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April, 2018

Making sense of Made In China 2025

Original article: Council on Foreign Relations

In a 200-page report on China's alleged unfair trade practices, the US Trade Representative mentions or cites Beijing's Made In China 2025 plan 116 times. Made In China 2025 is a blueprint announced in 2015 to transform China into an advanced manufacturing power within a decade. As a tech colossus, China could dominate next-generation industries like robotics, new-energy vehicles, biotechnology, and advanced information technology. 


The U.S. alleges Beijing has stolen American intellectual property in its quest for technological superiority and opposes China's use of quotas for self-sufficiency in specific industries. President Trump's tariffs target many of the industries Beijing is trying to upgrade with Made In China 2025. 

Analysis:

For more than 40 years, the U.S. sought to integrate China into the international system Washington and its allies created after World War II. Free trade has been at the crux of that system. On the U.S. side, Fortune-500 firms like General Motors, Caterpillar and General Electric have been the greatest beneficiaries of China's opening to the world. They have built thriving businesses in the largest market on earth. China, meanwhile, has received a massive influx of foreign investment that it has used to modernize the country. The impoverished backwater of Mao Zedong's twilight years is now the world's factory and second largest economy.  


Yet Beijing seeks to move beyond low and mid-tier manufacturing. It wants to be a technology titan, even if that means supplanting existing champions like the U.S., Germany and Japan. In fact, China surpassed Japan as Asia's top exporter of high-tech goods in 2014, according to the Asian Development Bank. 


China has long sought to upgrade its industries, but efforts accelerated after the revelations of U.S. government spying by former CIA contractor Edward Snowden in June 2013. The Chinese leadership became convinced that self-sufficiency in industries like telecommunications and semiconductors was essential for national-security reasons. 


From the U.S. perspective, China is using dubious means to vault up the global value chain. The Council of Foreign Relations (CFR) points out in a March report that Made in China 2025 targets 70% “self-sufficiency” in "core components" and "basic materials" of aerospace equipment and telecommunication equipment. The WTO prohibits such technology-substitution quotas, CFR says, adding that the quotas could hurt high-tech exporters like Germany and South Korea. 


Made In China 2025 has many parallels with Germany's Industry 4.0 plan. But the German initiative is more market-driven and inclusive, with a large role for foreign firms, The Associated Press noted in a report last week. China is more intent on creating its own national champions. 


Jian-Hong Lin, an analyst at Taipei-based market intelligence firm TrendForce, says that the basic principles of Made In China 2025 are in line with the norms of international trade. "The plan emphasizes both 'market-oriented' and 'government-guided,' which are consistent with global trade conventions," he says. 


Lin says that Made In China 2025 is "more of a vision than specific goals for individual industries." By reducing its reliance on imported components, China "hopes to strengthen its scientific research and manufacturing capabilities." 


Some see more grandiose ambitions in the blueprint. "The fact that Beijing won’t accept a subservient role in a US-dominated high-tech economic environment run by a tiny corporate elite spells out what’s unimaginable for this elite; a definitive swing of the world economy by 2025, from the West to the East," said Asia Times in an April report.  


That's one way to put it. Of course, Asia Times didn't mention the cyber espionage, forced technology transfers, and state-backed bids for key U.S. tech firms. Under President Trump, who has a more combative style than his predecessors, Washington is pushing back. And so the US and China will openly vie for control of the preeminent intellectual property of tomorrow: everything from 5G standards to artificial intelligence. 


Rather than using tariffs to blunt China's techno-nationalism, the Trump administration should return to the Trans-Pacific Partnership (TPP), experts say. President Trump withdrew from the free-trade pact soon after taking office. Yet last week he abruptly reversed course, suggesting that the U.S. would reconsider joining TPP. 


The TPP is genuinely market-oriented, offers robust protection for intellectual property and opens up new sectors to free trade. It represents an economic model favored by the United States, rather than China's state capitalism. If the US were to rejoin the pact, which includes Japan, two of the world's three largest economies would be participants. Other U.S. allies such as Australia and Singapore are also TPP signatories. 


With cooperation from its allies, "the U.S. gets back to setting the rules for the global economic order rather than letting China set the rules," Kevin Lai, a Hong Kong-based economist at Daiwa Capital Markets, told Bloomberg in April.

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