Commentary: “Made in China 2025” is Beijing’s strategy for transforming China into a hi-tech giant that dominates industries like robotics, avionics and electric vehicles. It is also a step back from the market forms, relying instead on a top down decision-making.
The strategy depends on massive government subsidies and centrally directed loans to key industries. The goal is “self-sufficiency” in these industries while at the same time seeking to dominate global markets. Key to the success of the plan is acquiring foreign technologies. As such, the plan is an attack on the competitiveness of U.S. industries.
Beijing has long followed a policy of forcing foreign companies wanting to do business in China to partner with local companies, giving the local companies access to hi-tech. Later the former partners have become competitors. Forcing Boeing to produce in China, for example, is a key strategy in China’s stated goal of gaining dominance in avionics.
This longtime strategy of forced partnering is now on steroids with the adoption of “Made in China”. It is a policy aimed at systematically stealing from the U.S. and other advanced countries.
China is not concerned with complying with the rules-based free trade approach that is the global norm, as in bodied in WTO. The intent, instead, is to use action, in the form of subsidies and government directed loans, to gain global dominance in hi-tech. By setting targets and goals by industry, as China has, the plan violates WTO to which China is party.
It is China’s lack of compliance with WTO that is the entry for Donald Trump to impose sanctions. Trump is a ham-handed oaf, but he has a point. While economists have shown the benefits of free trade, which are undoubted, we have also shown that when one side of the transaction uses the coercive power of the state to shape the transaction while the other side is passive, an imbalance can be created in favor of the market manipulator.
In the current situation, China is forcing tech transfer from the U.S. companies without just compensation. In effect, U.S. companies are “paying” for access to Chinese markets via tech transfer. The Chinese government is using its monopoly over access to Chinese markets to overcharge for this access. And the Chinese plan on using this newly acquired tech to take market share from American firms.
Where China to become dominate in one market or another as an organic outcome of free market forces, who can complain. Indeed, the beauty of capitalism is its ability to direct resources to their best uses. If China can out compete the United States in hi-tech, the world is better off. But when government control is used to divert resources to less effective uses. The world is worse off even if China is better off.
While Trump’s strategy of threatening a trade war is not illogical, there is another approach, one adopted by the Obama administration, which is to ignore “Made in China 2025”.
With or without U.S. sanctions that “Made in China 2025” will work is an open question. Expecting dimwitted Chinese bureaucrats to pull off a complicated thing like a tech revolution seems a bit far fetch. Certainly, there are many examples from history of failed centrally controlled economies that are now in the dustbin of history. In this view, it precisely because China’s has adopted a top down economic approach is why they will fail; therefore, benign neglect is the best response
The problem is, even if “Made in China 2025” is ultimately a failure, China can still do much mischief in the process of failing. Too often state support has local companies and governments chasing after subsidies, resulting in overcapacity. It is exactly this overcapacity that led to a global steel glut that was the initial target of Trumps tariffs.
Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He teaches economic development policy. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu.