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 Topic: Global Economics & Governance

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 about event

Upcoming Event

Sep
3-4
08:30

Bruegel Annual Meetings 2018

The 2018 Annual Meetings will be held on 3-4 September and will feature sessions on European and global economic governance, as well as finance, energy and innovation.

Speakers: Maria Åsenius, Richard E. Baldwin, Carl Bildt, Maria Demertzis, Lowri Evans, Mariya Gabriel, Péter Kaderják, Joanne Kellermann, Jörg Kukies, Emmanuel Lagarrigue, Philippe Lespinard, Montserrat Mir Roca, Dominique Moïsi, Jean Pierre Mustier, Ana Palacio, Jean Pisani-Ferry, Lucrezia Reichlin, Norbert Röttgen, André Sapir, Jean-Claude Trichet, Johan Van Overtveldt, Martin Sandbu, Margrethe Vestager, Reinhilde Veugelers, Thomas Wieser, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Brussels Comic Strip Museum, Rue des Sables 20, 1000 Brussels
Read article Download PDF

External Publication

Export and patent specialization in low carbon technologies

The low-carbon technology sector is going through a period of disruptive innovation and strongly increased investment, which is likely to continue. Global investment in new renewable power is the largest area of electricity spending. The political momentum to combat climate change was reinforced in the Paris Agreement, when almost every country in the world agreed to aim for carbon neutrality in the second half of the century.

By: Robert Kalcik and Georg Zachmann Topic: Energy & Climate, Innovation & Competition Policy Date: August 7, 2018
Read about event More on this topic

Upcoming Event

Sep
17
10:30

Perils and potential: China-US-EU trade relations

We are hosting a number of Chinese and EU experts to discuss trade relations between the three forces.

Speakers: André Sapir Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Oct
3
09:00

International trade and the EU-Japan Economic Partnership Agreement

This event; jointly organised by Bruegel and the Graduate School of Economics, Kobe University, will discuss the EU-Japan trade deal and asses its impact.

Speakers: Marco Chirullo, Gabriel Felbermayr, François Godement, Hiroo Inoue, Sébastien Jean, Yoichi Matsubayashi, Tamotsu Nakamura, André Sapir, Cécile Toubeau, Agata Wierzbowska and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic More by this author

External Publication

The impact of artificial intelligence on employment

Technological development, and in particular digitalisation, has major implications for labour markets. Assessing its impact will be crucial for developing policies that promote efficient labour markets for the benefit of workers, employers and societies as a whole.

By: Georgios Petropoulos Topic: Innovation & Competition Policy Date: July 31, 2018
Read article More on this topic More by this author

Opinion

Is Europe America’s Friend or Foe?

Since Donald Trump took office as US president, a new cottage industry in rational theories of his seemingly irrational behavior has developed. On one issue, however, no amount of theorizing has made sense of Trump: his treatment of America's oldest and most reliable ally.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 30, 2018
Read about event

Upcoming Event

Oct
11-12
20:00

Policy responses for an EU-MENA shared future

In the third edition of the "Platform for Advanced & Emerging Economies Policy Dialogue" we will discuss trade flows and trade policy between Europe and MENA, integration of developing economies into global value chains, and regional energy relations.

Speakers: Karim El Aynaoui and Guntram B. Wolff Location: Rome
Read article More on this topic More by this author

Blog Post

Italy's "Dignity Decree"

The new Italian government pushed through its first legislative act including elements of labour market reform. Presented as an overturn of the previous government’s “Jobs Act”, the estimated effects of the decree are controversial. We review Italian economists’ view on the matter.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: July 23, 2018
Read article More on this topic More by this author

Blog Post

Economy of Intangibles

Economists have been discussing the implications of the rise of the intangible economy in relation to the secular stagnation hypothesis, and looking more generally into the policy implications it has for taxation. We review some recent contributions.

By: Silvia Merler Topic: Finance & Financial Regulation Date: July 16, 2018
Read about event More on this topic

Past Event

Past Event

Should we revisit the patent system for pharmaceutical products?

Analysis of the legal issues with the current IP system for regulated market authorisations for pharmaceutical products, as well as its economic effects.

Speakers: Arno Hartmann, Christian Jervelund, Margaret K. Kyle, Roberto Romandini, Bruno van Pottelsberghe, Amaryllis Verhoeven and Reinhilde Veugelers Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 9, 2018
Read article More on this topic More by this author

Blog Post

World Cup Economics

As we approach the final rounds of the tournament, here are some recent contributions about the economics and economic impact of the World Cup.

By: Silvia Merler Topic: Global Economics & Governance Date: July 9, 2018
Read article More on this topic More by this author

Opinion

Ubu ou Machiavel?

L'administration Trump veut imposer une approche transactionnelle des relations économiques gouvernée par le rapport de force bilatéral en lieu et place du contrat multilatéral. Un défi d'une ampleur inédite pour l'Europe.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 6, 2018
Load more posts