Photo: AFP
Photo: AFP

Scott Kennedy put out a report for the Washington-based think tank Center for Strategic and International Studies on Tuesday, providing some useful background on the growing rumblings in the US of trade conflict with China.

A great deal of the anxiety in Washington centers around China’s techno-nationalist approach, supporting domestic industry at the expense of foreign competitors, coupled with China’s massive size. In short Kennedy notes, China could do to semiconductors and other tech what it has done to steel and aluminum, which would result in a downturn in productivity, the most important source of growth in the global economy:

From a global perspective, China’s approach to high tech carries potential major risks because of the country’s unique size and unparalleled ability to mobilize resources. Chinese companies that receive extensive state support are eating into the market share of international competitors, both in China and elsewhere.

More importantly, if left unchecked, it is possible that this frenzy of cheap financing and other industrial policies could imperil not only individual companies, but longstanding supply chains and business models that would make it more difficult for companies with budget constraints to continue investing in the research and development (R&D) that is a key source of continued progress in sector after sector.

To put it plainly, China could do to semiconductors, artificial intelligence, and pharmaceuticals what it has done to steel and aluminum. This could, in turn, result in a downturn in overall productivity, the most important source of growth for countries and the global economy.

Kennedy makes a valid point that no amount of complaining by US and European tech companies will change China’s strategy so long as it is working:

More specifically, is China generating sufficient successes that yield improved commercial performance, raising the country’s productivity and providing benefits to consumers and the broader society? If so, no amount of legal wrangling and lecturing will be persuasive. But if not, there is a greater chance China and its trading partners can have a more productive conversation about the best way to move forward.

His conclusion about whether China’s strategy is yielding innovation? The jury is still out:

Given this mix of factors, it is not surprising that the most common conclusion reached by scholars is that innovation success in China is partial and varied. Some highlight the differences across regions, recognizing that variation in local industry structures—the types of firms and networks— yields dif­ferent approaches to technology development and commercialization. Others emphasize the relative strength of multinationals, with particular emphasis recently being placed on transnational ethnic Chinese companies that help nurture local talent and technology development.16 But the most common recent finding is that Chinese industry has had more success with innovations of technology applications and the integration of previously separate technologies— what some call “second-generation innovations”—than with original basic-technology breakthroughs.