Why the US should emulate China’s production at home rather than trying to undercut its economic progress
- We should not allow economics to become hostage to geopolitics or, worse, to reinforce and magnify the strategic US-China rivalry
- The West’s objective should be to build more productive, more inclusive economies at home – not simply to outcompete China
As Covid-19 spread from China to Europe and then the United States, pandemic-stricken countries found themselves in a mad scramble for medical supplies – masks, ventilators, protective garments. More often than not, it was to China that they had to turn.
When China first turned towards global markets, it had the advantage of virtually unlimited supplies of low-cost labour. As everyone recognises by now, though, China’s manufacturing prowess is not the result of unfettered market forces.
For example, Sichuan, China’s second-largest province, reduced by half the number of categories for which imports of medical equipment were allowed. Most hospitals were obliged to source everything locally, with only top hospitals allowed to bring in supplies from abroad.
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Jack Ma donates 500,000 coronavirus test kits and 1 million masks to the US
Western media are now replete with accounts of China’s “drive to dominate important cogs in the global industrial machine,” in the words of The New York Times again.
The strategic and geopolitical tensions between the US and China are real. They are grounded in China’s growing economic and military power and US leaders’ reluctance to recognise the reality of a necessarily multipolar world. We should not allow economics to become hostage to geopolitics or, worse, to reinforce and magnify the strategic rivalry.
The Chinese people were the main beneficiaries, experiencing the fastest poverty reduction in history. These gains did not come at the expense of the rest of the world, though – far from it. The growth policies that today arouse other countries’ ire are the reason China has become such a large market for Western exporters and investors.
The standard justification for industrial policy is that new industries produce learning spillovers, technological externalities and other broad social benefits that render state support desirable. Many Western economists presume governments are not very good at identifying industries that merit support, and that domestic consumers and taxpayers incur the bulk of the costs. In other words, if Chinese industrial policy has been misguided and misdirected, it is China’s own economy that has suffered as a result.
By the same logic, if Chinese policymakers effectively targeted activities where social benefits exceed private benefits and produce improved economic performance, then it is not clear why foreigners should complain.
This is what economists call a case of “fixing market failures”. It makes as much sense for outsiders to want to block the Chinese government from pursuing such policies as it does to prevent a competitor from freeing up its markets.
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China develops technology to recycle kitchen waste into energy sources
The economics of industrial policy can get more complicated in the presence of monopolies and market-dominant firms. Industrial policies can be justifiably restricted when they enable the exercise of market power at the expense of the rest of the world.
However, Chinese producers are rarely accused of propping up prices, which is the hallmark of market power. More often, the complaint is the opposite. Such considerations probably apply more to US and European firms that are frequently the dominant players in hi-tech markets.
There is now broad political agreement in the US political spectrum that the country needs a more explicit industrial policy targeting good jobs, innovation and a green economy. A bill advanced by the US Senate’s top Democrat, Chuck Schumer, proposes to spend US$100 billion during the next five years on new technologies.
Much of the new push for industrial policy in the US and Europe is motivated by the perceived Chinese threat, but economic considerations suggest this is the wrong focus. The needs and remedies lie in the domestic sphere. The objective should be to build more productive, more inclusive economies at home – not simply to outcompete China or try to undercut its economic progress.