Tariffs are only a weapon. China's "Made in China 2025" policy is the target. This week's announcement from Beijing that they will be revising the policy indicates that the weapon is hitting the target. Let's recap.
Chinese Premier Li Kequiang introduced the "Made in China 2025" policy in 2015 as a focused plan to move China up the value chain as a manufacturer, to increase local manufacture of critical technical components of items like cars and cell phones to 70% by 2025, and to challenge American leadership in key future technology areas:
1) New advanced information technology and artificial intelligence (think Google and Intel);
2) Automated machine tools & robotics (think Allen Bradley and Epson);
3) Aerospace and aeronautical equipment (think Boeing);
4) Maritime equipment and high-tech shipping (think Korean or German);
5) Modern rail transport equipment (think General Electric or European);
6) New-energy vehicles and equipment (think Tesla);
7) Power equipment (think General Electric and Tesla);
8) Agricultural equipment (think John Deere or Catepillar);
9) New materials (think 3M); and
10) Biopharma and advanced medical products (think J&J or Bristol Myers).
In prior Five Year Plans China had emphasized domestic innovation in targeted industries. Made in China 2025 changes the dynamic relative to foreign companies wishing to do business in China by seeking to capture and surpass global technologies. The core reality is that the Chinese economy is comprised of state owned enterprises (often run by the military), domestic privately owned companies, and foreign owned private companies. Despite the incorporation of elements of capitalism, it remains a top-down, state-controlled economy, where nobody prospers without the approval of the Communist Party central authorities, and target industries and companies are subsidized by the government. Despite Chinese assertions, the level of government subsidies and coercions violates the rules of the World Trade Organization which it was allowed to join in 2001.
Until Donald Trump took on the growing behemoth with tariffs and the threat to leave the WTO, China was allowed to force companies with targeted technologies to give them up in order to participate in the Chinese market, while China stepped up a global effort to acquire technology through open source and clandestine means. Europe - with Brexit, and lesser problems afflicting France Germany, and Italy - is in no position to lead. With a century-long stigma, Japan is in no position to lead. The TransPacific Partnership was an effort to assemble an alliance of smaller countries in the effort to reign in China, but at least for now the essential American participation is off the table.
For clarity, global telecommunications equipment giant Huawei provides a good example. The Trump administration has asked many of our allies to buoycot their equipment because of the intelligence gathering nad potential strategic sabotage capabilities of its network. (The arrest of the company's CFO in Canada for violation of sanctions on trade with Iran is a flashpoint, but not really the driving issue.) This week's identification of Chinese intelligence services as being behind the hack of Marriott's and several other data bases also provides a public example of Chinese government capabilities and attitudes toward the use of Information Technology to further their development goals. And then there are the 340,000 Chinese students at American colleges and universities.
As a very big first step in the agreement between Trump and Xi Jinping to delay the imposition of increased tariffs, China has announced a change to the China 2025 policy to exclude smaller local companies from its mandates, and perhaps reduce the amount of "local content" required in finished products. More will be needed - doing away with joint venture requirements; a reduction in state-sponsored technical espionage; acceleration of approval of imported products without coopting the technology.
With apologies to the farmers and oil companies, the trade problem with China will not be solved by increasing their soybean and natural gas imports. It will require fundamental change to Chinese industrial policies and Trump has gotten their attention. China's leaders think strategically. So does Trump, even if Wall Street runs on quarterly profits.
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This week's bonus video covers the highlights of the acrimoneous Trump/Schumer/Pelosi meeting on funding the wall. One cynical perspective - Trump staged this televised meeting to help Pelosi with her base as she was trying to win over the Democratic caucus to again become Speaker of the House. They can count votes and do deals.
bill bowen - 12/13/2018
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