Ignoring the circumstances that compel Chinese policymaking is unproductive. Canada should do its homework on what led to Made in China 2025.
No part of Beijing’s industrial development strategy has attracted more confusion, either deliberate or unintentional, than Made in China 2025 (MIC). Released in 2015, the 10-year plan seeks to use government resources to bring Chinese industry up to par with advanced economies. For China, MIC represents the country’s ambitions to climb global value chains, address economic weaknesses and secure new sources of growth. For its critics, MIC is a state-sanctioned effort to cheat, rob and replace technological leaders in the United States and in Europe.
Observers from the US media, members of the US Senate and the US Trade Representative decry the leading role that MIC gives Beijing in assisting domestic industry as both “unreasonable” and “discriminatory.” This rhetoric is increasingly shaping perceptions of Chinese policy in Canada.
Sentiment in Ottawa is indicative. A conference report by the Canadian Security Intelligence Service identifies MIC as a significant factor in its view of China as an emerging threat. Other voices highlight the challenge it poses to the deepening of economic ties between Canada and China.
The visible hand of the state is an enduring feature of Chinese policy. Though it deviates from free market norms, MIC in reality is neither novel nor unique. It is another variation in a long-standing orthodoxy of state-led industrialization. By failing to address or even acknowledge the conditions influencing MIC, foreign assessments that deem it unfair, unlawful and unreasonable will find few sympathetic ears in Beijing — or in countries that follow similar models. At this turbulent moment in Canada-China relations, and as US-China trade negotiations continue, it is critical for Canadians to have a deeper understanding of the origins, ambitions and dimensions of MIC.
Old habits die hard
Starting with 1978 reforms that opened up the Chinese economy, the country’s leaders sought to identify models that other states had used to achieve growth and reduce poverty. From their research, they concluded that government leadership would not be out of place.
Exchanges between Chinese policymakers and counterparts in Japan, Singapore, Taiwan and South Korea are well-documented. In Japan, China saw “government guidance” of a “non-imperative” sort as paramount. The principle of “indicative planning” through state incentives, not commands, was one of many lessons.
Japanese economists who spoke with Chinese leaders emphasized Japan’s departure from the path of “a regular capitalist country” and the essential role of the state. Similarly, Chinese officials saw the success of dominant firms elsewhere, such as Japanese keiretsu and Korean chaebol business conglomerates. They drew upon these models in building “national champions”: the state-owned enterprises that have dominated China’s economy.
Tokyo’s influence was as significant in the 1980s as the doctrine of central planning was in the pre-reform period. From the Japanese advisers who met with China’s State Council to the forums that Japanese officials organized with Chinese economists, scholars and other policy brokers, exchanges throughout the decade resonated with Chinese thinking. Indicative planning, state guidance and national champions are all hallmarks today of Made in China 2025.
Just as technology spillovers were integral to development in East Asia, industrial espionage and technology transfer were commonplace during European industrialization. Canada too, with a legacy of Crown corporations and investment requirements on R&D localization, is no stranger to government intervention. Many scholars argue that state promotion of industries in their infancy has nourished the success of most developed economies.
China’s development strategy is based on conventions long established but seldom advocated in the international community. MIC is the product of common history rather than the violation of universal norms claimed by some.
Cut from the same cloth
As a vehicle for technological development, MIC is informed by innovation policy in other countries — not Chinese nationalism alone. Germany’s Industry 4.0, a state program to upgrade domestic manufacturing, is one inspiration. Chinese policy designers have commended Industry 4.0 as “a scientific foundation” for MIC. China and Germany have advanced partnerships between Industry 4.0 and MIC, including a joint working mechanism, industrial parks and ministerial dialogues.
Out of this cooperation, Industry 4.0 has morphed into an even more ambitious National Industrial Strategy 2030 with “made in Germany” front and centre. It calls for increasing subsidies, establishing state investment funds and defining industries that the strategy should support, from automotives to aerospace.
When China includes similar tactics in MIC, the US raises loud objections that it does not direct at MIC’s German counterpart. The US Trade Representative and the White House condemn China’s state handouts and the “putatively private companies” that receive them.
But American policy-makers have not shied away from spending public money for similar ends at home. The US security state commands immense resources to steer innovation. Reorganization of the Department of Defense in 2018 specifically created an Office of Industrial Policy.
The US government provides venture capital to many firms for early-stage and high-risk innovation. With $30 billion in commitments to tens of thousands of technology projects, the federally established Small Business Innovation Design Program, one of many national seed funds, is no different than the state agencies in Beijing that finance similar ventures. Canada’s Strategic Innovation Fund appears no less determined to bankroll technologies in a similar fashion.
In the Fourth Industrial Revolution, state innovation policy is an increasingly standard function of governance. As Beijing sees things, it is a necessary one.
A market in counterpoise
As the European business community sees it, “perfecting the market” by keeping the government at arm’s length “would do far more to ensure that China reaches its full potential…than more old-school, expensive industrial planning ever could.” MIC’s push for self-sufficiency and indigenous innovation raises doubts about China’s commitment to the market.
And yet, policymakers in Beijing contend with obstacles to the market that directly impair or implicitly frustrate their objectives. In the words of one recent essay, “China is cheating at a rigged game.” The cheating — IP theft and forced technology transfers — is a serious problem, but there is a reason why China takes this path and pursues state-driven strategies. When markets themselves hinder development, these strategies appear to present a solution.
Embargoes have long proven a stumbling block. For decades, US export regulations have restricted Chinese transfers of technology with “dual use” potential: civilian and military. Under successive administrations, controls have expanded from circuitry and semiconductors to high-performance computing equipment and satellites. According to one Chinese estimate based on 2004-09 data, bilateral trade lost to US controls could amount to $76 billion annually.
Furthermore, broader trends have hindered the spread of technology through market means. Studies by the United Nations Conference on Trade and Development have shed light on industry consolidation and monopolization of technologies by leading firms. Against this backdrop, UNCTAD acknowledges that development would be “harder to achieve, if not utterly impossible” for China without the policy instruments at Beijing’s disposal.
A 2013 United Nations Industrial Development Organization report reaches similar conclusions. Global value chains are naturally hierarchical, protective and hostile to technological proliferation. In this context, developing countries may need to take advantage of the flexibility in economic policy that the WTO allows, and the cloaked protectionism that can result.
Germany’s Minister of Economic Affairs makes clear that “hardly a successful country exists that relies exclusively and without exception on market forces.” Discussion that ignores these realities will fail to generate the change in MIC or the political will in Beijing that its critics desire.
Modifying a response
Under fire from the US in particular, China has pulled Made in China 2025 from the spotlight. Still, although the plan goes unmentioned in the 2019 Government Work Report, Beijing remains committed to it in all but name. This commitment to indigenous innovation is almost certain to increase in response to the White House’s May 15 directive barring American firms from selling to the Chinese IT giant Huawei.
Ignoring the circumstances that compel Chinese policymaking is an unproductive basis for dialogue or future negotiation. Governments in Europe as well as the US must address global market imperfections they have helped create. MIC is at odds with market principles that are otherwise fair and undiscriminating. But in Beijing’s experience, they exist in principle only.
A Canadian response must be qualified by recognition of this complexity as we assess Chinese investments in Canada and construct an economic strategy for working with China after the current chill in diplomatic relations is resolved.
Transparency over MIC’s policies, direction and effects must be a principle of communication with and pressure on Beijing. Building an understanding of China’s situation will allow Canada to mitigate the risks and identify the opportunities in the relationship as MIC unfolds. China’s development strategy — like that of many countries before it — is unlikely to change. Canada’s approach can.
The authors would like to thank Carlo Dade and Sharon Sun at the Canada West Foundation for comments on an earlier draft of this article.
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