The Future of ‘Made in China 2025’ Policy: Will Washington Maintain Its Edge?

By: Cheryl Wijaya

 

 

Modelled on Germany’s Industry 4.0 plan, ‘Made in China 2025’ policy goes much further than a mere development of artificial intelligence and robotics to transform the country’s manufacturing sector. Beijing’s grand ambition to convey a multi-decade plan of catching up to the technological frontier seems to be big, but the concomitant response from Washington poses a systemic risk of monumental proportion to the world’s two largest economies.

 

‘Made in China 2025’ Policy in a Nutshell

 

Announced in 2015 by Chinese Premier Li Keqiang, ‘Made in China 2025’ (MIC) policy aims to rapidly develop China’s manufacturing base in ten strategic sectors, with the objective of moving China further up the value chain.

 

 

Fig 1. Goals of MIC 2025

 

 

Politics, not Business: The Driving Force Behind China’s Smart Manufacturing Boom

 

The top-down strategy pushes the smart manufacturing boom in China as the government is the main driving force behind these policy initiatives. China’s political leaders see the new innovation-driven growth model as the means to solve the country’s overarching economic challenge, the ‘middle-income trap’ phenomenon. As Prime Minister Li Keqiang mentioned, “the manufacturing industry is a main pillar for the national economy, main opportunities must be used. The transition towards smart manufacturing is essential”.2

 

China’s ambition to be the world’s economic hegemon is manifested in its forward-looking strategic planning, large state funding, and policy innovation through experimentation. The government also supports Chinese enterprises with direct capital injections and preferential loans in many industries, as evidenced by the National Integrated Circuit Investment Fund in the semiconductor industry.3 In the end, localisation becomes the primary goal of Beijing’s political leadership.

 

Fig 2. China’s 10 Steps to 2025

 

 

Economic Impediments Impair Policy Effectiveness

GDP Growth Declines

China’s real GDP growth peaked in 2007 at 14.2% and has been trending downward since then. By 2017, it dropped to 6.9%.4 Although China has increased its investment on R&D sector, more resources must be allocated to accomplish the ambitious goal of MIC 2025. The 2017 spending amounts to around 2.1% of total GDP, Reuters calculated.5 When compared with the US and Germany, which spent 2.7% and 2.9% of its GDP respectively,6 China needs to step up its game and invest more of its resources on the R&D sector. The economic slowdown, however, might affect government’s willingness to invest and concomitantly lead to the postponement of the transition to an innovation economy.

 

Figure 3: China’s declining GDP growth

 

 

Innovation Gap: A Dependence on Foreign Technology

 

Additionally, a persistent innovation gap indicates that China’s industrial technology capacity is still inadequate. According to World Intellectual Property Organization, China is not among the Top Ten countries in terms of the Global Innovation Index, which is an annual ranking of countries by their capacity for, and success in, innovation.7 Although there has been a significant breakthrough in China’s R&D sectors during the past three years, its knowledge-intensive skill bottlenecks. Today, the dependence on foreign supply to push the smart manufacturing revolution forward still remains.

 

MIC 2025: A Bootless Errand? 

 

In the status quo, the high-end segment of the market is still dominated by the US firms, which accumulatively account 3,763.2 billion US dollars in the market value.8 However, does this illustrate the triumph of Trump’s mercantilist move and the failure of MIC 2025?

 

The figure shows that China may not be successful in all aspects of its ambitious plan, but it’s likely to thrive in some sectors. Although China is not among the Top Ten innovative country for now, the number 17 ranking this year represents a breakthrough for an economy witnessing the rapid transformation guided by state-led development policy which prioritizes research and development-intensive ingenuity.9 MIC 2025 is therefore not a mere ambitious plan although a critical scrutiny is paramount to assess its progress.

 

Fig 5. Top Ten Companies in the World by Market Value in 2018

 

 

 

Stepping Up the Game: Will Washington Maintain Its Edge?

 

According to Bloomberg, China’s GDP will overtake the US level in 2029 if the projected average growth rates are 2% for the US and 6.5% for China.10 However, will this likely to happen?

 

A leading scholar, Joseph Grieco, mentioned that states focus on maximizing relative gains in order to preserve their national security. “China’s abilities and ambitions have shifted much further up the value-added chain, to tech that represents our crown jewels economically and that is relevant for national security,” said Scott Kennedy, a fellow at the Centre for Strategic and International Studies in Washington.11

 

China may almost lead in technology, but not just yet. The Trump administration’s effort to level the playing field is translated in the Section 301 Case Against China and MIC 2025 to block Chinese acquisitions of US technology companies. In 2018, a Chinese multinational telecommunication firm, ZTE, was temporarily sanctioned from sourcing components from American manufactures for violating a US export ban.

 

Fig 6. Section 301 Report into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation

 

 

 

After the recent midterm election, it is a lot harder to gauge where the next Congress will come down on issues in the topsy-turvy world of trade. Nevertheless, the new Congress is not likely to change the direction of the US economic relationship with China as the Democratic-controlled House may be more eager in supporting tariffs overall. “Democrats have been reasonably enthusiastic cheerleaders” for getting tough on China, said Edward Alden, a senior fellow at the Council on Foreign Relations. Democrats will likely support Trump’s agenda, “unless it becomes clear that an escalating tariff war is starting to do serious harm to the economy,” he said.12 Consequently, the imposition of tariffs on the $200 billion Chinese goods inevitably hurts MIC 2025 technology development plan.

Ending the ‘Economic Iron Curtain’

 

While the outcome of MIC 2025 determines the continuity of US hegemonic role in the world’s economy, it cannot be the only variable that Washington should focus on. As Henry Paulson, the former US Treasury Secretary, has mentioned, the US should ‘dial down the rhetoric’ as China does not pose an ‘existential threat to American civilization’.13 If the US and China cannot find a way to develop a consensus, it will pose a systematic risk to the global economy and international order. Therefore, ‘reciprocity’ should be the guiding principle in the US-China trade and investment relations even though it adds tension to the relationship. In the end, history has taught us that the biggest enemy of the hegemon is not another country, but its self-complacency.

 

 

 

 

 

 

 

 

 

 

 

References

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