Why even a trade war won’t derail Made in China 2025

Designed to calm down fears of an ominous US-China trade war, President Xi Jinping’s speech at the Boao Forum, crammed with Chinese metaphors, was the logical extension of his landmark address to Davos early last year – when he established China at the vanguard of globalization 2.0.

At the Boao Forum, Xi stressed a “new phase of opening up” the Chinese economy; blasted a “cold war and zero-sum mentality”; and praised China’s long economic development march – from WTO membership to the foremost trade/connectivity 21^st century Eurasia integration project, the Belt and Road Initiative (BRI).

For the near future, the Chinese economy would have to follow one of two main vectors. Beijing might choose to open its economy mostly to US multinational corporations; a strategy privileging the West. That would be China’s Plan B. Or, roughly throughout the next seven years, Beijing may stage yet another breakthrough, solidifying itself as a high-tech Mecca. That’s China’s Plan A.

Plan A happens to be totally integrated with the BRI connectivity drive – from Eastern China to Western Europe via Central Asia, Southeast Asia, Southwest Asia and even the Caucasus. China, via BRI, aims to export not only capital and business savvy but also value-added high tech products.

And that brings us to the clash between two roadmaps – which should be read in detail – that are at the heart of a much debated, possible and certainly vicious trade war; China 2030 and Made in China: 2025.

2030 or 2025?

China 2030 was published, significantly, way back in 2013, by the World Bank in conjunction with the Chinese Finance Ministry and State Council. It’s still a product of the Hu Jintao era, calling for all the requisite “market reforms,” with emphasis on the “need” for China’s strategy “to be governed by a few key principles: open markets, fairness and equity, mutually beneficial cooperation, global inclusiveness and sustainable development.”

Xi Jinping, though, had broader ideas. Expanding on a concept initially floated by the Chinese Ministry of Commerce, at first named One Belt, One Road (OBOR), were also unveiled in 2013, in Astana and Jakarta. It took a while for the news to sink in that OBOR was nothing less than a full blueprint for pan-Eurasia integration.

Then, in 2015, Beijing unveiled what is the de facto national economic strategy: Made in China: 2025.

This is all about China – once again – stepping on the gas, this time to reduce dependency on foreign technology and the role of assembly line for foreign companies, by increasing investment in research and development; improving automation in Chinese factories; and developing strategic sectors such as robotics.

There’s already a 2020 target; arrive at 70% of production with Chinese-made components. The manner that the success of Huawei ruffled so many feathers in the US – the home of Apple – is just a small illustration of what may lie ahead.

Yet Made in China: 2025 is way more ambitious, aiming to propel the Middle Kingdom to the Top Three of global high-tech industry leaders before 2049 – when the People’s Republic turns 100. That’s how China plans to beat the middle-income trap.

So Beijing has drawn its own, indigenous roadmap towards becoming a state of the art high-tech “manufacturing superpower” exporting made in China high-speed rail, aircraft, electric vehicles, robotics, AI technologies and the 5G standards that will power the Internet of Things.

Previous economic role models certainly include South Korea – whose process of gradual chaebol modernization was state-guided. And crucial inspiration is also drawn from Industrie 4.0, the German national strategic initiative launched in 2011 aiming to consolidate the nation’s technological leadership in mechanical engineering.

Europe is watching

The fact that Beijing won’t accept a subservient role in a US-dominated high-tech economic environment run by a tiny corporate elite spells out what’s unimaginable for this elite; a definitive swing of the world economy by 2025, from the West to the East.

Beijing won’t back down. The whole drive is away from the unilateral moment towards a multipolar world – where the partnership with Russia plays a key role, as they coordinate their efforts on everything from the yuan and the ruble backed by gold to an alternative to the SWIFT payment mechanism, culminating with the most far-reaching project in world history in terms of economic connectivity across more than 60 nations and cultures; BRI – which is bound to be integrated with the Eurasia Economic Union (EEU) – happens to be, essentially,  a concerted, state-guided industrial policy.

As this Global Times editorial stressed, a US-China trade war won’t solve anything, much less the clash between China 2030 and Made in China: 2025. US industrialists are in a very delicate position – as they have massively invested in China; transferred technology to China; and even use Chinese technology themselves – as supply lines are global. If a tech wall would ever be erected between American and Chinese companies, Europeans would gladly replace the Americans.

Meanwhile, Beijing will play the appeaser – for instance, by opening up its financial sector to foreign investment, including the removal of foreign ownership caps for banks.

Bottom of Form

Yi Gang, the newly appointed governor of the People’s Bank of China, promised at the Boao Forum that Beijing will allow foreign investors to take a maximum 51% equity stake in brokerage firms, futures companies and fund management firms, and will remove foreign equity ceilings in all these sectors by 2021.

With formidable diplomacy, Yi stated, “I would say with financial and service industries opening up, the US in the future would have more comparative advantage in service trade. So that when we have goods trade and services trade, these two would balance out as a result.”

Then there’s always the hard road to “solve” the US trade deficit. In a research note, this is what Goldman Sachs analysts – led by Chief Economist Jan Hatzius – have suggested: “For a deficit country such as the US, it is possible to scale up the trade restrictions sufficiently to achieve even an ambitious deficit reduction target. But this comes at a heavy cost in terms of weaker growth. Put simply, the only surefire way to reduce the deficit sharply under retaliation is a recession.”

Trade war or recession, only one thing is clear; China will do whatever it takes to implement Made in China: 2025 – its roadmap to high-tech preeminence.