Beijing helms a massive global economy—and has created an industrial policy with a long-term aim of growing its geopolitical power, often sacrificing economic efficiency and manipulating markets to deliberately undermine competition in key strategic industries.
The goal: to make the People’s Republic of China Asia’s—and, lately, the world’s—dominant industrial power.
Watch Episode 2 of SAFE’s webinar China | Competition | Power to hear our panel of experts discuss how China’s unique industrial policy impacts global markets by pursuing a strategy that is less about efficiency and growth, as we think of it in market-oriented economies, and more about cornering market share of politically strategic sectors.
Rick Switzer, formerly at the U.S. Department of State, returned to lay the groundwork for the discussion, noting that it is important to understand Beijing’s actions through the lens of the Chinese Communist Party’s long-term political goals, not market economics.
“They don’t mind losing money; they don’t mind overcapacity; they do things that, from a purely economic perspective, make zero sense,” he said.
Switzer pointed to China’s ship building industry, which now makes up 60% of the world’s market because of Beijing’s concerted strategic efforts.
Switzer noted that we have seen this process repeated many times across different industries and warned that Beijing’s new target is commercial airplane manufacturing. When Chinese firms pursue overcapacity, it is to drive profits out of the industry and put market-based firms at a distinct disadvantage.
Beijing pursues a goal-oriented industrial policy, and the goal is to take a certain percentage of global market share in service of geopolitics, not to create globally competitive world-class firms, like Samsung.
Gutting the competition
Robert Atkinson, President of the Information Technology and Innovation Foundation (ITIF), didn’t mince words: “If you aren’t frightened, you aren’t paying attention.”
Atkinson drew the contrast between the “process oriented” approach Western countries take and Beijing’s goal-oriented approach. For China the goal is “global techno-economic dominance.”
That’s why their focus is on advanced industries, which have high fixed costs and low marginal costs, and once such industrial know-how is gone, it’s generally impossible to restore. For example, he said, “If the U.S. loses Boeing, it’s gone forever.”
This approach leads China to take Western research and development, scale it, and then push other firms out of the market.
The debate in Washington focuses on a few industries, he said, but it’s deeper and broader than that: “If the U.S. did not have an aerospace industry, a machinery industry, a car industry, we would be a decimated… economy. We just can’t let that happen.”
China’s Civil-Military fusion
Jonathan Ward, author of The Decisive Decade & China’s Vision of Victory, put a finer point on it. A big part of Beijing’s strategy is the “ability to fight and win wars, including against the United States” from a position of industrial and technological superiority.
China is undertaking the largest military build up since the Second World War. Electric cars, for example, are part of China’s “civil-military fusion.” Innovations and industrial capacity in the EV industry feed directly into the PRC’s national defense industries. This isn’t isolated to Chinese-owned businesses like BYD. Intellectual property theft is also key, Ward noted, citing the example of Tesla.
Chris Cloutier, International Trade Attorney, brought in a legal lens. The promise of liberalization of Chinese markets that many celebrated when the PRC joined the World Trade Organization (WTO) had not been delivered. Instead, the role of State-Owned Enterprises (SOEs) has only grown.
To counter that, the U.S. tariffs on Chinese imports have been an important innovation, but they aren’t enough.
“Whoever the next administration is, a really important thing is to get the rest of the world to go along with us… We need a more holistic approach because while we can wall off America from Chinese imports, there’s a whole of the rest of the world out there,” Cloutier said.
Drilling in on a counter strategy
Switzer noted that the U.S. is “by far the most profitable market in the world… While we don’t want to be Fortress America, we should not discount how very powerful this market is. The rest of the world will choose the U.S. market over the Chinese market if they are forced to choose.”
And Ward noted that Chinese companies are the engine of Beijing’s Grand Strategy, which makes it targetable.
“If and when we want to take a part the Chinese Grand Strategy, we can do it by targeting the corporate entities, the banking entities, and the strategic entities the CCP uses to control the global economy,” he said.
The PRC’s Grand Strategy relies on access to the world economy, especially the U.S. and allies: it’s key to cut them off from access of markets, technology, and capital now before they make further inroads.
But how can the U.S. re-shore production and help break Beijing’s stranglehold?
Atkinson said that focus is necessary; this isn’t about manufacturing broadly or trade deficits. It’s about 20 or 30 industries that are fundamentally underlying national power. That means banning imports from targeted Chinese companies, where we can make a convincing case that they are competing unfairly. We also must expand defense funding especially around new weapons systems, their components, and the industries we cannot afford to lose.
Switzer said companies are thinking in the short term and are selling to the PRC, which in the long run is aiming to create mirror companies to put Western companies out of business. A coordinated strategy is necessary because no one company will stop selling to the Chinese market if they worry their competitors will continue.
“Ultimately, this is about us aligning geopolitically to secure our economic future and our long-term security,” Ward said. “That’s going to be a bifurcated global economy. A lot of this is going to get done in corporate strategy that realizes what happens to you at the end of the China Engagement Road. At the end of that, you lose a lot of things.”
Watch episode one here and stay tuned for episode three.
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