Trade

Globalization-related issues.

Confronting Chinese Innovation Mercantilism

February 28, 2012 - 9:30am - 11:00am
U.S. Senate
Dirksen Senate Office Building
G11
Washington
DC
20510

America’s trade relationship with China has entered into a perilous stage in the last five years.

World Bank Tells China to Reform State Sector to Ensure Stability

Los Angeles Times
The World Bank's report "doesn't repudiate China's export-led strategy," Atkinson said Monday. "It actually calls for more of it."

Enough is Enough: Confronting Chinese Innovation Mercantilism

February 28, 2012
| Reports

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In the last decade, China accumulated $3.2 trillion worth of foreign exchange reserves and now enjoys the world’s largest current account balance. In 2011, it ran a $276.5 billion trade surplus with the United States. This “accomplishment” stems largely from the fact that China is practicing economic mercantilism on an unprecedented scale. China seeks not merely competitive advantage, but absolute advantage. In other words, China’s strategy is to win in virtually all industries, especially advanced technology products and services. One may argue that all countries do this and assert it is the essence of competition. But China’s policies represent a departure from traditional competition and international trade norms. Autarky, not trade, defines China’s goal. As such China’s economic strategy consists of two main objectives: 1) develop and support all industries that can expand exports, especially higher value-added ones, and reduce imports; 2) and do this in a way that ensures that Chinese-owned firms win. It is time for policymakers in the United States and other countries to begin responding to today’s reality for Chinese mercantilism represents a fundamental threat to not only the U.S. economy, but to the entire system of market and rules-based globalization.

Because China is so large and because it’s distortive mercantilist policies are so extensive, these policies have done significant damage to the United States and other economies. The massive subsidies to keep production artificially cheap both reduce the cost of Chinese labor and move the world production system more towards labor and away from capital, reducing global productivity. The theft of intellectual property and forced technology transfer reduce revenues going to innovators, making it more difficult for them to reinvest in R&D. The manipulation of standards and other import restrictions balkanizes global markets, keeping them smaller than they otherwise would be, thereby raising global production costs. Further integration of global supply chains that link the United States and China could be good for both nations but not if Chinese policies continue to be based on absolute advantage and mercantilism. In this case, the results will be more of the same: the loss of U.S. industrial and high-tech output, and the jobs and GDP growth that go with it. The logical evolution of this path for America is something akin to what happened to Great Britain: an economy that was once great but now suffers from a hollowed-out traded sector and hence now experiences great difficulty in creating good jobs and rising living standards.

China’s goal of absolute advantage through innovation mercantilism runs counter to the effective functioning of the global trading system, which is grounded in the notion of competitive advantage: nations finding what they are good at or can be good at and exporting products and services in these areas to pay for the imports of goods and services they are not as good at producing. Running an integrated global trading system that maximizes global economic welfare is impossible when the second-largest economy rejects the fundamental premise. As such, China’s autarkic goals and mercantilist policies are fundamentally at odds with the principles of the open and rules-based international trading system that China committed to when it elected to join the World Trade Organization (WTO) in 2001. Countries that join the WTO make a commitment to a trading system, not an exporting system. Rolling back Chinese innovation mercantilism, while continuing to integrate China into the rules-based system of market-led global trade and investment, should be a key priority of U.S. (and European) trade policy.

The stakes could not be higher, for this conflict is not just about China, but about the future of the entire global trading system, especially as developing nations become more active participants in it. China’s autarkic and mercantilist approach reflects a fundamental ideological difference between how China sees its role in bringing about state capitalism and the traditional western model of capitalism supported by global organizations such as the WTO. As China increasingly touts the superiority of the “Beijing consensus” over the “Washington consensus” (the latter rests on the premise that market forces work and governments should play only a minimal role in promoting the interests of their countries’ companies and workers), there is a real risk that the former, not the latter, will become the guiding star of other nations around the globe seeking to boost their living standards. We already see this in nations like Brazil and India that are looking to emulate China by ramping up mercantilism. If this happens, it will be extremely difficult to maintain a global trading system that operates along the lines economists originally envisioned. In 1990 Francis Fukuyama wrote his well-regarded book The End of History and the Last Man which postulated that “a true global culture has emerged, centering around technological driven growth and the capitalist social relations necessary to produce it and sustain it.” Fukuyama did not, and perhaps could not, have foreseen that out of the ashes of the authoritarian anti-capitalist regimes of the right and left could emerge a powerful and successful alternative to free-market capitalism, in this case state capitalism as embodied in what could be termed the Beijing consensus.

If free trade is to prevail over the Beijing consensus, it’s not enough to tout the superiority of the Washington consensus, for it is in fact now a deeply flawed model for growth and prosperity. It places too many limitations on legitimate government roles to spur innovation and competitiveness. But the Beijing consensus is also not only seriously flawed, it is a fundamental threat to global economic integration. Instead of a choice between these two schools of thought, it is time to consider an alternative model, what might be termed the “Helsinki consensus.” Finland and many other countries are fundamentally committed to a vision of global integration and free trade, but at the same time recognize that “good”, non-mercantilist innovation policies (e.g., funding for applied industrial research and technology transfer, support for STEM education, R&D tax incentives, national technology strategies, etc.) are critical to enable them to effectively compete in global markets. They focus on both consumer and producer welfare and recognize that globalization is an unalloyed good but only if other nations also play by the rules. Yes, the Washington Consensus suggests funding basic research and education, but it is loath to develop a real national innovation strategy focused on key technologies and industries. It also assumes companies compete against other companies and ignores the fact that countries also compete, whether through legitimate or dubious means. The World Bank, IMF, and other multilateral organizations need to start advocating the Helsinki consensus around the world so that nations are not forced into an unproductive choice between the Washington consensus and the Beijing consensus. For if their choice is so limited, too many will default to the latter, especially as they look at the respective economic performances of the United States and China.

Highlight image from futureatlas.com.

Enough is Enough: Confronting Chinese Innovation Mercantilism

February 28, 2012
It is time for policymakers in the United States and other countries to wake up to the facts on Chinese trade policies and begin responding to today’s reality.

America’s trade relationship with China has entered into a perilous stage in the last five years. With China’s shift to an “indigenous innovation” strategy based on forced IP transfer, standards manipulation, discriminatory regulatory and tax policies, and favoritism towards state owned enterprises, China is unabashedly seeking to favor Chinese-owned firms in order to dominate practically all sectors, especially the higher value-added, innovation-based sectors. Yet, the Washington consensus response can be summed up in one word: patience. Read more »

See video

ITIF Report Declares "Enough is Enough" with China's Innovation Mercantilism

WASHINGTON - The Information Technology and Innovation Foundation today released a major report, "Enough is Enough: Confronting Chinese Innovation Mercantilism," which details China's increasing use of dubious trade practices to acquire global competitive advantage in nearly all industrial sectors. Read more »

Enough with the Politeness: China’s “Innovation Mercantilism” Threatens the World Economy, and Washington Needs to Speak Up

February 17, 2012
| Blogs & Op-eds

During Chinese Vice President Xi Jinping’s U.S. visit, Atkinson drew from his report for an op-ed in The Washington Monthly and called for less patience and more action, both domestically and internationally, to contain and roll back Chinese practices that ultimately will harm the entire global trading system. However closely connected the economies of the United States and China are, Atkinson says China still needs us more than we need China so we should make the most of current circumstances to bring about more balance into the relationship.

U.S. to Share Cautionary Tale of Trade Secret Theft with Chinese Official

The New York Times
“The Chinese have U.S. companies over a barrel because of the pressure for short-term earnings. They’ve got renminbi dancing in their eyes,” Mr. Atkinson said, referring to China’s currency.

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E&E News
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The WTO should prosecute a proactive trade policy that fights foreign mercantilist actions, including currency manipulation, closed markets, high tariffs, and forced offsets for market access.

When a country like China is committed to winning in key innovation-based industry and is willing and able to engage in a wide array of mercantilist practices, some of which violate various global trading agreements, no matter how good the innovation policies of places are, they will not lead to innovation activity. Only if the federal government takes aggressive and sustained action to combat innovation mercantilism will sub-national places stand a fighting chance. Helping places win the race for global innovation advantage will require action directed abroad to dramatically reduce unfair and protectionist foreign trade practices.

Good Speech, Good Ideas, Yet More Needed…

January 26, 2012
| Blogs & Op-eds

In follow-up analysis of the State of the Union address, ITIF affirmed it praise for the President's focus on competitiveness but makes the case for more robust R&D, tax, trade and energy that should included in the President's upcoming budget proposal.

 

  • It is important to maintain funding for applied R&D in addition to basic R&D to better ensure commercialization of good ideas. The revitalization of manufacturing requires serious investment in a manufacturing technology initiative.
  • Better trade enforcement must be matched with identifying China as a currency manipulator and setting higher standards in new free trade agreements.
  • Corporate tax reform must expand and retain tax incentives to bolster the competitiveness of traded sectors and not be tethered to revenue neutrality. Lower effective corporate taxes should be the goal.
  • Technology's role in enhancing productivity and long-term growth is critical. Support for clean energy must include robust investment in the innovation that will lead to the breakthroughs we need.