CHAPTER 1
China’s Economic Growth and Industrial Trajectory
For a generation, China has been the manufacturing center of the globe. In 2015 alone, China produced or assembled 28% of the worlds’ automobiles, over 90% of the world’s mobile phones, 80% of its computers, 41% of its ships, 24% of its power, and nearly half of the world’s steel.1 In 2018, the United Nations National Statistics reported that China accounted for 28% of global manufacturing output (Richter 2020). What is made clear in MIC2025 is that China is no longer content with being the world’s factory, and with good reason. China’s production in these industries remains low value-adding and energy-intensive, which not only weakens China’s position in advanced markets but also contributes heavily to global pollution. 2 Furthermore, China is keenly aware of the middle-income trap (when economic growth levels off and stagnates before high GDP capita is achieved). In 2019, China’s GDP per capita rose to $10,261.679, an almost 1000% increase from the year 2000. However, China still falls far behind advanced economies like the U.S. whose GDP per capita measured $65,297.518 in the same year.3 Chinese and international policy experts agree that if China is to achieve high-income status, its future economic development must be driven by innovation, rather than credit.4
Furthermore, China is aging, and its eligible workforce (people aged 15 to 59) is shrinking. The one-child policy, introduced in the 1980s to control population growth and reduce poverty, has effectively stymied China’s birth rate. In 2016, Beijing reformed its “family
1 European Union Chamber of Commerce in China, 2020 file:///C:/Users/Marina/Downloads/China%202025%20EU%20Chamber%20of%20Commerce%202017%20Report.pdf
2 European Union Chamber of Commerce in China, 2020
3 The World Bank https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=US
4 European Union Chamber of Commerce in China, 2020
planning” policy, allowing parents to have two children. Although leading to an 8% increase in 2016, birth rates fell 3.5% in 2017 and continue to decline. The future of China’s family planning practices now hangs in the balance as policymakers are being forced to confront the repercussions of a smaller workforce. In January of 2019, the Chinese Academy of Social Sciences released a report projecting China’s population to peak at 1.44 billion in the year 2029, suggesting that by 2030, China will begin to see negative population growth (Campbell 2019). By 2050, the country’s population may decrease to 1.364 billion, with 330 million Chinese over the age of 65. 5 By 2065, Chinas population is projected to fall back to 1996 levels at approximately 1.248 billion. China’s unprecedented economic ascension was built upon laborintensive manufacturing facilitated by a large population. However, with a declining workforce, and no social safety net for the elderly, China’s push to get rich before it gets old is not unwarranted; it is dire.
China’s desire to move up the global value chain is coinciding with a profound period of technological advancement. Global advancements in digitization and machine learning have caused many scholars to suggest we are entering into a new phase of industrialization, akin to the waves of industrialization occurring since the 18th century. Industrial progress has progressed in waves. The first industrial revolution began in the 18th century and was characterized by mechanical production driven by steam and waterpower. The second revolution occurred in the 19th century when the electrification of machines enabled assembly lines and mass production. The third revolution began in the late 1970s when computers gave way to industrial robots, programmable logic controllers, and IT-based production management. Today, production in industrial countries hinges mostly on tools and technologies created during the 3rd revolution.
5 http://en.people.cn/n3/2019/0104/c90000-9534837.html
However, scholars are currently pointing to a fourth disruption, Industry 4.0. Industry 4.0 is characterized by the combination of advanced internet and communication technologies embedded systems, and intelligent machines.6
The aforementioned topics all influence the new direction Beijing is taking in terms of foreign and domestic policy. Industrial plans like Made in China 2025 (MIC2025) and the Belt and Road Initiative (BRI) show China’s desire to improve its domestic technology industry as well as expand its influence across the globe. Furthermore, Beijing’s promotion of cutting-edge technology including next-generation telecommunications infrastructure, satellites, and digital currency supports the notion that Chinese officials are targeting certain networked industries in their pursuits of gaining more power in the international order.
1.1 Overview of Made in China 2025
While China’s ascension to global dominance is not guaranteed, the Chinese government is taking steps to ensure its upswing amidst economic maturation. In 2015, Chinese state officials launched an initiative to promote the development of advanced industries and technologies. Entitled China Manufacturing 2025, or “Made in China 2025” the program aims to transform the country into an industrial superpower. Made in China 2025 targets emerging hightech industries such as the automotive industry, aviation, machinery, robotics, energy-efficient vehicles, advanced maritime and railway equipment, information technology, medical equipment, and other industries pivotal to growth in advanced economies. By setting ambitious goals for “smart manufacturing,” and systematically intervening in its domestic markets, China aims to substitute foreign expertise with Chinese enterprises and move towards “self
6European Union Chamber of Commerce in China, 2020
sufficiency.” Most of the information regarding MIC2025 was taken from the 2020 European Union Chamber of Commerce in China report.
MIC2025 is one route China is taking to transition from a low-value-adding, laborintensive production economy to the forefront of global innovation. In President Xi Jinping’s words, “China’s foundation for science and technology is still not firm. China’s capacity for indigenous innovation, especially original innovation, is still weak. Fundamentally, the fact that we are controlled by others in critical fields and key technologies has not changed.”7 At its core, this is what MIC2025 aims to change. The plan seeks to gradually replace foreign with Chinese technology and increase Chinese market share of core technologies. By positioning itself at the center of high-tech, China aims to simultaneously reduce its reliance on foreign enterprises and increase international dependencies on Chinese technology. The policy even has a clear goal for this, aiming to increase the domestic market share of Chinese suppliers of “basic core components and important basic materials” to 70% by 2025. This shift is meant to be accomplished by breaking down institutional barriers and improving coordination between government, academia, and industry. The exact definition of ‘indigenous’ in MIC 2025 is unclear and often at odds with initial definitions set by the Chinese government. In the past, it was found to refer only to products and technologies developed in China, defined as “enhancing original innovation through co-innovation and re-innovation based on the assimilation of imported technologies.” Now, it is unclear whether that definition will expand to include foreign innovation in China.
7 European Union Chamber of Commerce in China, 2020
The MIC2025 initiative identifies ten key sectors of special interest. In the order listed in the original plan, they are:
• Next generation IT
• High-end numerical control machinery and robotics
• Aerospace and aviation equipment and high-tech maritime vessel manufacturing
• Advanced rail equipment
• Energy-saving vehicles and NEVs
• Electrical equipment
• Agricultural machinery and equipment
• New materials
• Biopharmaceuticals and high-performance medical devices
1.2 Implementation Strategies of MIC2025
Achieving the goals outlined in MIC2025 will require intensive political campaigning and financial support from the Chinese government. China is taking various approaches to implement MIC2025. The Congressional Research Service outlined six main strategies in its August 2020 report for U.S. Congress. The first are tax, trade, and investment measures. The Chinese government is using tax preferences as incentive for foreign firms to shift their production and R&D to China. In addition, the Chinese government uses domestic standards, IP, competition, and procurement policies to solicit foreign knowledge while using Chinese suppliers for key components. The second tactic is forced joint ventures (JVs) and partnerships. China forces JVs through formal regulations and informal certifications that require businesses to have a Chinese partner. For example, in aerospace, China leverages its status as a major purchaser to press for joint ventures and technology transfer which helps develop indigenous capabilities. Third, the Chinese government, by means of its government guidance funds (GGFs) provides generous state subsidies to its domestic companies. The report notes that as of March 2018, an estimated $426 billion dollars was funneled collectively through 1,800 GGFs linked to MIC2025. Fourth, GGFs target and fund strategic foreign acquisitions. GGFs look to acquire firms whose IP, talent pools, ties to suppliers and customers, and corporate expertise would build Chinese capabilities. Lastly, Chinese firms both encourage the return of qualified expatriates and recruit foreign talent. The recruitment of foreign expertise is not unique to MIC2025, but rather a trend in Chinese R&D. Many of China’s largest technology firms (e.g. Alibaba, Baidu, Tencent, and TikTok) have U.S. based R&D centers that partner with universities and leverage U.S. talent. 8
The U.S. is not the only international player noting concern over China’s MIC2025 implementation strategies. Three years before the publication of the Congressional Research Service report, in 2017, the EU Chamber of Commerce released its assessment of MIC2025. It lists 10 key policy tools, and mimics similar areas of concern, namely:
Forced technology transfers in exchange for market access.
Market access and government procurement for FIEs
Standards
Subsidies
Financial policy
Government-backed investment funds
Support from local government
Technology-seeking investments abroad
State-owned enterprises: mergers and politicization
Public-private partnerships
8 Congressional Research Service, 2020 https://fas.org/sgp/crs/row/IF10964.pdf
The policies, goals and context surrounding of MIC2025 illustrate China’s determination to rise to the top of the global value chain. Although not the sole focus of this paper, MIC2025 provides a tangible entry point to the discussion of China in terms of structural power and interdependence. Malkin (2020) argues that via MIC2025, China is raising its latent capacity to go beyond relational power (defined in Malkin as “the power to work within the structural of global order overseen by the U.S.”) raise its productive power (broken down into four categories: market power, centrality in global value chains, ownership of assets, and technological standard setting) to shape the structural contours of global order (Malkin 2020, p.5). While Malkin suggests that U.S. hegemony remains constant, his empirical evidence suggests that recent IPE scholarship is too quick to dismiss China as a real challenger of U.S. structural power.
Other scholars do not share these optimistic views about China’s future as the next global hegemon. While the China’s economic statistics and industrial plans are impressive, they are not a conclusive measurement of the nation’s hegemonic potential in the twenty-first century. Mingtan Liu and Kellee Tsai apply a comparative and historical account of the Chinese economy to explain the dynamics affecting China’s growth in the contemporary era. Liu and Tsai claim that interactions among three types of capital: state, private and foreign, produce developmental dynamics that constrain China’s growth. Those dynamics include compromised competitiveness of China’s corporate sector due to the domination of SOEs, limits on Chinese firms’ ability to develop leading transnational corporations (TNCs), and early openness of and continued dependence on foreign capital (Liu and Tsai 2020, p.1). Tsai and Liu’s key argument is, although state-capitalism and openness to foreign capital helped spur China’s growth, the dynamics of the growth process itself, combined with the changing nature of the global economy have generated structural constraints on China’s capacity to develop strong TNCs and resulted in strong backlash from Western industrial nations. As further discussions of new interdependence will illuminate, this is of serious concern in an age where such corporations play a dominant role in the global economy.
Liu and Tsai’s article is particularly useful in that it both historicizes China’s economic development as well as applies and critiques certain theories of structural power. Their discussion of China’s development provides important context for my discussion of MIC2025, the digital yuan, the BeiDou program, and the backlash these decisions have had from the international community. Particularly helpful context is that throughout the Reform Era, the goal of the CCP was to maintain political power. This led to the bolstering of formidable SOEs at the expense of private enterprise, and an openness to foreign capital that reduced the bargaining power of domestic private capital. The party’s reform strategy has been to “empower the market to save itself,” which, in turn, leads to a delicate balancing act between the interest of capital and maintaining state control over strategic sectors. Therefore, MIC2025 and increased state involvement in next-generation technology are of particular importance. The question will be whether promoting indigenous innovation to move up the global value chain, will lead to the state favoring of less productive SOEs over private business and throw the nation into a “partial reform equilibrium” whereby the state acts as a political barrier to the nation’s capital accumulation.
China’s state-centric model is not only a potential deterrent to the economy but has significant political ramifications. Liu and Tsai use Robert Cox’s theory of structural power and hegemony to anchor this argument analytically. Cox defines hegemony as encompassing both strong structural power and the ability to generate consent and exercise leadership in the global political economy. Referring to their structural constraints and empirical evidence regarding the productivity of China’s SOEs, the authors explain why this view of hegemony proves more fruitful than traditional structural power literature. Liu and Tsai claim that authors like Strange equate preponderant structural power with hegemony. What this does is fail to distinguish between the ability and the will to rule. Cox’s account, however, is more encompassing, in that he argues hegemons should be perceived by other major powers as (more or less) representative of global interest, and that perception should expand beyond subjective sentiment and offer tangible benefits to other countries under the hegemon’s leadership. To be a global hegemon, Tsai, Liu, and Cox suggest one must have both qualities. China, however, does not fit perfectly in this model. China’s state-centric tendencies raise concerns from the international community as it would be incongruous to assume that a protectionist state has the best interest of the international community in mind. However, what Liu and Cox fail to demonstrate is that China is making efforts towards expanding tangible benefits to its allies.
If Malkin’s propositions hold ground; then China is working towards increasing its structural power via networked infrastructural technology such as telecommunications, digital currency, and satellite technology. These technologies hinge upon advancements made through Industry 4.0. Industrial programs like MIC2025 articulate China’s desire to move up the global value chain and reconfigure its position in both the international economy and hierarchy. In order to determine whether these examples are truly indicative of a shift in interdependence or structural power requires extensive discussion of the two literatures.