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Why Trump's fear over 'Made in China 2025' is unfounded?

The rise of China's manufacturing industry shall not be the US's biggest worry. Instead, it shall think otherwise or whether a more powerful China would mean wider, unfettered market access to US companies and products.

“Made in China 2025” is China’s strategic answer to tremendous challenges at home and abroad. Domestically, pinched by a shrinking labor force and subsequent  rising wages, more and more labor-intensive enterprises are shutting down their operations in China and moving to cost-efficient southeastern Asian countries. China’s proclivity to fall into the “Middle income trap” has become a nightmare its government is doing everything possible to avert. 

Externally, initiatives of the “Advanced Manufacturing Partnership,” which the U.S. launched in 2011, “Industry 4.0” from Germany in 2013 and the “New Robot Strategy” from Japan in 2015 have ushered in a new era of industrial revolution. China has missed out the previous rounds of revolution and now it seems the distance to catch up with these advanced industrial powers get more visible or even longer.

As a blueprint released by China’s State Council, Made in China 2025 aims to transform the country into a tech high ground that dominates manufacturing innovation, including the Internet of Things, smart appliances and high-end consumer electronics. Or in the word of The Mercator Institute of China Studies based in Germany, the goal of Made in China 2025 is essentially to build an economic structure and capabilities similar to that of Germany and Japan.

The plan has become a focal point in Sino-US trade war, with Trump blustering to impose 25% tariff on imports from certain industries that China identified as part of its “Made in China 2025” plan. Even the German state secretary for the Ministry of Economic Affairs called for Europe-wide measures to more closely review and monitor Chinese investments in European firms.

So what makes the plan so controversial? Why is the West or Trump in particular so rankled with it? Here we take a closer look and get a lowdown on the plan.

State support

From the western perspective, China is not a free market and relying instead on a top down decision-making. Though it’s not a bete noire to build up China’s tech prowess, the tools used for the plan often took the form of subsidies and government directed loans, which irked the western countries.

According to statistics from Xinhua-run Economic Information Daily, the total state funding for the plan is likely to exceed 10 billion yuan ($1.5 billion). Aside from central-level funding, local authorities will also increase financial support for "Made in China 2025" projects with over 10 billion yuan expected to be invested by local governments nationwide from 2016 to 2020.

The government will also cooperate with China Development Bank to provide financial services including loans, bonds, leasing to support major projects, with an estimated 300 billion yuan of financing in place for the 2016-2020 period.

Western countries fear such support undermines the principles of fair competition and exploits the openness of market economies in Europe and the United States. Even worse, they fear, state support could back fire by tempting local companies and governments to chase subsidies, resulting in production glut and bringing down global price and squeezing out costlier western competitors. 

Fear of unfair market access

The plan’s goal to achieve self-sufficiency by setting a quota of 70% of basic core components and important basic materials manufactured in and controlled by China as of 2025 could effectively bar foreign companies from China and falls foul of WTO rules against import substitutions, critics of the plan said.

The critics claimed, to fulfil the quota, not only public procurements are reserved only for domestic products, but local governments also encourage Chinese companies to favor Chinese products and services.

Tech acquisition and alleged forced transfer

Essential to the success of the plan is acquiring foreign technologies. After the plan was released, outbound Chinese investments in foreign companies that specialized in automation and digitization of industrial production increased significantly but it’s mainly driven by government funding and highly opaque investor network. China Integrated Circuit Industry Investment Fund is among the most ambitious, having raised 120 billion yuan ($19 billion) so far, with a target of 600 billion ($95 billion), geared toward investments in chip manufacturing and design. 

For those coveting access to Chinese market, they will have to enter into joint ventures with majority local partners wielding the power to force tech handover from foreign counterparts. According to the US-China Business Council’s 2017 member survey, 19 percent of responding companies said that in the past year they had been directly asked to transfer technology in exchange for market access. Of these, 33 percent said that the request came from a central government entity and 25 percent said that it came from the local government.

However, the Chinese government and most of Chinese economists believe no market economy could be 100 percent free from state support and interventions,  Chinese authorities also denied any forced technology transfers from foreign companies in the country.

An overblown fear?

According to the statistics from the World Bank, the proportion of manufacturing industry in the US economy has decreased from 16.1% in 1997 to 11.6% in 2017. Although the US has tried to revive the manufacturing industry since the Obama administration, it was of no avail. The locomotive of the US economy lies in its vibrant high-tech, financial, service industries. Trump’s efforts to backtrack the status of the US to a traditional manufacturing powerhouse is unrealistic and endangering the US and world economy at large.

As “Made in China 2025” was first unveiled back in 2015, the attitude adopted by the Obama administration is to ignore because they believe the plan is primarily for manufacturing, which doesn’t pose much imminent threat to the US economy. Since the plan aims to build up an economic structure and manufacturing capacity similar to Germany and Japan, it’s really baffling to see these two countries seeking cooperation with China and ironical to see the US so concerned and provoked by the plan. Though the US is so worried, it shall roll out its own industrial policy as a countermeasure rather than engage in a zero-sum game.

As illogical as it could be, the Trump administration resort to high tariff as its countermeasure. A proposed 25 percent tariff on “high-tech” imports from China will do more harm to the US rather than China. While China has a massive market enough for its advanced industry to grow by initially focusing on its domestic customers then most likely third world countries before exporting to other developed countries, Trump’s tariffs on “high-tech” imports will raise costs and reduce the competitiveness of U.S. manufacturers in a wide a range of high-tech sectors. And if China slaps retaliatory tariffs on U.S. goods, U.S. manufacturers face the double-whammy of increased costs alongside reduced access to the Chinese market — the largest market for many U.S. exporters.

Of course, China shall take other countries’ concerns into account. The reason why the west especially the US felt alarmed and apprehensive about China’s rise is that the US believes that China’s strategic pathway in recent years is contrary to what the United States expects, and the Chinese economy has been further strengthened by the visible hand—state intervention.

As a matter of fact, the basic principles set out in “Made in China 2025” contain language such as “give markets the decisive role in allocating resources,” “strengthen the dominant position of enterprises,” “actively transform government functions” and “create a stable environment for enterprises.” China needs to carry out the plan in earnest and allow the market to play its decisive role in developing its advanced manufacturing industry.

Some of the targets or quotas in “Made in China 2025” serve as forecasts or guidance. They're not mandatory requirements. If there is evidence that “Made in China 2025” is in violation of the WTO rules, judgments will need to be made according to the WTO dispute settlement rules instead of taking unilateral punitive actions. As a responsible stakeholder, China is willing to make necessary compromise to bring its policies more into line with international rules.

As such, the rise of China’s manufacturing industry shall not be the US’s biggest worry. Instead, it shall think otherwise or whether a more powerful China would provide wider, unfettered market access to US companies and products.

China is willing to allow foreign companies equal opportunities to tap into the “Made in China 2025” plan and accepts products manufactured in China by a China-based company whether it’s a wholly-owned foreign enterprise or a Sino-foreign Joint Venture with a Chinese minority or majority share holder as part of the plan. And it will ultimately benefit Chinese tech development in the long run.

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