China is now the world’s second largest economy. The reforms begun by Deng Xiaoping in the 1980s have transformed the Chinese economy. Much of this is driven by rapidly growing demand from the Chinese domestic market, but it also reflects strategic decisions by China’s leaders.
They hope to see China take a dominant position in advanced technologies for both economic and security reasons and to advance the position of Chinese firms in the global market. The principle techniques they have used in pursuit of this objective include:
- Heavy, sustained government investment in human capital, infrastructure, and research;
- Generous subsidies along with non-tariff barriers to build national champions
- Weak regulatory barriers to business activity;
- The acquisition of foreign technology, either licitly or illicitly.
China’s leaders want to move away from a dependence on foreign technology, so that China moves up the production value chain and is no longer just the assembler of other nations’ intellectual property. They want China to become a leader in innovation. Since the 1980s, China has sought to build a strong technology base and has made repeated efforts to achieve this.
The primary motivation is to enhance China’s security and national power. Previous efforts to achieve this have not been as successful as Beijing may have hoped, but with each effort China has improved.
China’s quest for technological leadership is not new. What is new is that unfair trade, security and industrial policies, tolerable in a smaller developing economy, are now combined with China’s immense, government-directed investment and regulatory policies to put foreign firms at a disadvantage.
With the development of human capital (after decades of spending on STEM education) for both in entrepreneurship and innovation, China is a much more formidable competitor and policies that put foreign firms at a disadvantage can no longer be justified on ground of poverty, development, repayment for 100 years of humiliation or other excuses.
China now has the wealth, commercial sophistication and technical expertise to make its pursuit of technological leadership work. The fundamental issue for the U.S. and other Western nations, and the IT sector is how to respond to a managed economy with a well-financed strategy to create a domestic industry intended to displace foreign suppliers.
China is a strategic competitor and its managed economy and centrally directed industrial policies undercut market economies. In addition to ending its dependence on foreign technology, China’s goal is to overtake the U.S. economically and technologically. This is not a military conflict, but it has deep implications for American security and for the future of an international system based on the rule of law and democratic norms.
If China followed international business practices, its decisions to invest in domestic industries would be unobjectionable. There would be powerful effects on the global economy, but competition is good for the market and China’s economic growth is in many ways a welcome development. But China has not hesitated to use unfair practices and policies to advance its own firms, extract concessions, or block competition by foreign companies in China.
China’s Five Year Plans lay out the strategic economic and technological goals that China will pursue and fund. These have had mixed success, but a steady, well-funded pursuit of its economic and technological goals is a hallmark of Chinese policy. China has a strategy to build a high-tech economy and is willing to spend heavily and consistently to achieve this.
China will commit to support research and investment programs for decades. A centrally directed economy can be remarkably inefficient in making investment decisions, but China has compensated for this with heavy and sustained government spending to build industrial and innovation capacity.
Although it is a member of the World Trade Organization (WTO), China routinely ignores WTO rules. Its public justification for this is that China is still developing and should not be held strictly accountable, but this is nonsense for the world’s second largest economy.
Compare the treatment of U.S. companies in China to Chinese companies in the United States. When Alibaba built a data center in Seattle, it was not forced to do this as a junior partner in a joint venture, nor was it forced to provide source code to the gov- ernment for review, but U.S. companies seeking to operate in China face these requirements.
China uses various tactics to achieve its technological and economic goals, such as non-tariff barriers to trade, security regulations, procurement mandates, acquisitions (both licit and illicit) of foreign technology, and strategic investments in or acquisition of foreign firms. Companies from the U.S. and other Western nations find themselves under pressure to make long-term concessions in technology transfer in exchange for market access.
Chinese policy is to extract technologies from Western companies; use subsidies and nontariff barriers to competition to build national champions; and then create a protected domestic market for these champions to give them an advantage as they compete globally. Huawei is the best example of a now globally dominant Chinese company built along these lines, but there are others. A senior Chinese official once remarked that if China had not blocked Google from the China market, there would be no Baidu.
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