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Feigenbaum: How China Wants High-Tech To Power Its Economy To The Top

Thought Leader: Evan Feigenbaum
August 2, 2024
Source: Forbes
Written by: Evan Feigenbaum

Written by WWSG exclusive thought leader, Evan Feigenbaum.

Feigenbaum Article Aug 2024

In mid-July, China concluded a pivotal economic strategy meeting, where it quadrupled down on technology as the lynchpin of its strategic and development plans.

Beijing is now moving toward a four-pronged strategy that could challenge multinationals, bolster Chinese competitiveness, and better position Chinese firms to set engineering standards across a wide swath of emerging and frontier economies:

  1. investing in innovation at the technological frontier, not least to reduce Chinese dependence on foreign supply and insulate it from coercion;
  2. applying technology to transform more traditional industries, especially in manufacturing;
  3. exporting Chinese standards whenever overseas customers buy Chinese systems or technologies, extending China’s influence and creating harmonization or plug-and-play challenges for multinational competitors; and
  4. continuing to make technology and knowledge transfer the price of access to China’s domestic market.

One key conclusion of the meeting, the Communist Party’s Third Plenum, which takes place every five years, is that Chinese economic strategy should harness what Beijing is calling “new productive forces” and “high quality productive forces.” The phrases are a euphemism for promoting innovation but not just, as American and European policymakers fear, at the technology frontier in emerging areas like artificial intelligence and quantum computing. Curtailing China’s access to these advanced technologies has become a major priority for Washington and Brussels in recent years and they are leveraging their regulatory and administrative arsenals to do so.

But Beijing may in fact be placing even greater emphasis on applying technology to traditional industries, aiming to lock in Chinese dominance of advanced manufacturing and outcompete global rivals in “old-fashioned” industries like shipbuilding.

For Chinese policymakers, emphasizing technology as the key to development and competitiveness is not in itself new. The Third Plenum’s key phrase, “new productive forces,” is a favorite of President Xi Jinping. But his more celebrated predecessor Deng Xiaoping, who ushered in economic reforms in 1978, liked to refer to science and technology as “the number one productive force.”

Even under Chairman Mao Zedong, the revolutionary leader who promoted class struggle and proletarian economics, Beijing held its nose and funded and promoted elite science and technology programs, making frequent ideological compromises for the sake of national security and a technonationalist effort to benchmark and try to keep pace with strategic rivals, including Japan.

What has changed over the last 5-7 years is China’s geopolitical environment, which has deteriorated precipitously as U.S.-China relations collapse and Washington increasingly uses export controls and regulatory instruments not just to curtail the flow of American technology to China but to persuade and sometimes coerce allies and partners to do the same.

So part of the reason Xi is placing so much emphasis on technology is to better insulate China from American strategic pressure.

For decades, U.S. policymakers, firms, and funds viewed co-innovation and technology transfer as a commercial good—and as the price for gaining access to China’s huge and promising market. But this is no longer the case. Now, technology has been “securitized,” as Washington policymakers and regulators look warily at China’s development of dual use technologies, such as AI, quantum computing, and new synthetic and composite materials, that have commercial benefits but wide military applications too.

The Trump and Biden administrations, on a bipartisan basis, have leveraged American dominance of high-end technology, such as small nanometer chips, to curtail China’s ambitions in frontier industries.

They deploy a sprawling kitbag of administrative tools, such as the Commerce Department Entity List, to make it harder to transfer technology and skills to China. And they have made collaboration with Chinese tech firms politically toxic—for example, by listing Chinese firms involved with any dual-use capability, whether they are state-owned or private, on a Defense Department list of “military-linked” companies, even if they mostly do commercial production, sales, or service.

Since nearly all emerging technology is dual use, this securitized approach could expand exponentially, leading U.S. firms to preemptively avoid partnerships with Chinese counterparts for fear of running afoul of Washington’s political, strategic, or regulatory class.

Xi aims to counter this by investing heavily in domestic innovation. The U.S.-China technology relationship will be defined over the next five years not by the joint efforts of the previous 30 years to develop transformational technologies but instead by the balance between Washington’s impulse to control and the Chinese push to indigenize.

But indigenous innovation is just the first pillar of China’s emerging technology strategy. The second and third may be more decisive in making China competitive, even dominant, in the industries that matter most to multinationals and market participants.

The second pillar—applying technology to “old” industries to make them “new”—is already playing out in traditional industries like shipbuilding. AI and advanced computing can be used to design vessel components and model how a ship might respond to contingencies and sea states. So Chinese designers and firms claim publicly and privately that they seek to speed up ship design by compressing their design timelines and using computer models to showcase to customers every aspect of a vessel before it is built. Similarly, Chinese firms are applying AI to advanced manufacturing.

The third pillar—making Chinese standards default regional and global standards—depends on China’s ability to leverage scale. A Washington think tank, CSIS, estimates that Chinese shipbuilders “now collectively account for over 50 percent of all merchant tonnage produced globally each year.” And China has a massive domestic population of 1.4 billion. By combining its sheer domestic market power with its growing role as an exporter of technology to the Middle East, Africa, Southeast Asia, and beyond, China aims to have its industrial and engineering standards become pacesetters. And if Chinese firms are first-movers, later arriving global competitors will have to, at minimum, harmonize with a dominant Chinese engineering or business standard in these markets

By integrating these three pillars, the abstract phrase “new productive forces” could yield tangible new advantages for Chinese firms around the world. And China is not abandoning the fourth and most traditional pillar of its technology strategy. It continues to welcome foreign firms, albeit fewer of them and on tougher terms, so long as they continue to transfer technology and knowledge.

Some observers now argue that Beijing “no longer welcomes” foreign firms or that the country has become “uninvestable.” But the reality is more subtle: Beijing has made clear during its post-COVID recovery that it wants foreign businesses even as it favors domestic champions so long as they support and tie closely into China’s own economic development and industrial imperatives. If a company can help China move up the value chain or assimilate new technologies, processes, and skills, it is still welcome.

That is why, even though foreign direct investment (FDI) in China has dropped precipitously, falling to a 30-year low and shrinking by about 28 percent from January to May, China’s government insists that “actual utilized FDI” has not particularly slackened, especially for advanced manufacturing. And multinationals are still being asked to establish research and development centers consistent with Beijing’s aim of encouraging the transfer of systems and skills.

For Beijing, the name of the game is to reduce strategic vulnerability to foreign pressure, foster productivity, and leverage technology for market entry and to set standards. And so while many have dismissed China’s efforts at the frontier, this is just one pillar of its evolving approach.

It is too easy denigrate “new productive forces” as empty Communist sloganeering when there is strategy and method to the supposed madness. Taken together, and viewed through a longer term lens, these four pillars comprise a cohering effort to challenge foreign players, plug vulnerabilities, and bolster China’s competitive options.

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