China compelled high-speed rail manufacturers, including Japan's Kawasaki and Germany's Siemens, to offer their latest designs and produce 70 percent of each system locally.
The example cited in the article by Thomas M. Hout and Pankaj Ghemawat illustrates that something close to extortion is a core element of China's economic development strategy. China is employing this same strategy of divide-and-conquer with Boeing and Airbus as those companies compete for China's huge commercial aircraft market. Of course, China is not alone. As ITIF has documented, "innovation mercantilism" is on the rise. Many countries are willing to bend or ignore the rules of global commerce and fair competition to gain an advantage in key industries. However, what policymakers must realize is there is high potential for backfire in the long run. For example, India imposes high tariffs on advanced technology to protect its domestic companies. But for every dollar of tariffs, India experienced an economic cost of $1.30 as firms were compelled to use inferior components. This is damaging to India's innovators and those from other countries.