China’s Technology Strategy: Leverage Before Growth

Whether China likes it or not, sustained and fast economic growth is not in its present or future. Political and military strategies dependent on fast growth are no longer viable options. This hardly means Chinese Communist Party (CCP) Chairman Xi Jinping has given up. He has outlined new objectives, and his regime has implemented new strategies flowing from those objectives. (1) The US and others have only partly recognized this shift and have barely begun to respond to it.

Similar to its military strategy, the People’s Republic of China’s (PRC) current economic competitive strategy is asymmetric. Beijing focuses on the PRC’s “strengths,” which include being able to produce at scale, having some of the world’s largest consumer market segments, employing predatory regulatory practices, and using coercive technology acquisition. China is trying to neutralize American advantages stemming from an open, wealth-seeking, highly innovative economy. If the US keeps competing as if its rival is another open-market economy organized for individual prosperity, it risks losing the crucial contest for economic leverage and political influence. To defeat the PRC’s geo-economic strategy, the US needs to ensure it no longer helps Chinese companies seeking to catch up and consider defending its most innovative companies.

Xi’s Vision

Despite obstacles to economic growth, Xi’s speeches meant only for the party cadre exude optimism about the Chinese socialist system’s ultimate victory over American-style capitalism. In what may have been Xi’s first speech to party leaders in January 2013 (kept secret for six years), he called on Communist leaders to stick to this ideological struggle, even if it takes a good while:

Facts have repeatedly told us that Marx and Engels’ analysis of the basic contradiction of capitalist 1 A society is not outdated, nor is the historical materialist view that capitalism will inevitably perish and socialism will inevitably triumph. This is the irreversible overall trend of social and historical development, but the road is winding. The ultimate demise of capitalism, and ultimate triumph of socialism, will inevitably be a long historical process. (2)

His policies are aimed at proving his version of Marxist theory to be well-founded. Indeed, Xi is confident that what the CCP calls “socialism with Chinese characteristics” will not only survive but also offer an edge in long-term strategic and technological competition. In a 2016 speech on building a leading scientific and technological power, Xi said:

Our greatest strength lies in our socialist system, which enables us to pool resources in a major mission. This is the key to our success. We have relied on this in making noticeable scientific breakthroughs in the past. And today we will still rely on this in achieving leapfrog scientific and technological innovations. We will develop a new mechanism under the socialist market economy to pool our resources in scientific initiatives. (3)

Xi’s case to the Communist cadre is that, unlike the US, the PRC can conduct long-term planning and organize resources on a large scale to advance commercial and technological objectives. (4)

Where American analysis can go astray is in assessing the competition with China using comparative wealth or broad technological leadership. China’s system is not designed for maximum prosperity or innovation. Rather, policy buttresses the PRC’s economic power and leverage, which in turn give it geopolitical advantages. At the 19th Party Congress in 2017, Xi went further than pronouncing the advantages of socialism for the PRC. He announced the advent of a new era in which Chinese-style socialism will become the center of global affairs. His argument was that the Chinese system has more to offer than the American democratic capitalist system, particularly in developing countries for whom the PRC’s successful socialist modernization is “blazing a new trail.” (5)

Xi is therefore attempting to reorder the international system to the extent of undermining genuinely competitive markets. He unveiled the Global Development Initiative in September 2021, offering developing countries an ostensibly new development pathway based on the PRC’s state-centered approach focused on the good of the “collective.” (6)

Xi is not subtle about his desire for much of the world to emulate Chinese socialism. And his immodesty about the PRC’s system may be well-founded. The US has been naive in interacting economically with China as if free-market principles hold, even as it has become clear that China is manipulating markets for strategic advantage.

To be sure, Beijing is not succeeding in outpacing the US in economic size. The gross domestic product gap barely shrank from 2012 to 2022, and the wealth gap expanded. (7) Xi’s ceaseless crackdown on the private sector generally and technology firms in particular invites more of the same. Taking the proverbial whip to the most innovative sectors, disallowing market forces to determine apportionment of capital, limiting property rights, and inhibiting labor movement is not a formula for catch-up. Stir in horrific demographics pressuring personal and national finances as the cohort of retirees mushrooms, and the result is dimming long-term prospects. The PRC is on a path to Japan-style stagnation before attaining Japanese levels of income.

But outpacing the US in wealth, prosperity, or even broad innovation is not Beijing’s plan. Growth is still welcome, of course, but the primary goal is durable state control. Despite decades of experimentation with markets, the CCP still directs factors of production—land, capital, and labor—to a considerable extent. The State Council in 2020 labeled data a new factor of production and is implementing plans to ensure data come to China and stay in China.(8) This is certainly not economically efficient; it’s occurring because it serves other aims.

The Resulting Challenge

Xi’s strategy of global competition is consistent with his notion of the strengths of the “socialist market.” Beijing is trying to dictate what Leninists call the commanding heights of the economy. What constitutes these heights can be debated and obviously changes over time. In this case, Xi may have chosen supply chains on which the US and its allies have come to depend. A slowly growing PRC will still be in a competitive, even menacing, geopolitical position if it can effectively dictate global availability of pharmaceuticals, mass-use semiconductors, and telecom equipment, among others. Deteriorating competitiveness means China cannot support high final-stage production in as many sectors as before. But supply chains offer the opportunity to strongly influence industries merely by taking the premier position in one or two elements of the chain. (9)

While that could serve as the PRC’s primary goal, it would not be the only one, just as growth was aimed first but not solely at urban employment. Related to supply-chain influence is greater Chinese state influence over both domestic and foreign innovation, through imposed corporate dominance. Here, Beijing does not need to have the most innovative or profitable industries to gain leverage over the US and others. Rather, it can use its competitive advantages and market-warping strategies to try to drive out of business highly innovative US companies, then replace them with PRC national champions.

Consider the “Huawei model” of competition. The model did not originate with and is hardly limited to Huawei, but the firm is the best-known example. The first step is regulatory protection of Chinese enterprises at home, so some cannot fail. The process continues with cooperative and coercive intellectual property (IP) transfer to the PRC in exchange for market access or access on better terms. Domestic firms are subsidized as needed to capture more of the home market. Guaranteed income there plus subsidy-enabled excess capacity then power an international expansion.

Next, major foreign competitors are targeted overseas, for acquisition or further IP transfer, via partnership or theft, clearing the way for Chinese leadership. Early on, there appears to be high competition and innovation globally, but this is misleading, because the Chinese side of the competition is not market-based. Eventual consolidation leaves Chinese firms with a stranglehold, where consumer welfare falls versus a competitive market.(10) The telecom sector became less innovative as Huawei’s competitors died off. It also happened in photovoltaics, where the PRC is globally dominant.(11) Competition and innovation may begin to ebb in autos, where China will not be dominant but has become the top exporter and is displacing foreign production.(12) (Elsewhere, the PRC is becoming a vital supply-chain partner, most prominently through electric batteries.) (13)

A future target for Chinese predation could be biopharmaceuticals. Currently, the US leads in gene-editing innovation, biologics, and of course mRNA research— the most innovative segments of the industry. However, China has named the sector as a high priority and will again try to use dominant sales and export positions, for example in chemical precursors, to induce firms to locate related research and production in the PRC. If the pattern holds, subsidized Chinese competition and coercive IP acquisition are inbound.

This may not work; China does not always win. But when Beijing is successful in using monopoly or oligopoly revenue from its own market, conventional subsidies, and coercive IP transfer to kill some of the most innovative American companies, innovation will slow in the US and around the world. An early version of this has already occurred. The historical pace of American corporate research and development slowed with China’s accession to the World Trade Organization. (14) Moreover, sectors facing greater import competition saw weakness in research and development spending and patenting. (15)

Replacement Chinese enterprises will not be as innovative; they are not even designed to be as innovative. American standards of living will be lower than they would be otherwise, and the same will ultimately be true for global standards of living. Even Chinese living standards may not rise; what the PRC primarily gets is greater capacity to coerce and deter others’ coercion. Consider a dozen more Huaweis playing central roles. This will not occur everywhere—only in sectors Beijing prioritizes and where China is capable. But it is certainly a goal.

How to Respond

The US may be a decade late in recognizing Beijing’s strategy of gaining economic leverage, but it does not have to accept a world in which the PRC controls critical industries through dominant firms or supply chains. China faces its own challenges. With regard to technology in particular, it has tried but failed to reach the leading edge in some sectors. Beijing has been reminded, in the form of slowly progressing restrictions imposed by others, that it depends on multinationals such as Nvidia and Taiwan Semiconductor Manufacturing Company for anything close to advanced semiconductors. It has painfully failed to match the US in COVID-19 vaccines. Airline champion Commercial Aircraft Corporation of China cannot make quality turbofan jet engines and needs General Electric. (16) None of this is for lack of devoted resources.

The US will retain considerable economic leverage, and likely a higher standard of living than it would have otherwise, if it can maintain innovation dominance in vital industries. This requires, among other things, preventing the PRC from harming or destroying the competitive position of certain leading American companies (see Motorola.)(17)

It is encouraging that the Biden administration has signaled that a major objective is to stay far ahead in such areas as the development and manufacturing of semiconductor chips with the strongest computational power. (18) But setting out goals is actually harmful if it becomes cover for not making material changes. As of late spring 2023, the interim semiconductor export controls introduced in fall 2022 have not been finalized, likely due to objections from US and allied-country companies. Long-promised restrictions on outbound investment in semiconductors have not materialized. While spending heavily on chips at home, the US still helps China catch up.

If and when these failings are addressed, a great deal can be done elsewhere. It’s generally recognized that semiconductors cannot be the only sector where the US government considers market intervention. Other industries are necessary to maintain a leading geopolitical position, an additional and important factor beyond what’s best for consumers. But more than with chips, recognition has not been followed by action, due first to disputes over which industries might qualify. An obvious step is to quickly formulate and apply investment and export restrictions elsewhere in computing, such as quantum computing, cyber competition, and artificial intelligence and autonomous systems. This may be in progress, but it is not visible. The same is not true in biotechnology, including biopharmaceuticals and genetics. The easy consensus is this group of products and technologies is important, but action is scant. Research support is ongoing, though not at the same level as promised for chips. The administration consciously chose to exclude biotechnology from outbound investment review, permitting the PRC to continue to draw American money in the sector. (19) The principle should be that technology protected at home by the Committee on Foreign Investment in the United States (CFIUS) should not see development in China financed by American money. The same should apply to exports: Where biotechnology is controlled, it should not be permitted to then substitute American investment in the sector.

A third, still-higher level of challenge is found in new energy materials and applications, where dependence on the PRC is presently heavy. (20) American subsidies may be in progress, but reducing dependence is not. For this purpose, innovative US companies should receive much stronger IP protection. For decades, the US has done nothing more than complain about IP loss, including in new energy, (21) and pretend the next round of negotiations will be different. With Beijing emphasizing many aspects of new energy development, Chinese IP coercion will only intensify. Unless the US can do better on this score, it cannot outperform the PRC in new energy.

The Biden administration and others have identified these three sets of industries, or “families of technologies,” in National Security Adviser Jake Sullivan’s words—computing, biotech, and new energy—that will play an outsized role in overall US competitiveness.(22) Unfortunately, both the administration and Congress have also set out longer lists of “critical” sectors that are more dubiously justified. (23) This is a mistake. Broad intervention would risk widespread distortion of competition, hobbling innovation instead of protecting it. Given the lack of action even in consensus areas, calling for broader steps is also obviously impractical.

It may not even be called for by Chinese behavior. While there are multiple ways for the US to narrow its focus to a list of genuinely strategic industries, Beijing itself has (indirectly) suggested the best approach. In sectors where the PRC continues to struggle, which at least appears to include commercial aviation, for example, America and its allies should avoid providing assistance to China but should not intervene in their own successful markets. The eligible list should be of industries where the US is ahead, but China has demonstrated the ability to narrow the technological gap and displace foreign production with its heavily subsidized firms.

The US should not merely identify these industries and call it a day, as it has up to now. In light of the PRC’s targeting, America should at a minimum stop supporting Chinese enterprises with money and technology and take difficult steps to better protect American IP in the industries where there is consensus the US must lead. In light of Beijing’s goal of having dominant firms, Washington should, when adopting policy about the authors responses, be especially mindful of the most innovative American companies, including those that seem well ahead. They are prime targets and can be killed off by the PRC’s anticompetitive policy mix even if the PRC does not catch all the way up technologically. Successful American firms should be protected from Chinese predation (only) and studied for lessons on how to perform under this kind of duress.

Conclusion

Reasonable people can differ over the state of Sino-American competition, in part because it’s reasonable to differ about what’s being competed over. If it’s wealth and prosperity, China has been shooting itself in the foot with re-centralization under Xi.

But if the contest is over whether the Chinese authoritarian socialist system is better than the American democratic capitalist system at accumulating one form of economic power and the associated geopolitical gains, Xi’s strategy is sound and feasible. American openness and profit-seeking continue to allow the PRC to warp and eventually suppress market competition. The US is winning macroeconomically, in part because it started out so far ahead and in part because Xi’s China may no longer even be trying to compete in conventional macroeconomic terms. America is not winning the battle for leverage and needs to protect, learn from, and expand on its successes in order to do so.

Dan Blumenthal is a senior fellow at AEI and author of The China Nightmare: The Grand Ambitions of a Decaying State (AEI Press, 2020). Derek Scissors is a senior fellow at the American Enterprise Institute. He is concurrently chief economist for the China Beige Book.

Footnotes

1. Dan Blumenthal and Derek Scissors, “Breaking China’s Hold,” Atlantic, December 23, 2022, https://www.theatlantic.com/ international/archive/2022/12/china-economic-coercion-united-states/672524.
2. Matt Pottinger, “The Chinese Communist Party’s Threat to America,” testimony before the Select Committee on the Strategic Competition Between the US and Chinese Communist Party, US House of Representatives, February 28, 2023, https:// www.fdd.org/analysis/2023/02/28/the-chinese-communist-partys-threat-to-america.
3. Quishi, “Build China into a World Leader in Science and Technology,” May 30, 2016, http://en.qstheory.cn/202107/19/c_643429.htm.
4. Liza Tobin, “China’s Brute Force Economics: Waking Up from the Dream of a Level Playing Field,” Texas National Security Review 6, no. 1 (Winter 2022): 81–98, https://tnsr.org/2022/12/chinas-brute-force-economics-waking-up-from-the-dream-of-aAMERICAN ENTERPRISE INSTITUTE 5level-playing-field. Liza Tobin quotes a Xi Jinping speech. Xi said, “To stay at the forefront of the times, a nation must always be guided by the right theories and thoughts. How does the [Chinese Communist Party] succeed? Why does Chinese socialism work? Because Marxism works… Marxism points the way for advancing human society. It is a powerful theoretical weapon for us to understand the world and its underlying trends, seek the truth, and change the world.” Xi Jinping, The Governance of China (Beijing, China: Foreign Language Press, 2022), 4:35.
5. Daniel Tobin, “How Xi Jinping’s ‘New Era’ Should Have Ended U.S. Debate on Beijing’s Ambitions,” Center for Strategic and International Studies, May 8, 2020, https://www.csis.org/analysis/how-xi-jinpings-new-era-should-have-ended-us-debatebeijings-ambitions.
6. Mercedes Page, “Unpacking China’s Global Development Initiative,” Lowy Institute, August 1, 2022, https://www. lowyinstitute.org/the-interpreter/unpacking-china-s-global-development-initiative.
7. People’s Republic of China National Bureau of Statistics, “Statistical Communiqué of the People’s Republic of China on the 2022 National Economic and Social Development,” February 28, 2023, http://www.stats.gov.cn/english/ PressRelease/202302/t20230227_1918979.html; US Department of Commerce, Bureau of Economic Analysis, “Gross Domestic Product, Fourth Quarter and Year 2022 (Second Estimate),” February 23, 2023, https://www.bea.gov/news/2023/gross- domestic-product-fourth-quarter-and-year-2022-second-estimate; World Bank, GDP (Current US$)—China, United States, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=CN-US; and Credit Suisse, Global Wealth Report 2022, https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html.
8. Xinhua News Agency, “zhōng gòng zhōng yāng guó wù yuàn guān yú gòu jiàn gēng jiā wán shàn de yào sù shì cháng huà pèi zhì tǐ zhì jī zhì de yì jiàn” [Opinions of the Chinese Communist Party Central Committee and the State Council on Improving the Systems and Mechanisms for Market-Based Allocation of Factors of Production], April 9, 2020, http://www.gov.cn/ zhengce/2020-04/09/content_5500622.htm; and China Law Translate, “Counter-Espionage Law of the P.R.C. (2023 ed.),” April 26, 2023, https://www.chinalawtranslate.com/en/counter-espionage-law-2023.
9. For more on this, see Blumenthal and Scissors, “Breaking China’s Hold.”
10. Under legal pressure, the Ministry of Commerce acknowledged this in one case. Eleanor M. Fox, “China, Export Cartels and Vitamin C: American Second?,” Competition Policy International, March 2018, http://www. competitionpolicyinternational.com/china-export-cartels-and-vitamin-c-american-second.
11. International Energy Agency, Special Report on Solar PV Global Supply Chains, August 2022, https://www.iea.org/reports/ solar-pv-global-supply-chains/executive-summary.
12. Shunsuke Tabeta, “China Surpasses Japan as World’s Top Auto Exporter,” Nikkei Asia, May 19, 2023, https://asia.nikkei. com/Business/Automobiles/China-surpasses-Japan-as-world-s-top-auto-exporter; and Xinhua News Agency, “China’s Auto Exports Surge 54.4 Pct in 2022,” January 12, 2023, https://english.news.cn/20230112/31fec85210074a5783b14a5e283fd09b/c.html.
13. Scooter Doll, “CATL Dominates Global EV Battery Market for Sixth Straight Year,” Electrek, February 8, 2023, https:// electrek.co/2023/02/08/catl-dominates-global-ev-battery-market-sixth-straight-year; and Keith Naughton, Gabrielle Coppola, and Edward Ludlow, “Ford Is Investing $3.5 Billion in EV Battery Plant with Chinese Firm,” Bloomberg, February 13, 2023, https://www.bloomberg.com/news/articles/2023-02-13/ford-to-invest-3-5-billion-in-battery-plant-with-chinese-firm?sref= bWSPFsy2.
14. Congressional Research Service, U.S. Research and Development Funding and Performance: Fact Sheet, September 13, 2022, https://sgp.fas.org/crs/misc/R44307.pdf.
15. David Autor et al., “Foreign Competition and Domestic Innovation: Evidence from US Patents,” American Economic Review: Insights 2, no. 3 (September 2020): 357–74, https://www.aeaweb.org/articles?id=10.1257/aeri.20180481.
16. Richard Aboulafia, “If China Arms Russia, the U.S. Should Kill China’s Aircraft Industry,” Foreign Policy, March 20, 2023, https://foreignpolicy.com/2023/03/20/china-russia-aircraft-comac-xi-putin.
17. Bernardo Montes de Oca, “What Happened to Motorola? A Brief History,” May 8, 2020, https://slidebean.com/story/ is-motorola-still-in-business.
18. Gregory C. Allen, “China’s Pursuit of Defense Technologies: Implications for U.S. and Multilateral Export Control and Investment Screening Regimes,” testimony before the US-China Economic and Security Review Commission, April 13, 2023, https://www.uscc.gov/sites/default/files/2023-04/Gregory_Allen_Testimony.pdf.
19. Gavin Bade, “White House Nears Unprecedented Action on U.S. Investment in China,” Politico, April 18, 2023, https:// www.politico.com/news/2023/04/18/biden-china-trade-00092421.
20. Natasha Turak, “U.S. Is ‘Absolutely’ Behind on Supply Chain Independence from China, Biden Advisor Says,” CNBC, February 7, 2023, https://www.cnbc.com/2023/02/07/amos-hochstein-us-is-behind-on-supply-chain-independence-from-china. html; and Michael Martina and Patricia Zengerle, “US House Committee Chair ‘Concerned’ by Tesla Deals in China,” Reuters, https://sports.yahoo.com/us-house-committee-chair-concerned-223901655.html.
21. US Department of Justice, Office of Public Affairs, “Court Imposes Maximum Fine on Sinovel Wind Group for Theft of Trade Secrets,” press release, July 6, 2018, https://www.justice.gov/opa/pr/court-imposes-maximum-fine-sinovel-wind-grouptheft-trade-secrets.