On Wednesday afternoon, the Senate Banking Subcommittee on Security and International Trade and Finance zeroed in on one of the major issues impacting the success and direction of the global economy: the complex economic relationship between the United States and China. While some think it will be impossible for China to overtake the U.S. in innovation, a growing number of experts see things differently. They think such a view tends to ignore problematic policies China is championing which make it harder to do business in that important market and also set a bad precedent for others contemplating protectionist policies.
The experts testifying at the Wednesday hearing noted that, during the past 30 years, China has made significant investments to build a world-class university and research laboratory system. The Information Technology & Innovation Foundation recently reported that, during the past decade, China has produced more engineering bachelors’ degrees than the United States, Japan, South Korea, Taiwan, France, and Germany combined, and almost twice as many doctorates of engineering as the United States. Between 1999 to 2008, Chinese R&D investments increased by 21 percent a year, while itsR&D intensity (R&D-to-GDP ratio) jumped by 179 percent.
In addition, as ITI’s Dean Garfield testified, China’s “indigenous innovation” practices equate to the country putting its thumb on the scale to tilt the advantage toward its own companies and industries. While China may not introduce as much new technology to the world, they are always fast and often first to copy it, produce it at a much lower price, and then work hard to dominate the market with it. They are positioning themselves for the long-term to produce advanced technology products. Even if the innovation doesn’t start in China, they are ready to make it and sell it to the world.
This hard reality set the stage for today’s hearing. Senators on both sides of the aisle pressed to understand the challenges we face in the U.S.-Chinese Strategic and Economic Dialogue, and what steps we could consider to keep markets open and the playing field level. ITI’s Garfield opened with a reality check: U.S. companies – especially tech companies – operating in the China market continue to face increasingly challenging and complex market access barriers under the guise of indigenous innovation.
Dean Garfield, ITI: China has been an important part of the innovation story. The large growth in China’s GDP has led to a demand for the most innovative products around the world. In addition, China is an important part of the global supply chain, which has resulted in hundreds of thousands of jobs being created here in the United States. Unfortunately, this has not been a story of straight line success. As China is beginning to transition into more of a consumer-driven economy, they’ve decided to put their thumb on the scale, particularly as it relates to innovation policy.
Through the work of the Strategic and Economic Dialogue (S&ED), there have been some successes against some of the most blatant offenses, including foreclosing important aspects of the economy related to state-owned enterprises and government agencies from competition from U.S. and foreign-based companies. But, in spite of the success on some elements of indigenous innovation, it continues apace. It’s the same movie with a new title. China has adopted some more sophisticated strategies for its indigenous innovation policies, but it continues apace.
It’s a theme that Senators picked up quickly. They shared the concerns that limiting market access will continue to have a negative impact on U.S. industries and small businesses alike.
Senator Mike Johanns, R-Nebraska: I’m very encouraged by recent news coming out of China that the leadership is beginning to understand the importance of a transition to a consumption-based society and the scope of the efforts necessary to achieve that kind of transition…. [M]arkets must be opened further to allow institutions with innovative new products that will greatly benefit the Chinese to have access to that market.
Senator Sherrod Brown, D-Ohio: If we don’t get access in terms of our exports to their markets, this may undermine our recovery and undermine job creation here.
But what about the familiar refrains about forcing the Chinese to revalue its currency? For many of the people at the hearing, that approach is news for page two. The front-page focus, they maintained, needs to stay on market access.
John Dearie, Financial Services Forum: Market access is the new issue; currencies are the old issue. Get off that one. Don’t waste your time on that. The next China is what you should be focusing on, not the last China.
Stephen Roach, Yale University’s Jackson Institute of Global Affairs: There is no international economic issue of greater importance than the economic relationship with China. Over the past seven years, there’s been far too much emphasis on the currency issue... It’s incumbent to think of a new framework to address China.
And, even with different economic and political backgrounds on the dais and at the witness table, there were common solutions: engage China with the international community, and find like-minded allies within the country to help press for adherence to global norms.
Senator Johanns: We have the ability to partner with them, and I’m not talking about foreign aid or anything like that. I’m talking about technical expertise from the United States and from China sitting down and working through these issues in a way that is positive in terms of opening up markets and hopefully avoiding those problems before they develop.
Dr. C. Fred Bergsten, Director of the Peterson Institute for International Economics: The Chinese are responsive to external advice and even pressure, but if it looks like they’re responding to external pressure then they get their backs up and in fact it’s counterproductive. Using the multilateral institutions where they are a full member, full participant, is absolutely crucial to the strategy.
John Dearie: Engagement works. Sometimes it seems like it’s not working because progress is always terribly incremental; the Chinese move at a pace that seems very unsatisfying. But if you look back in retrospect and look at what the United States and China have accomplished together since 1979, it’s incredible. And very important to understand today, there is a happy alignment right now between U.S. interests and Chinese interests in terms of the economic space. They want to go where we want them to go. And so there’s an enormous opportunity here.
Dean Garfield: There are two strategies that immediately jump to mind. One is doing what we did with the S&ED, which is, though we were consistent as the U.S. government in our opposition with China, we worked really hard to build a multinational commitment around the problem with indigenous innovations. It’s important that we are consistent in our own advocacy and unified in our position and forceful in our position, but also we’ve got to work with our multinational partners to make clear that it’s problematic. It’s important we work with our international partners to counter this.
So why does this discussion matter? It’s simple: Jobs. These issues – and their solutions – will help to shape the direction of the global economy for many years to come.
Senator Mark Warner, D-Virginia: China’s continued growth and deepening ties to the U.S. economy mean that there must be ways we can work to identify and work through the real issues that exist between our two countries. Reforming China’s economic policies, modernizing its financial systems and rebalancing its economy towards greater consumption rather than greater consumption present real opportunities for U.S. and in China’s economic relationship. Also obviously, that would affect most American families as well.
We have to engage China now, in both a bilateral and multilateral approach, and we must look at rebuilding our own economic fundamentals. We ignore China’s policies and growing capabilities at our own peril. And we have to do more at home to ensure American competitiveness.
Dean Garfield: There are a number of initiatives that are on the docket for this Congress that could help to make the U.S. more competitive, whether it’s tax reform; immigration reform, where we educate our best and brightest and then ask them to leave the country or make it very difficult for them to do; cybersecurity, in making our systems more secure. And so we don’t have to look very far to see a list of policy priorities that can make the U.S. a lot more competitive.
We have to be more aggressive about preparing our highly skilled workforce, keeping innovators in our country, and creating a climate that encourages companies to grow deep roots in America. We should take a page from the Chinese strategy and redouble our investments in our universities, in our students, and in our scientists.
It is obvious to say that the U.S.-China relationship is crucial to the global economy as well as the future of our own economy. But sometimes the most powerful truths are the simplest ones. The real challenge is finding effective ways to engage China and turn its mindset. Right now, the Chinese not playing by global standards; they are making up their own. This is having the effect of upsetting the apple cart of global integration in slow motion.
The longer we simply complain about the Beijing approach without smartly pushing back – directly and in every multilateral forum we have – the greater risk we have of ending up in a world of balkanized economies no longer enjoying the benefits of smoothly running supply chains build on global approaches to trade. Next month, the G20 meets in Mexico. It is an opportunity for the world’s economic superpowers to join together and drive a simple message to China and others finding clever, new ways to frustrate market access: get your hands off the scale and play by the rules.
Tom Gavin is ITI's vice president for external affairs.