How China Pulled So Far Ahead on Industrial Policy

How China Pulled So Far Ahead on Industrial Policy

For more than half a century, concerns about oil shortages or a damaged climate have driven governments to invest in alternative energy sources.

In the 1970s, President Jimmy Carter placed solar panels on the roof of the White House as a symbol of his commitment to generating energy from the sun. In the 1990s, Japan offered homeowners groundbreaking subsidies for installing photovoltaic panels. And in the 2000s, Germany developed an innovative program that guaranteed consumers who installed a solar system that they would sell their electricity at a profit.

But no country has come close to matching the scale and tenacity of Chinese support. The proof is in the production: Beijing accounted for 85 percent of all global investment in clean energy production in 2022, according to the International Energy Agency.

Now the United States, Europe and other wealthy nations are desperately trying to catch up. Hoping to correct past missteps in industrial policy and learn from China’s successes, they spend large sums on subsidizing domestic companies while trying to block competing Chinese products. They have made modest progress: Last year, China’s share of investment in new clean energy factories fell to 75 percent, according to the Energy Agency.

The problem for the West, however, is that China’s industrial dominance is based on decades of experience using the power of a one-party state to pull all the levers of government and banking while encouraging frantic competition among private companies.

China’s unrivaled production of solar panels and electric vehicles is based on earlier development of chemical, steel, battery and electronics industries, as well as major investments in railways, ports and highways.

The country spent an extraordinary 1.7 percent of its gross domestic product on industrial support from 2017 to 2019, more than twice as much as any other country, according to an analysis by the Center for Strategic and International Studies.

These expenditures included cheap loans from state-controlled banks and cheap land from provincial governments, without any expectation that the companies they supported would turn an immediate profit.

And it came as the United States and other countries accused China of a willingness to circumvent international trade agreements, steal intellectual property and use forced labor.

All of this has helped put China in a position today to flood rival countries with low-cost electric cars, solar panels and lithium batteries, as consumers in the wealthy world increasingly turn to green technology.

For example, China now controls over 80 percent of global production of all steps in solar module manufacturing.

“There are huge economies of scale when you get as big as China,” says Gregory Nemet, a public policy professor at the University of Wisconsin who has studied the global solar industry. When the investments led to overcapacity and reduced the profitability of Chinese companies, Beijing was prepared to bear the losses.

President Biden and European leaders are committed to expanding their countries’ manufacturing capacity in advanced technologies such as semiconductors, electric vehicles and batteries, including by adopting some of China’s tactics to boost the industry.

China’s rise to dominance in key global manufacturing sectors shows the potential and power of national industrial policy, said Jennifer Harris, a former Biden aide who now leads the William and Flora Hewlett Foundation’s Economy and Society Initiative.

“Was it wasteful? Absolutely,” she said. “Was it successful? Absolutely.”

Mr. Biden and European leaders are more willing to take Beijing to task for what they say are illegal practices, such as selectively subsidizing overproduction and then giving undervalued goods to other countries.

Beijing denies breaking trade rules and says its huge industrial capacity is a sign of success. Xi Jinping, China’s supreme leader, said this month that China had increased global goods supply and eased international inflationary pressures while helping the world fight climate change.

Mr. Biden said this month that he would impose tariffs of up to 100 percent on imports of Chinese green technologies, including electric vehicles. The aim is to prevent China from opening up further in America.

European officials are expected to introduce their own tariffs soon – despite warnings from some economists and environmentalists that the measures will slow progress toward clean energy goals. Europe is increasingly concerned about security issues as China has shifted its geopolitical posture towards Russia and Iran.

The West’s adoption of industrial policy is a departure from the ideology of open markets and minimal government intervention that the United States and its allies previously espoused.

When Ronald Reagan was elected president in 1980, the policies triggered by the energy crisis of the 1970s were largely reversed. Even the solar panels installed in the White House during the Carter administration were removed.

With the exception of certain security-related industries, the United States has held that an unfettered market always knows best.

“If the end result was that you had to rely on other countries for important parts, that was fine,” said Brad Setser, a senior fellow at the Council on Foreign Relations.

Joseph Stiglitz, an economist at Columbia University, said the United States has long lacked a broader industrial policy and coordinated strategy.

“Even Democrats were afraid to take a more aggressive government role,” he said, “and I think that was obviously a big mistake with long-term consequences.”

From the perspective of some Chinese economists, complaints about injustice from the United States and Europe are a sign of the failure of their own governments.

“The West’s decision to pursue neoliberal economic policies was a strategic mistake that led to the de-industrialization of its economies and presented an opportunity for China,” said Zheng Yongnian, a professor at the Chinese University of Hong Kong.

Whatever mistakes were made, political leaders in the United States say they are determined not to repeat them.

According to the International Energy Agency, the United States and the European Union made “significant progress” in clean energy technology last year.

And the Biden administration’s multibillion-dollar program is one of the largest uses of industrial policy in American history.

Mr. Biden’s tariffs are a targeted escalation of an American trade offensive against China that began under former President Donald J. Trump. Mr. Trump imposed tariffs on more than $350 billion a year in imported goods from China, drawing retaliatory tariffs from Beijing. Mr. Biden has kept those tariffs in place, added or increased them on clean energy, and raised new trade barriers with Beijing, including denying China access to advanced semiconductors from the United States.

Mr. Biden’s trade agenda is “very, very aggressive,” said David Autor, a Massachusetts Institute of Technology economist who has extensively documented the impact of trade with China on the American economy, including factory job losses.

He believes there are key differences between Mr. Biden’s trade strategy and Beijing’s as both nations seek to take the lead in the race for clean energy.

According to the author, China focused more on sending low-cost exports to global markets and preventing foreign companies from dominating China’s domestic markets.

Mr. Biden, he said, is more focused on keeping imports out of China and denying China access to some key American technologies such as advanced semiconductors.

At a meeting of Group of Seven finance ministers in Italy last week, leaders from both sides of the Atlantic warned that the United States and Europe must coordinate their protectionism and subsidies if they want to overtake Beijing in the race for dominance in key industries .

“Excess capacity threatens the viability of businesses around the world, including in emerging markets,” Treasury Secretary Janet L. Yellen said Thursday.

“It is vital,” she added, “that we and the growing number of countries that have identified this as a problem present a clear and united front.”

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2024-05-27 04:01:43