By Ernest H. Preeg
September 9, 2005
In April 2005, Premier Wen Jiabao summarized the Chinese economic strategy in starkest terms: "Science and technology are the decisive factors in the competition of comprehensive economic strength. ... We must introduce and learn from the world's achievements in advanced science and technology, but what is most important is to base ourselves on independent innovation ... [which] is the national strategy."
China has pursued this advanced technology strategy since 1995 with impressive results. Research and development (R&D) has grown more than 20 percent yearly compared with 6 percent in the United States and 5 percent in Europe and Japan. University students have tripled, and China now graduates 6 times as many engineers as the United States.
Chinese exports are the bottom-line indicator of competitive economic performance. Chinese exports doubled from 2001 to 2004, with more than half of total exports now in high-technology industries. China passed Japan in 2004 to become the third-largest exporting nation, and is headed to become the No. 1 exporter in three to five years.
Foreign direct investment (FDI) has been the decisive catalyst for Chinese advanced technology development up to this point, with a $61 billion inflow in 2004, led by Taiwan, South Korea, Japan and the United States. Foreign companies accounted for 57 percent of total Chinese exports in 2004 and have established more than 700 R&D centers in China, mostly linked to Chinese universities and companies.
John Chambers, chief executive officer of Cisco, the No. 1 U.S. computer equipment producer, told a Beijing audience China will be the world's information technology center.
Premier Wen's Stage 2 objective of independent Chinese innovation also is beginning to bear fruit. Chinese firms, such as Huawei for telecommunications equipment and Lenovo for computers, are growing rapidly, based on an increasingly export-oriented strategy of brand-name recognition, product quality reputation and a large, leading edge R&D program.
Examples of Chinese advanced technology innovation are the planned launch of more than 100 satellites to form a global Earth observation system, the Dawning 4,000-A Shanghai supercomputer, and the Godson II central processing unit computing chip to support the 64-bit Linux operating system.
A U.S. "future of innovation" task force concluded, in February 2005, that China "has been investing heavily in nanotechnology and already leads the U.S. in some areas... and is making rapid progress in biotechnology."
Emergence of China as an advanced technology superstate fundamentally changes the world economic structure. The new order centers on three such superstates -- the United States, the European Union and China -- each with deepening regional trade and investment linkages. The three regions of North America, West Europe and East Asia, account for 79 percent of global gross domestic product and 85 percent of global exports, with China-centered East Asia the fastest-growing.
The Chinese economic strategy, as presented by Premier Wen, requires an equally forceful U.S. strategy to maintain America's longstanding leadership position in technology innovation and application. It cannot be overstated that this has major national security as well as commercial implications.
A U.S. protectionist strategy won't work because it will increase the cost of U.S. innovation while opening further global export opportunities for China and others. The U.S. response needs to be free trade and market-oriented, involving mutually supportive international and domestic economic policy actions.
Internationally, the most urgent focus should be on the "currency manipulation" issue, whereby China and other East Asians maintain exchange rates far below market-based levels, and thus gain a large competitive trade advantage. The Chinese trade surplus is on track to quadruple this year to $140 billion, or 8 percent of GDP, which would require a substantial increase in earlier 25-50 percent estimates of yuan undervaluation.
Trade policy initiatives should seek fair and open access to foreign markets and further mutual reduction of trade barriers. Priorities for improved access to the Chinese market include protection of intellectual property and nondiscrimination in tax and regulatory policies for U.S. companies.
A particular threat to U.S. exports are recent initiatives by China and other East Asians to form free trade agreements without the United States, which the U.S. should counter with further free trade agreements across the Pacific, beginning with Thailand, South Korea and Taiwan.
The domestic economic agenda should involve improved educational performance, particularly in math and science, public sector R&D targeted more on technology innovation, and other policy actions related to the corporate tax structure, tort litigation and government regulation that put U.S. companies at a cost disadvantage with foreign competitors.
An overarching domestic economic objective is an increased national savings rate, to reduce the trade deficit, 85 percent borne by the technology-generating manufacturing sector.
The principal U.S. weakness now is lack of national purpose, which is needed to carry out a forward-looking policy agenda. This requires strong political leadership, in both the executive and legislative branches, which has been sadly lacking.
Napoleon is credited with the comment: "Let China sleep, for when she awakens, the whole world will tremble." China has now awakened as an advanced technology superstate, which should be a wake-up call for the United States as well.
Ernest H. Preeg is senior fellow in trade and productivity at the Manufacturers Alliance/MAPI, and author of "The Emerging Chinese Advanced Technology Superstate" (MAPI and the Hudson Institute, July 2005), on which this article was based.