Beijing Forges Ahead With ‘Made In China’ Policy, Targeted By Proposed U.S. Tariffs

After three rounds of tariffs and counter-tariffs, both actual and proposed, the U.S. and China appear deadlocked, with the possibility of a trade war still looming. China remains defiant in the face of U.S. threats, while the U.S. appears indifferent following China's pledges to open its markets.

"China will not enter into any negotiations while under threats from the U.S.," Chinese Commerce Ministry spokesman Gao Feng told journalists last Thursday. He added that the U.S. has not shown any sincerity about holding talks.

Last Tuesday, Chinese President Xi Jinping pledged to open markets, protect intellectual property and increase imports. The following day, China's central bank governor pledged to open the country's financial sector to foreign investment. But China insisted this had nothing to do with ongoing trade frictions with the U.S.

There was no immediate reaction from Washington, other than a presidential tweet in which Donald Trump thanked Xi for his pledges.

China's commerce ministry, meanwhile, denied that Xi's remarks represented concessions to the U.S. — or that any are warranted.

China has been particularly unapologetic about its strategic industrial policy, dubbed "Made in China 2025." Proposed U.S. tariffs take special aim at this policy, which a recent report by the U.S. Trade Representative describes as discriminatory toward U.S. firms and a threat to U.S. trade.

The Made in China plan, announced in 2015, calls for China's government to funnel billions of dollars into developing and acquiring advanced technologies in fields such as artificial intelligence, robotics, biopharmaceuticals, new energy vehicles and aviation.

The Trump administration sees the policy as another effort to steal U.S. technology and push American firms out of the Chinese market. But, says Douglas Fuller, an expert on China's technology policies at Zhejiang University in Hangzhou, "You can't just tell China that, 'No, you're not allowed to continue your technological development.'"

Dong Yang, the vice chairman of the China Association of Automobile Manufacturers, and other Chinese business leaders see upgrading industry as a natural part of any country's economic development. The tariffs look to them like just another U.S. effort to thwart China's rise.

"Why should one country take aim at another country's policy to develop its own economy?" Dong says. "Just mind your own business."

The Made in China plan also calls for Chinese companies to control 70 percent of the domestic market in key sectors by the year 2025. The idea is to help China transition from making labor-intensive, low-profit goods such as toys, apparel and furniture, into more lucrative, capital- and technology-intensive products.

"We will promote China's industries' progress toward the middle and upper reaches of the global value chain, and foster groups of world-class, advanced manufacturers," Xi told delegates to the 19th National Congress of the ruling Communist Party last November.

Beijing Institute of Technology economist Hu Xingdou says the policy might help some Chinese firms. "Or it might create huge production overcapacity and waste," he warns. "It may also tempt many companies to try to trick the government into giving them subsidies."

Hu cites state media reports (some of which were later refuted by other state media) that most research and development funding in China never makes it to the intended projects, and is instead often wasted on unnecessary meetings and travel. The problem, Hu says, is that China lacks a modern R&D system with effective systems of evaluation and oversight.

Another concern is that government subsidies lure so many firms into certain industries that it creates a glut of products, which China then dumps on international markets and crashes prices, as has been the case with steel and solar panels.

"To the extent that [Made in China 2025] is coercive, to the extent that it is inconsistent in dramatic ways with market-based principles of competition, it fundamentally distorts the world economy," argues Lester Ross, partner-in-charge of the U.S. law firm WilmerHale's Beijing office.

China's vice trade minister Wang Shouwen rejected U.S. criticisms at a recent press conference.

"Made in China 2025 is transparent, open and non-discriminatory," he said. "Foreign and Chinese companies, public and private-sector companies can all participate."

Wang added that his ministry has reviewed the Made in China plan to ensure its strict compliance with World Trade Organization rules. And, he said, China has no intention to monopolize domestic markets.

"Some of the targets in our plan are intended as forecasts or guidance," he insisted. "They're not mandatory requirements."

Fuller says that U.S. tariffs aimed at Made in China 2025 are not likely to be very effective, partly because China exports very few hi-tech products to the U.S.

Most Chinese tech firms, such as electric car makers, are not yet mature enough to compete in U.S. markets. Others, like telecom giant Huawei, are already effectively barred by the U.S. government on national security grounds.

For now, says Fuller, the focus of Made in China 2025 "is really quite domestic, and that's going to create a lot of business opportunities for these firms in China."

When it comes to the trade spat with the U.S., he says, "I don't see anyone here really quaking in their boots."

Instead, Fuller suggests that the U.S. would do better to come up with its own industrial policy and put more money into cutting-edge scientific research.

"The U.S. really has to look at itself," he says, "and decide where its priorities are to stay competitive."

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