China’s Industrial Policy and its European Business Partners
Photo Credit: GEVME
By Michael S. H. Heng

China’s Industrial Policy and its European Business Partners

Mar. 13, 2017  |     |  0 comments

A recent blog article in the Wall Street Journal is an interesting read. The paper reports the views of the European Union Chamber of Commerce in China (EUCCC) that China’s latest industrial policy is a waste of the country’s resources and a challenge to the members of the Chamber.

The views of the EUCCC consist essentially of two points. The first point is a critique of China’s state industrial policy — the latest being encapsulated as the “Made in China 2025” initiative. In the words of the business group’s President Joerg Wuttke: “Very often these major plans, with lots of money, where government bureaucrats decide who’s the winner and who’s the loser, end up in tears.”

The second point is their complaint of what they experience as unfair trade practices, more limited access to Chinese markets, and stepped-up use of regulations by the Chinese state to support national champions.

Though the two points may be related, the business group can present a better case by separating them, at least at the conceptual level.

It is a well-known fact that many countries have relied on state industrial policy to drive their industrialization and economic modernization programs. This is especially so for newly industrializing countries (NICs). Germany, Japan, South Korea, Taiwan and (of course) the United States have all have travelled along this well beaten path. It is such an established approach that some NICs cannot even be bothered to apologize for it when faced with neoliberal criticisms from the advanced economies.

Even having graduated as industrial economies, these countries should have good reasons to continue using industrial policy and state intervention. The case is being well argued in the works of economists like Chang Ha-Joon and Mariana Mazzucato. Like all policy formulations and implementations, there have been shortcomings and mistakes as well as success stories. The challenge is to distill insights from both successes and failures, and not to operate with ideological blinkers.

Unfortunately, in some western countries, especially the US, the merits and practical necessities of state industrial policy do not fit in well with neoliberal economic ideology. The result is a mild version of economic schizophrenia. Those advanced economies inspired by neoliberalism engage in a kind of “stealth” industrial policy in the form of defense procurement policies, space programs, and funding for scientific research at universities. These states will do well to be open and aboard with industrial policy and state intervention in critical industries. There is nothing wrong doing so.

Even in the age of globalization, it can be argued that state industrial policy falls within the domain of sovereignty.

However, it is useful to look at the second point of the EUCCC’s criticism. It says that the “Made in China 2025” policy threatens to undermine fair competition and hurt the Chinese economy by fueling overcapacity, bad debt, and inefficient and misdirected investment.

Incidentally, the problems of overcapacity, bad debt, and inefficient and misdirected investment are widely recognized among Chinese economists. For example, this was articulated by the senior economist Cai Fang in his recent book. These negative features of the Chinese economy are partly due to the massive stimulus package that was implemented to cope with the 2008 financial crisis. Unlike neoliberals advocating small government, this group of Chinese economists advocate state intervention to reduce income inequality, to narrow inequality in the provision of public goods, to reform state-owned enterprises, to ensure equal access to credit for small-and-medium enterprises, to promote labor market mobility, to support laid-off employees with a social safety net and skills training, to reform the household registration system, and to increase investment in research and development.

Perhaps, what the EUCCC really wants to highlight are what it perceives as unfair trade practices and the limited access to Chinese markets.

On this issue, the Chinese government has said it is committed to providing fair access. And, in the government’s policy blueprint for the year on March 5, Premier Li Keqiang pledged that “China will keep working to be the most attractive destination for foreign investment.” Between them, they offer an official arena for the EUCCC to press its case, especially when it can be framed in the spirit of promoting mutual benefits.

Trade is a win-win transaction between two or more willing parties. It is an exchange of something that you have for something that you do not have but want at a price that is acceptable to both sides. In a civilized world, nobody can force you to sell things that you do not want to sell. Neither can anyone force you to buy things that you do not want to buy. This is a fundamental principle that is more solid than any trade agreement. It assures business success in trade.

If China imposes unfair trade practices on its trading partners, it is a matter of time before it faces retaliation from them. Such high-handed measures are simply counter-productive in the long run.

We may recall that without trade agreements between states centuries ago, Chinese merchants were able to carry out brisk trade with their foreign counterparts — selling silk, tea and porcelain, and importing maize, potatoes, and other products foreign to China. The exchange has certainly enriched both sides of the trade in many ways. China has certainly benefitted by having more varieties of crops and enriching its cultural and intellectual life.

Trade is bound to come to a halt when there is no benefit in either buying or selling. There is much wisdom in marketing courses in reminding students not to try selling ice to an Inuit or bringing coal to Newcastle.

It stands to reason therefore that both the members of the EUCCC and their trading partners in China should work hard in a harmonious atmosphere to explore the needs of one side and what the other side can offer. Market institutions justify their raison d'état by supporting the smooth operations of trade based on this fundamental principle.

What is true for trade is true for investment. As China continues to upgrade its technological capabilities and increase its economic sophistication, foreign investors must respond to this development so that both sides can enjoy benefits in the process. Trying to sell what were once advanced products to China now will run into difficulty when China can produce them locally.

Western Europe has a strong technological base and with long-standing expertise and experience in scientific research and technological innovation. These resources should be exploited to produce cutting edge technologies that will function as “open sesame” to the vast Chinese markets.

What confronts European companies in China now will in due course come to confront Chinese companies investing overseas. Such logic of business economics knows no nationality, border, culture, or even politics.

Perhaps, a fruitful follow-up to the complaint of the EUCCC is to conduct a reflective, friendly, open-minded, and respectful conversation involving all the relevant parties with a view to chart the course of an enduring win-win business relationship.

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