Let’s be honest: To an outsider, the catalog of U.S. criticism of China’s economic methodology can come across as sour grapes. The U.S. is the world’s most powerful country. Its companies and individuals have continued to dominate key sectors of the world economy even as its global GDP share has declined from its 1950s high water mark of around 40% and Chinese companies have overtaken it in entering the Fortune Global 500. It’s complaining about challenges to an anti-creative copyright and intellectual property system set up by colonial powers which has successfully enshrined first-mover advantage. And beneath it all are a series of value judgments about market interventions being morally wrong or unfair, when history is full of governments shaping markets to their own advantage, and market decisions are leading us off a cliff with climate change and exploding inequality.
However, if we strip away the moralizing, and ignore how free you like your markets, and ignore who’s saying it, there is at least one frequently made, provocative claim that even a skeptic might look at twice. That is: The claim that within the existing system China’s rise — and the methods behind it — have distorted markets and in doing so dragged down other countries’ ability to create innovative new technology like flying cars or anything that isn’t an app.
There are two main arguments for this view.
The crudest goes like this: There is little incentive to invest in innovation if Chinese companies are likely to steal your idea and reap the profits. The idea here — alluded to by people like Peter Thiel — is that cases such as that of Chinese research scientist Hongjin Tan — accused of stealing next-generation battery technology worth more than $1 billion — are systematically encouraged by the Chinese government. This, over time, could have reduced the profits that can be derived from costly research and development spending. And a simple logic that follows on from this is that competitors begin to focus on rent extraction instead of innovation, because the profits are guaranteed and the opportunity costs are not as high.
A more nuanced argument comes from a different angle: Others who believe China’s rise has knocked innovation elsewhere don’t focus on intellectual property theft, they instead focus on the Chinese government’s injections of cash into key industries. Their arguments suggest there is a sweet spot for innovation between too little competition within an industry and too much, and they say that massive state industrial policy spending from China has tilted the balance away from the optimal number of competitors. As a result of that, they argue that outside companies which would have had higher profits to reinvest in research and development end up with lower profits, and thus innovation declines.
So, has Chinese government policy robbed the world of flying cars and inflicted on us the rent-extracting monstrosity of Amazon and a million iterations of the same old products?
There are no definitive answers, but there are questions around both arguments.
One is regarding scale. Mike Orlando, the acting director of the National Counterintelligence and Security Center told CBS this year that the U.S. (for instance) is taking “$200 billion to $600 billion dollars a year in losses to intellectual property theft by China.” In an economy worth around $23 trillion last year (if we take a partisan actor’s account), is a 0.87 to 2.6% dent worthy of comparison with the impact of something like the COVID pandemic, which has had its cost estimated at between $10 trillion and $22 trillion? Or is $248 billion of industrial spending? Two: China’s payment of licensing fees and royalties for the use of foreign technology grew fourfold from 2007 to 2017 to nearly $30 billion, so why hasn’t that corresponded with a reduction in those complaining about stealing’s effects on innovation (quite the contrary)? And finally (and most importantly) three: Why do structural accounts of declining innovation from non-China experts — like the ditching of ambitious public-private partnerships because we’ve forgotten how innovation really works, or the marketization of research and the switching to a shareholder model of capitalism — correspond better with the period when most believe the decline began, in the 1960s or 70s? Why was this well before China was a major economic power?
These questions lead one to suspect — if we follow someone like David Graeber — that deeply embedded structural reasons for falls in profits that result in falls in investment, plus medium-term policy frameworks, override the shorter-term movements of capital described above. However, it must be said that just because something is not a definitive factor in a phenomenon doesn’t mean it’s not a contributing factor. And the level of complexity involved will always mean there is room for debate.
Either way, the U.S. government’s recent policy moves may test the theories about China’s structural role. Its Inflation Reduction Act is a Green New Deal-inflected fiscal stimulus for business that from its inception has always been seen as a counter to China’s state-capitalist success. And its CHIPS Act is similarly directed, with the addition of banning companies from sending chips more advanced than 28 nanometers to China. What those policies mean is, whether you believe in the China factor or not, we are probably about to see what happens when a country tries to remove it.