The burgeoning trade war between the US and China has as much to do with technology as with the balance of trade.
Reports have surfaced that the US Department of the Treasury is drafting rules to block Chinese firms from investing in US companies doing business in so-called industrially significant technology, while the US Department of Commerce is planning new export controls to keep such technologies out of Chinese hands.
The moves follow US President Donald Trump’s proposal to impose tariffs on US$50 billion worth of Chinese products, many of which are on the priority list for “Made in China 2025” — Chinese President Xi Jinping’s (習近平) blueprint to transform China into a global leader in high-tech industries such as aerospace, robotics, pharmaceuticals and machinery.
Although the Chinese government has refused to modify its initiative, the US is demanding that China end all government subsidies and grants under the program. Trade talks have stumbled on this point.
The US’ concern with Made in China 2025 is understandable; China’s approach to technology development has been controversial, to say the least.
However, there are better ways to respond to China’s policies. Two ways, to be precise.
First, the US and other trade partners must continue to confront China on its intellectual-property (IP) violations and market-access inequities.
Under free-market competition, one country’s successes in science and technology should not come at others’ expense. Innovations, such as new cancer drugs or faster computing, should benefit people everywhere — not only those fortunate enough to live in the country where the discoveries happen to have been developed.
With a deep pool of talent, China has much to contribute to progress in science and technology; the world should welcome China’s efforts to innovate.
However, the terms of competition and development must be market-conforming, not market-distorting.
Given China’s spotty record on market access and IP protection, the US is right to consider how the Made in China 2025 strategy will affect US interests.
However, its policymakers should focus on getting the rules of the game right, rather than stopping Chinese innovation per se.
The second response is even more important: As China develops its innovative capabilities, the US must invest more in its own science and technology base.
Visionary leaders, rather than cowering in fear of Made in China 2025, should use it to galvanize support for science and technology.
In other words, Made in China 2025 could be another “Sputnik moment” for the US.
When the Soviet Union on Oct. 4, 1957, successfully launched Sputnik 1, the world’s first artificial satellite, the achievement sent shock waves through the US government, which responded with huge investments in rocket technology, research and education.
In less than a year, then-US president Dwight Eisenhower had approved funding for NASA and launched Project Mercury, the agency’s first human spaceflight program.
In 1959, the US Congress allocated US$134 million to the National Science Foundation, an increase of nearly US$100 million from the previous year. By 1968, the foundation’s budget had increased to nearly US$500 million.
During this period, the US government also stepped up research support, and poured money into programs to strengthen US students’ skills in math and science.
Collectively, the US response to Sputnik propelled advances in aeronautical science, microelectronics, integrated circuits and communications. It is not an exaggeration to say that government policies in this period laid the foundation for decades of US dominance in global science and technology development.
Made in China 2025 demands a similar response.
However, at the moment, the US’ commitment to innovation remains grounded. Not only is the Trump administration failing to support innovation; it is also actively derailing investments in tech-related research.
For example, Trump is trying to revive dirty fuels, such as coal, which powered the first Industrial Revolution, rather than investing in solar, wind, and other renewables that will power the “Fourth Industrial Revolution.”
Trump is not the only guilty party; the US Congress has been equally uninspired for years.
According to the American Association for the Advancement of Science, federal funding for research and development last year fell by 23.6 percent in real terms compared with 2007.
Since 1976, US federal spending on research and development has actually declined as a percentage of GDP — from 1.2 percent to just 0.7 percent this year.
Furthermore, instead of supporting advanced education, the Trump administration has proposed cutting US$360 million (a 5.3 percent reduction) for such support from next year’s education budget.
At the same time, the tax legislation passed by the Republican-controlled Congress in December last year imposes an unprecedented tax on those university endowments valued at more than US$500,000 per student.
While only a handful of schools would be affected, the hardest hit include major centers of research such as MIT, the University of Chicago, Harvard, and Stanford — the very institutions the US must rely on to maintain a competitive advantage.
The US needs another Sputnik initiative. Innovation hates a vacuum: If the US fails to boost its support for science and technology, other countries should and will fill the void.
Ultimately, the enemy of US innovation is not trade or Made in China 2025. The real enemy is US leaders’ own lack of vision.
Yasheng Huang is international program professor in Chinese economy and business, and professor of global economics and management at the MIT Sloan School of Management.
Copyright: Project Syndicate
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