US economy

Industrial policy war — capitalism with Chinese characteristics

In recent years, trade actions by US president Donald Trump have gradually transformed the world’s free trade system into one of managed trade, focusing on outcomes rather than being rule-based. Measures such as tariffs, quotas (to escape tariffs), commitments to buy, and export and investment controls are becoming normal. The narrative has also widened from trade war to industrial policy war — efforts to promote certain high-tech sectors to become globally dominant.

So far, the industrial policy war has been remarkable for its negative aspects. Basically, the US has used trade, financial, economic, legal and regulatory tools to weaken national champions supported by China. The motivation for doing so has moved beyond commercial and economic reasons to national security and strategic concerns.

In particular, the preferred enabling laws have shifted from the Trade Act of 1974 (in particular, Section 301) or the Trade Expansion Act of 1962 (Section 232), which authorise countervailing duties or tariffs, to the International Emergency Economic Powers Act (IEEPA) of 1977 or the recent Countering America’s Adversaries Through Sanctions Act (CAATSA) of 2017, authorising various forms of sanctions against entities or activities deemed to be contrary to the US national security or foreign policy interests.

Framed in this context, US measures against Huawei and possibly others are not amenable to economic solutions. Pressure has been applied on China to change its system sufficiently for the US to stop regarding entities such as Huawei as threats — an unlikely prospect. To complicate matters more, the US Department of State has recently identified other Chinese tech companies including Alibaba, Tencent and Baidu, in addition to Huawei and ZTE, as parts of a “malignant ecosystem”.

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Recently, it has been argued that the attempt to weaken foreign competitors is not enough — because tariffs alone are unlikely to bring back manufacturing jobs — and that the US and the west must follow China’s example and implement the “positive” side of industrial policy: supporting domestic companies to compete and prevail internationally. However, in today’s context, such support goes well beyond the old style of picking “national champions”, to embrace all-government or all-society efforts. These include not only competitive financing but also favourable legal and regulatory treatment by central and local governments (including land use rights) and mandates to assure demand. The following examples illustrate these points.

  • China has allocated 5G spectrum to its telecom operators at practically no cost. In contrast, Germany has raised €6.5bn in its 5G spectrum auctions, while the US Federal Communication Commission (FCC) has raised $2.7bn so far this year. This cost advantage, coupled with support from cities and municipalities especially regarding land use rights, has helped China’s telecom operators to roll out base stations — estimated to be 172,000 this year alone, more than all the western countries combined. This puts China ahead in implementing and benefiting from 5G technology.

  • This state-sponsored programme has significantly helped Huawei to develop a critical mass of demand for its 5G infrastructure products. As a result, Huawei has been able to offer 20 to 30 per cent discounts on its base stations to win export orders, having shipped 200,000 units to 50 telecom operators in Europe and Asia by August 2019 despite US sanctions.

  • In Artificial Intelligence (AI), where algorithms must be trained and perfected using a huge volume of data, China has a clear advantage. Personal data protection is not a high priority in its race to be globally dominant, as specified in its “Made in China 2025” strategy. In contrast, western AI developers may be constrained by data privacy protection laws such as the EU’s General Data Protection Regulation (GDPR).

  • In embryonic stem cell research and development, China’s scientists face far fewer ethical constraints compared with the US, which bans federal funding for such research.

  • With government mandates and support, many cities in China have increasingly used electric buses. Some, such as Shenzhen and Shanghai, will soon have only electric buses in their fleets. Benefits from such economies of scale have pushed China’s electric vehicle producers to the forefront of international competition.

  • China’s solar panel producers have received similar state support to gain global dominance.

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In short, modern industrial policies entail significant intrusion by the government in economic and social spheres. China’s social and economic system has created an uneven playing field favouring Chinese companies in competition with their western counterparts, both domestically and internationally. Engaging in a race against China in this space and in this manner means the west risks becoming more like China, rather than the reverse, as Henry Kissinger might have hoped.

While China is practising socialism with Chinese characteristics, the west appears to be gradually embracing capitalism with Chinese characteristics! If this pans out, China will have won the ideological war.

Hung Tran is a nonresident senior fellow at the Atlantic Council and former executive managing director at the Institute of International Finance.


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