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China won't back down in its plan to dominate tech

China's efforts to become a global powerhouse in the technology of the future are under attack. But don't ex...

Posted: Dec. 18, 2018 2:18 PM
Updated: Dec. 18, 2018 2:18 PM

China's efforts to become a global powerhouse in the technology of the future are under attack. But don't expect it to beat a retreat.

Beijing's plan to pump billions of dollars into areas like microchips and robotics to shed its dependence on foreign technology — known as "Made in China 2025" — has come under fire from the US government. And Washington is waging a campaign against Huawei, a Chinese tech champion that hopes to build the world's 5G mobile networks.

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Under pressure from US tariffs on exports and a deepening economic slowdown, China's leaders are looking for ways to avoid further confrontation without putting those longer-term strategic goals at risk.

The Chinese government has moved to slash its tariffs on American-made cars, started buying more soybeans from US farmers again and shown signs its willing to rethink "Made in China 2025."

The steps follow a truce in the trade war agreed by President Donald Trump and his Chinese counterpart Xi Jinping over dinner earlier this month. They've raised hopes of a deal of some kind that could include significant changes to allow a greater role for foreign companies in China's economy. Trade experts are skeptical.

"Beijing is not going to give up its plans for becoming a dominant industrial and technological power simply to please Washington," said Kristen Hopewell, a senior lecturer in international political economy at the University of Edinburgh. "Any changes are likely to be superficial, not substantive."

'Made in China 2025'

In 2015, China announced a 10-year plan to transform its vast manufacturing sector by pushing it into high-tech industries including electric cars, aerospace and advanced medical devices.

The Communist Party views the strategy as essential to ensuring China keeps developing. But the plan's aggressive goals to dominate supply chains for entire industries have fueled concerns among foreign businesses, who fear losing out in favor of Chinese companies, and governments, who see a potential security threat.

"These are things that if China dominates the world, it's bad for America," US Trade Representative Robert Lighthizer said in March. His report alleging unfair Chinese practices, which laid the foundation for Trump's trade war, mentioned or cited "Made in China 2025" a total of 116 times by one count.

Will it change?

Since "Made in China 2025" became a focal point in the trade war, the Chinese government has started playing it down.

A list of priorities that Beijing issued to local governments last week made no mention of "Made in China 2025," even though it was included in the previous version two years ago. And The Wall Street Journal reported that Chinese officials are drafting a replacement plan that's more open to foreign companies and could be rolled out early next year.

"What has been seen as an exclusionary policy can now become a positive vehicle for China's future development," said Harley Seyedin, president of the American Chamber of Commerce in South China.

Experts who have studied China's role in global trade are less optimistic, saying change is likely to be cosmetic.

"Heavy subsidies and other forms of state intervention are at the core of China's development strategy," said Hopewell. "China is trying to manage the external optics of its economic policies, but it is highly unlikely to undertake the kind of deep, structural reforms towards a more market-based economy that the US is seeking."

Trade war tactics

Potential changes to "Made in China 2025," along with Beijing's placatory moves following the Trump-Xi meeting in Argentina, are being widely interpreted as attempts to make progress toward defusing the trade war.

Xi has some political cover to make changes. Tuesday is the 40th anniversary of the start of China's "Reform and Opening" that launched the country's rapid leap from a largely rural economy into an industrial juggernaut.

But in a speech to mark the occasion Tuesday in Beijing, Xi made no mention of any new measures to open more of the Chinese economy to the world. That suggests his government may stick to the gradual changes it has been introducing in recent years or be unwilling to show all its cards yet amid the trade talks with the United States.

"China is accelerating a series of economic reforms, many of which it would have enacted eventually anyway, and attempting to package it as a major concession to US demands," said Mark Wu, an international trade professor at Harvard Law School.

Trump administration officials are still taking a wary approach to what China's offering.

Commerce Secretary Wilbur Ross said last week that Beijing has been "playing down" the "Made in China" plan since the United States and other countries began pushing back against it.

"They haven't been talking that much about it," he said on CNBC. "That doesn't mean they've dropped it."

The heavy hand of the state

American business leaders say a revamp of "Made in China 2025" gives Beijing a chance to dial down the role of the state in its economy and give a freer rein to competition.

Despite all the talk of reform, Chinese state-owned companies are playing an even bigger role in the economy under Xi. Industrial policies have pumped huge amounts of subsidies into sectors like electric vehicles.

The business model of some Chinese companies "is just to receive subsidies without developing a viable product," said William Zarit, chairman of the American Chamber of Commerce in China. "It's terribly wasteful."

If Beijing opens up its 2025 plan and gives foreign firms an equal footing to domestic ones, "it will be a win-win for China and the rest of the world," Zarit said.

But he cautioned that Chinese officials have a track record of changing written rules to make the situation seem fairer but then using unwritten practices to disadvantage foreign companies.

"As long as the Communist Party exerts control over the financial system, key resources, and the internet, the government can always tilt the playing field in favor of domestic firms in strategic technology sectors," said Wu, who previously worked for the World Bank in China.

The Huawei wild card

The Trump administration added a new unpredictable element this month to its confrontation with China.

The arrest of Meng Wanzhou, the chief financial officer of Huawei, has provided more fuel for the view that the US government is trying to undermine China's tech rise.

Huawei's products have also come under intensified scrutiny in Europe and Asia-Pacific, part of a reported push by the US government to clamp down on the company, which it views as a security threat.

The US Justice Department is seeking to prosecute Meng, who was arrested in Canada, over allegations she helped the company get around American sanctions on Iran. Huawei says it's unaware of any wrongdoing by Meng, the daughter of the company's founder.

"Meng's detention emphasizes that even if Beijing and Washington do cut a deal to avert punitive tariff increases, the US has plenty of other non-tariff weapons it can deploy in its economic and technological campaign against China," Tom Holland of research firm Gavekal wrote in a note to clients this month.

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