The West and specifically the United States of America is troubled by the threat of a technologically dominant China – and keen to ensure it never materializes. And yet, given China’s current status, many argue that little can be done to impede it.
In the United States, and after one of the most intense elections in the country’s history, there is one issue on which both parties seem to agree on: the need to “stop” China.
On a larger geopolitical scale, the US government supported by the EU Commission believe that China has secured its economic and technological gains unfairly due to its government’s persistent influence over the economy. Geostrategists often push this view, imagining that a government can achieve technological superiority by investing in the fashionable sectors of the day.
However other analysts believe that this explanation is deceptive, at best. The most “successful” grand economic-development plans usually go with the grain (i.e. accept something rather than oppose it or fight against it), focusing largely on targets that, given the economy’s fundamentals, would be achieved anyway. Crediting state intervention when those targets are met is thus inappropriate.
Recent history cases studies support the above mentioned idea; Japan is a cautionary example. During its post-1945 growth spurt in the 1970s and 1980s, the Ministry of International Trade and Industry (MITI) acquired an almost mythical global reputation for the apparent success of its efforts to channel resources toward strategic sectors. Many countries were advised to emulate its model.
But in the 1980s, Japan’s real-estate bubble burst, and growth slowed significantly. As it turned out, many of the sectors MITI supported had not actually succeeded. What had really been driving Japan’s growth was not MITI’s prescience, but a high savings rate and the rapidly increasing education level of a disciplined workforce – much the same factors that have driven China’s development.
Not long ago, China’s leaders seemed to understand the limits of state intervention. In fact, the Communist Party of China’s general advice to authorities was to scale back the state’s involvement in the economy, because state-owned enterprises (SOE) generally remain far less efficient than private firms, and only about one-third as profitable. And yet, while SOEs continue to underperform, compared to private firms, China’s leaders have radically changed their views on intervention. Now, the conventional wisdom is that the country owes its progress – and, indeed, its emerging global dominance – in some high-tech sectors to the state’s guiding hand.
The true driver of China’s success, however, is its high savings rate – nearly 40% of GDP, or more than twice the rate in the US and Europe.
This gives China massive resources for investment in establishing the fundamentals for technological leadership. Notably, the country has made enormous investments in improving both the quantity and quality of education.
Regarding secondary education, China has already fully caught up with the West in attendance. And testing by the OECD’s Program for International Student Assessment suggests that Chinese secondary-school students are far better at solving problems than their American or European peers.
Moreover, tertiary education – the real key to technological leadership – has exploded in China over the last two decades. According to the US National Science Foundation, China now produces more than twice as many engineers, and more peer-reviewed science and engineering publications, than the US. Similarly, it has surpassed the European Union in spending on research and development, and on current trends, it should catch up with the US over the next decade (some think it already has).
The US is haunted by the specter of a technologically dominant China – and keen to ensure it never materializes. And yet, given China’s fundamentals, there is little the US could do to hamper, let alone arrest, its progress. Huawei is just one example of a firm that has capitalized on China’s pool of millions of engineers to develop new products. Even if the US manages to destroy Huawei, many other Chinese high-tech companies are destined to emerge, driven by the same talent.
The so-called dual-circulation strategy that is set to shape China’s next Five-Year Plan is perfectly in line with the aforementioned fundamentals. As China’s economy grows and diversifies, it is naturally becoming less reliant on exports, and its newly minted engineers will master a growing number of technologies. In other words, the government’s plans for the coming years would probably materialize, even without state intervention.
By contrast, the US strategy – which begins with an economic “decoupling” from China – has little chance of success. To be sure, the decoupling itself might be feasible. But it would also be counterproductive.