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 article More on this topic More by this author

Opinion

G20 climate commitments must be turned into action

The G20 is just about holding together in difficult times, but the world's leading economies need to make good on their climate promises. Major projects such as China's One Belt One Road initiative and the G20 Compact for Africa must incorporate sustainability criteria, or it will be impossible to meet the Paris goals.

By: Guntram B. Wolff Topic: Global Economics & Governance Date: August 17, 2017
Read about event

Upcoming Event

Sep
7-8
09:00

Bruegel Annual Meetings 2017

The Annual Meetings are Bruegel’s flagship event. They offer a mixture of large public debates and small private sessions about key issues in European and global economics. In a series of high-level discussions, Bruegel’s scholars, members and stakeholders will address the economic policy challenges facing Europe.

Speakers: José Antonio Álvarez Álvarez, Agnès Bénassy-Quéré, Pervenche Béres, Grégory Claeys, Zsolt Darvas, Jean Luc Demarty, Maria Demertzis, Anna Ekström, Lowri Evans, Sandro Gozi, Peter Grünenfelder, Patrick Graichen, Reiner Hoffmann, Levin Holle, Kate Kalutkiewicz, Steffen Kampeter, Peter Kažimír, Emmanuel Lagarrigue, Matti Maasikas, Steven Maijoor, Nathalie Moll, James Murray, Julia Reinaud, Carlos Sallé Alonso, André Sapir, Dirk Schoenmaker, Mateusz Szczurek, Marianne Thyssen, Reinhilde Veugelers, Nicolas Véron, Liviu Voinea, Johan Van Overtveldt, Ida Wolden Bache, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Square - Brussels Meeting Centre
Read about event More on this topic

Upcoming Event

Sep
13
08:30

EU-China Economic Relations: Looking to 2025

This event will see the launch of a report on EU-China relations and discuss issues such as trade and investment, indusstrial cooperation and innovation and global governance

Speakers: Ian Davis, Alicia García-Herrero, Dame Clara Furse, Tony Graziano, Anatole Kaletsky, K.C. Kwok, Ina Lepel, Hanna Müller, André Sapir, Robin Niblett, György Szapáry, Tim Summers, Jean-Claude Trichet, Zhang Yansheng, H.E. Ambassador Yang Yanyi, Liu Xiangdong,, Guntram B. Wolff and Elena Flores Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Oct
5
12:30

Crowd Employment

This event aims to discuss the various nuances and diversity that characterize crowd employment.

Speakers: Cristiano Codagnone, Valerio Michele De Stefano, Irene Mandl, Georgios Petropoulos and Amit Singh Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

The US Antitrust Counter-Revolution

Plenty of recent research has highlighted a rise in concentration in the US economy, across different sectors. Economists are now wondering to what extent this is attributable to a shift in the antitrust enforcement philosophy. We review contributions to this debate.

By: Silvia Merler Topic: Global Economics & Governance Date: July 31, 2017
Read article More on this topic More by this author

Blog Post

The US retail crisis

What’s at stake: America is undergoing a retail sector crisis, partly related to the increase of competition from online commerce. We review recent contributions to this debate.

By: Silvia Merler Topic: Innovation & Competition Policy Date: July 17, 2017
Read about event More on this topic

Past Event

Past Event

Europe's global positioning and its trade implications for Asia

This event, taking place in Hong Kong will discuss Europe-Asia relations in the context of global developments.

Speakers: Alicia García-Herrero, Peter Mandelson, David Tweed and Guntram B. Wolff Topic: Global Economics & Governance Location: Bloomberg Hong Kong Office 25/F, Cheung Kong Center, 2 Queen's Road, Central, Hong Kong Date: July 7, 2017
Read article More on this topic More by this author

Opinion

Engagement in a time of turbulence

The arrival of China as an increasingly significant setter of global standards may be uncomfortable for India but is near-inevitable and needs to be planned for.

By: Suman Bery Topic: Global Economics & Governance Date: July 5, 2017
Read article Download PDF More by this author

Policy Contribution

The challenge of China’s rise as a science and technology powerhouse

China's ambition to be a global leader in science and innovation by 2050 seems well within reach. The creation of US-Chinese science and technology networks is enabling China to catch up and helping the US to keep its position at the science frontier. What steps should be taken by the EU to engage more with China, not to miss out in the future multipolar science and technology world?

By: Reinhilde Veugelers Topic: Global Economics & Governance, Innovation & Competition Policy Date: July 4, 2017
Read article More on this topic More by this author

Podcast

Podcast

Global trade and Europe

Multilateral trade has generated a huge amount of wealth, and lifted many around the world out of poverty. But there is also growing awareness that globalisation is creating “losers”, and this risks feeding a backlash against multilateral trade. We explore the benefits and risks of multilateral trade, and ask how Europe should behave in a shifting context

By: The Sound of Economics Topic: Global Economics & Governance Date: June 30, 2017
Read article More on this topic

Blog Post

Can EU actors keep using common law after Brexit?

English common law is the choice of law for financial contracts, even for parties in EU members with civil law systems. This creates a lucrative legal sector in the UK, but Brexit could make UK court decisions difficult to enforce in the EU. Parties will be able to continue using English common law after Brexit, but how will these contracts be enforced? Some continental courts are preparing to make judicial decisions on common law cases in the English language.

By: Uuriintuya Batsaikhan and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: June 22, 2017
Read article Download PDF

Policy Contribution

How to handle state-owned enterprises in EU-China investment talks

Chinese state-owned enterprises (SOEs) are one of the main obstacles preventing China and the European Union from agreeing a bilateral investment agreement. Creating barriers to prevent Chinese companies acquiring European assets will not solve the problem, but bringing Chinese corporate governance closer to global market principles will be essential to ensure European and Chinese corporates operate on an equal footing in their cross-border investment decisions.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: June 19, 2017
Load more posts