World View: Trade deficits with China are not the real threat

To underestimate China’s innovatory practice is a much more serious mistake


Can China innovate? Many of its competitors do not think so. They still assume “Made in China” is the limit and that “Designed in China” is an unrealistic dream.

The assumption that the Chinese can copy, not innovate, underlies much of the thinking behind Donald Trump’s burgeoning trade war. His trade adviser Peter Navarro published a book, Death by China, in 2011 arguing that China’s theft of US intellectual property is part of its plan to become an authoritarian superpower superseding the US, which must be vigorously contested by tariffs, politics and military action if necessary.

That policy is now being pursued. The case behind it is made in a 35-page report this week by Navarro. Chinese acts of “economic aggression” include physical and cyber-enabled theft of technologies and intellectual property, evading US export control laws, counterfeiting, piracy and reverse engineering.

Such an approach overestimates the balance of trade element in this conflict of interests. Trade statistics do show a substantial deficit in China’s favour; but if proper account is taken of the actual value added to many products in China, the picture is changed. Take Apple’s iPhone which features prominently on the China-US deficit. Only $15-$30 to the value of an iPhone is added by being made in China compared with $150 for its Samsung components from South Korea and the balance to Apple’s own engineering innovation in the US.

Supply chains

Thus the trade war policy disregards the globalised supply chains created when US and western companies profitably outsourced their manufacturing to China from the 1980s and 1990s. Benefits to them invisible in the trade figures continue to reduce the actual economic balance between their host states.

To underestimate China’s innovatory practice and potential arising from this foreign direct investment is a much more serious mistake. The whole point of its development strategy and industrial policy has been to accomplish the transition up the value chain from “made” to “designed” in China. That is the fundamental basis of the Communist party’s planning since Deng Xiaoping’s doctrine of international opening to succeed Maoism in the 1980s. It has been fine-tuned by all leaderships since then and is central to Xi Jinping’s policy platform from now to 2025.

In a major speech last month he spelled it out: “To realise the Chinese dream of a great rejuvenation of the Chinese nation, we must have strong scientific and technological strength and innovation capabilities . . . If China is to flourish and rejuvenate, it must vigorously develop science and technology and strive to become the world’s major scientific centre and innovative highland.” Robotics, quantum communications, digital payments and biotechnology are but some of the fields he has in mind.

Successful initiatives

We are in the midst of that transition, with the evidence of its worldwide scale illustrated by several initiatives in energy and food. It is shown by its takeover from the US this year of the largest number of scientific peer-reviewed publications and worldwide filing for patents.

Alongside the extraordinarily ambitious Belt and Road Initiative (BRI) to link China, Asia and Europe by rail, sea and road, there is now being rolled out with Xi’s full support a plan to create a global electricity network eventually connecting 100 countries in all five continents.

It is driven by State Grid, China’s huge power transmission utility, ranked as the world’s second-largest company after Walmart in the 2017 Fortune 500 list. Just as the BRI is driven by China’s environmental construction surplus capacity, this one arises from the surplus power capacity created by dam building in its mountainous hinterland since the 1990s.

Added to that is a remarkable piece of innovation: ultra-high voltage cable which can transmit electricity at 10 times existing speeds and volumes and far less loss than previous cables. The technology has been strategically developed and used in China and can now be rolled out worldwide.

China is also a leader in solar and renewable energy, producing 80 per cent of the world’s panels. An experiment in the city of Jinan heralds a future in which solar panel motorways would replace asphalt, charge vehicles, heat adjoining homes and melt snow. Another experiment uses diluted seawater to grow rice, promising a food revolution in its vast marine hinterland and relief for its depleted water reserves.

A civilisation that first gave humanity paper, printing, the compass and gunpowder is hereby showing it can innovate and imagine a different future. Protective and defensive trade wars will not roll that back.

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