Monetary Fund.

By: Christine Lagarde Topic: Global Economics & Governance Date: April 12, 2017
Read article More on this topic More by this author

Blog Post

Uuriintuya Batsaikhan

Embracing the silver economy

What’s at stake: The oldest human in known history was a Frenchwoman called Jeanne Calment who celebrated her 122nd birthday in 1997. Thanks to advances in technology and medicine humans living until 100, if not 122, might not be an exception in the near future. Ageing, while described as a looming demographic crisis, also offers a silver lining. Business in rapidly ageing societies is already adapting their strategies to navigate the “silver economy”. This blogs review looks at the implications of the silver economy on growth, productivity and innovation as well as the opportunities offered by the silver industry.

By: Uuriintuya Batsaikhan Topic: Global Economics & Governance Date: April 10, 2017
Read article Download PDF More on this topic

Policy Contribution

PC 10 2017 cover

Europe’s role in North Africa: development, investment and migration

The authors of this Policy Contribution propose five ways in which EU policymakers can contribute to development in North Africa and build partnerships on trade, investment and migration.

By: Uri Dadush, Maria Demertzis and Guntram B. Wolff Topic: Global Economics & Governance Date: April 8, 2017
Read article More on this topic More by this author

Blog Post

IMG_20151119_103626

Machines that learn to do, and do to learn: What is artificial intelligence?

Artificial intelligence is much talked about, but what exactly is it? Georgios Petropoulos explores the origins, methods and potential of machine learning.

By: Georgios Petropoulos Topic: Innovation & Competition Policy Date: April 6, 2017
Read article More on this topic More by this author

Podcast

Podcast

A glance into the future — how will AI change our lives?

Technological advancement is moving us towards the artificial intelligence era. How different will our lives be in this new era? How will AI change the nature of work, and how will it affect politics? Is the development of AI something to fear or something to be optimistic about? Our guests tackle these issues and more in this episode of The Sound of Economics.

By: The Sound of Economics Topic: Innovation & Competition Policy Date: April 6, 2017
Read article More on this topic

External Publication

g20 insights cover

Key policy options for the G20 in 2017 to support an open and inclusive trade and investment system

In the face of exceptional challenges, the G20 should step up its efforts in 2017 to preserve the current global trade and investment system, including effective multilateral dispute settlement procedures, while not losing sight of medium-term reforms. The G20 should focus on (1) supporting the World Trade Organization, (2) being upfront about the mixed effects of trade and investment, (3) improving G20 measures to tackle protectionism and (4) promoting investment facilitation.

By: Sait Akman, Axel Berger, Uri Dadush, Simon Evenett, Lise Johnson, Maximiliano Mendez-Parra, Raul Ochoa and Claudia Schmucker Topic: Global Economics & Governance Date: April 3, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

The American opioid epidemics

What’s at stake: The US Department of Health and Human Services (HHS) declares that the country is “in the midst of an unprecedented opioid epidemic”. Since 1999, the rate of overdose deaths involving opioids - including prescription pain relievers and heroin - nearly quadrupled. We review contributions looking at the economic drivers and implications of this phenomenon.

By: Silvia Merler Topic: Global Economics & Governance Date: March 27, 2017
Load more posts