Employees work at a SMIC microchip plant in Beijing. The Chinese government is spending almost $5 billion on a new fund to support the country's microchip industry. Photo: AFP

A dramatic change in outside perceptions of China’s capacity for innovation can be seen in the evolution of news headlines over just the past several years. What was once a question of whether China can innovate has become one of how it is doing so.

But the view from Washington has been slow to change, and experts are now sounding alarm bells that – amid stagnation in the US – China may be poised to overtake the United States in innovative capacity in a host of areas.

A new report released on Monday outlines 36 different metrics by which China is either catching up to the US or leapfrogging it in terms of innovation.

The measures, compiled by the Information Technology and Innovation Foundation (ITIF), range from simply what percentage of GDP is being invested in research and development, to high-tech manufacturing exports.

In category after category, China is making far more rapid progress than the US in investing in science and technology research and grabbing market share of high-tech industries. Even when it comes to semiconductors, the area that has been identified as one where China lags behind the US the most in terms of innovation, Chinese exports totaled more than 300% those from the US in 2016.

The Semiconductor Industry Association (SIA) has also noticed China’s strides, calling in a report released last week for a doubling of US investments in microchip research and upping federal funding from the current $1.5 billion to $5 billion annually.

It also stressed that increasing market access and attracting talent from overseas was key to remaining competitive.

Allergic to government support

Yet there is still no sign that the US government is prepared to take the advice.

“The Trump administration is loath to propose additional spending that would support US innovation and in fact has proposed cuts to most programs,” ITIF president Robert Atkinson wrote in an e-mail to Asia Times. “They certainly support the goals but have proven unwilling to invest government resources.”

The ideological hurdle of eschewing government support is a relatively new development in Washington, one that seemingly dismisses earlier success of the last century. The ITIF report noted that in the early 1960s, the US government took decisive action, “investing more in R&D than the rest of the world’s businesses and governments combined – and it paid off in spades, leading to the United States becoming the dominant technology economy for a half-century.”

Government support does not tell the whole story of innovation, however, and it overlooks the strides China has made to mitigate the shortcomings that come with a top-down approach to innovation.

Jimmy Goodrich, vice-president for global policy at SIA, noted recently that China’s greatest successes had come from firms that did not benefit from government subsidies.

“If you look at the single most successful chip company in China – and that’s without a doubt HiSilicon, the design arm of Huawei – they don’t have any of that support,” Goodrich said during a panel event at the Center for Strategic and International Studies.

“They haven’t taken subsidies from the central government, they haven’t gotten big loans, and they’ve really done a lot of it on their own,” he stressed.

But Goodrich acknowledged that, in his view, the key to the US regaining and maintaining leadership in semiconductor innovation in the 1980s was public-private collaboration.

After Japan had leapfrogged the US in chip-making prowess, Goodrich recounted, Congress and the administration of president Ronald Reagan established Sematech, which drew on federal government resources to support the private sector.

“And that really helped catch up and, frankly, look in different directions at what Japan wasn’t focused on. Because their companies were all building DRAMs and we decided to do things completely differently and build entire new markets.”

Playing defense

While these and other policy advocates and industry groups are asking for Washington to support domestic innovation as the primary way to compete with China, some administration advisers and lawmakers are looking at the opposite approach.

One bipartisan bill introduced in the Senate this year aimed to cripple Chinese telecommunications equipment makers Huawei and ZTE by banning sales of US components to those firms. The proposal follows a ban imposed on sales to ZTE last year, which threatened to doom the Chinese national champion before it was rescinded.

But industry representatives say that such an action would in the end doom US chipmakers, not Chinese. The end goal is increased market share, and China is the largest market. While both Huawei and ZTE would in relatively short order be able to source high-end chips from Europe, South Korea, Taiwan and Japan, US semiconductor firms could never regain market share in China.

Adding to this defensive posture is a new reluctance in Washington to encourage overseas talent to plant roots in the United States. The Donald Trump administration’s “Buy American and Hire American” aims to limit the scope of the HB-1 visa, which offers foreign graduates of US higher-education institutions a pathway to stay in the United States.

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