In order to avoid further foreign pushback, China’s official media have recently been instructed to downplay the significance of “Made in China 2025,” the master plan announced by Chinese President Xi Jinping in 2015 with the goal of making China the “master of its own technologies.” Whether officially acknowledged or not, “2025” accurately reflects Xi’s ambitions to gain “self-sufficiency” in a host of advanced industries. China seeks not only mastery but global dominance in a wide array of advanced-technology products, including artificial intelligence, computers, electric vehicles, jet airplanes, machine tools, pharmaceuticals, robots, and semiconductors. Many of these technologies have dual-use capabilities, helping China’s military and economy simultaneously.
What is troubling about what might be supposed to represent a natural exercise in self-help is that the 2025 strategy involves more than just pulling China up by its own bootstraps through fair and above-board means. China also bestows massive subsidies to build up its national tech champions, manipulates technology standards, demands the handover of technology from international companies doing business in China, picks the pockets of foreign firms in China and around the world to acquire valuable technology, favors Chinese companies in its domestic market and subsidizes them when they compete internationally, and subsidizes the acquisitions of foreign advanced technology enterprises. U.S. and foreign enterprises across virtually every advanced technology sector—from aerospace and biotechnology to information and communications technology (ICT) products, internet, clean energy, and digital media—have been harmed by China’s aggressive use of mercantilist techniques and will continue to be harmed if China cannot be pressured to roll back its egregious predatory practices.
The U.S. government has been slow to respond to the Chinese challenge for a number of reasons: the comfortable belief in the inherent superiority of the innovative and competitive American free market; the lack of support by many companies for a more active and assertive national innovation policy; and policy attention to the near-term cybersecurity dangers of Chinese ICT companies—Huawei, ZTE, and others—rather than to the long-term dangers that they and others will dominate the world market. The United States may have a narrow lead in the so-called fifth industrial revolution (information technology, including computing and the internet). Whether we will lead in the emerging sixth industrial revolution, based on technologies like artificial intelligence, robotics, and autonomous systems, is an open question. “Made in China 2025” targets these and related industries for global leadership. It would be a major strategic blunder and a huge risk to assume that China will fail and the United States prevail in the competition for leadership of the next technology revolution without concerted and sustained American government action.
The Trump Administration is rightly pressuring China to roll back its unfair practices, but success is far from assured, especially as the Administration has not enlisted its allies to widen the pressure—indeed, it seems to have gone out of its way to alienate those allies. Instead of putting all of its eggs in the tariff-heavy trade enforcement basket, it’s time for America to rise to the challenge by developing its own comprehensive plan to maintain competitive advantage in the advanced technology industries that are most critical to U.S. economic and national security. The Administration and Congress should develop their own strategy to unleash the power of American innovation and entrepreneurship. Call it “Invented and Made in America, 2028.”
Given the extent of China’s “2025” initiative, the United States must act or it is likely to see its output and employment significantly eroded in advanced industries as diverse as aerospace, biopharmaceuticals, computers, internet, and semiconductors. Meanwhile, it could be far outpaced in the international market in emerging industries such as artificial intelligence, 3-D printers, grid-scale batteries, drones, robotics, electric vehicles, and quantum computing. China’s strategy is very specific: It calls for Chinese companies winning 80 percent domestic market share of high-end, computer-controlled machines; 70 percent for robots; and 60 percent for big data. And once those domestic gains are in place, China’s strategy is to aggressively support its companies as they seek out and capture global market share, weakening U.S. companies in the process.
If U.S. policy continues to rely only on the market to support innovation by its universities, government labs, and companies, not only will America miss out on the millions of high-wage jobs the industries of the future will produce, but its defense capabilities will be severely weakened. When U.S. servicemen and women go into conflicts today, they have the advantage of technologically superior weapons systems and knowledge networks. But keeping that advantage depends on the U.S. economy maintaining global technological superiority, not just in defense-specific technologies but in a wide array of dual-use technologies. It is a highly risky proposition to assume that the United States can count on a military edge if the Chinese continue to advance, largely through unfair, predatory practices at the current pace. Ensuring that U.S. capabilities stay well ahead of the Chinese should be a key focus of “Invented and Made in America, 2028.”
As a first step, Congress should pass S. 2757, the bipartisan National Economic Security Strategy Act of 2018. By requiring the Administration to develop a national economic strategy to support the national security strategy, the legislation will not only help the Administration make stronger connections between economic security and national security, it will help identify key challenges and policy needs. By focusing attention not only on the strengths and weaknesses within American industry but also on threats from other nations, policymakers will be better prepared to take the decisive steps that are required. The National Economic Security Strategy should be written with broad public and business participation to raise awareness of the issues and to solicit the best ideas from the country.
Based on this strategy Congress should pass legislation targeting the core technologies most important to America’s future national and economic security, and then appropriate at least an additional $50 billion annually to support their development, with increases to that level phased in over the next ten years. These funds would be invested in pre-competitive research and development and shared technology test-bed facilities including increasing funding for the Defense Advanced Research Projects Agency (DARPA) and in programs like the successful, but underfunded, Manufacturing USA Institutes and DOE’s Advanced Research Projects Agency-Energy (ARPA-E). Even a $50 billion investment would not match the government R&D spending, as a share of GDP, of the late 1970s, when the United States led the world in the development of game-changing innovations in aerospace, semiconductors, computing, and information technology. That investment rate would have produced a $243 billion investment in 2018, $100 billion greater than the current government investment.
Congress should also establish a much more generous R&D tax credit. While business R&D investment in the United States jumped by two-thirds on an inflation-adjusted basis from $328 billion in 2000 to $458 billion in 2016, the rate of R&D growth as a share of GDP over the same period has been anemic, inching up from 2.61 percent to 2.74 percent. Moreover, businesses are investing a much smaller share of their revenues in crucial, if riskier, early stage basic and applied research than in later-stage development, and the global share of business R&D performed in the United States has fallen significantly in the past decade.
One reason for this performance is that the U.S. R&D credit, which provides an incentive for companies to expand research funding, is anemic compared to those of our competitors, ranking 25th-most generous among 35 OECD nations. Expanding the R&D “Alternative Simplified Credit” from 14 percent to 30 percent would give companies in the United States much more incentive to invest in the future. Both the R&D credit—which is focused more on earlier-stage experimentation rather than later-stage development—and the increased Federal funds for collaborative R&D would help spur more crucial and more risky earlier stage business R&D expenditures.
The U.S. government took similarly bold steps after the Soviet Union launched Sputnik. Funding for Federal R&D nearly tripled from 0.67 percent of GDP in 1956 to 1.9 percent of GDP in 1967, with much of that going to development of advanced technologies (that share today has fallen below 0.74 percent). The current economic and potential future military threat that China poses today warrants no less of a commitment.
Skeptics may argue that America can’t afford big new investments, given its towering national debt, or that the government should not be picking winners and losers, or they might say there’s no need to worry about China, because government-directed economies always fail.
But the economic and national security costs associated with losing technology leadership would be far greater than deferred debt payments. Moreover, the direct and indirect investments would go a long way to boosting lagging U.S. productivity growth, which in turn would reduce the growth of the debt-to-GDP ratio. Government investments in research and development have historically contributed to economic growth many times greater than the original investment.
The development investment program proposed here would not be supporting individual firms favored by policymakers. The expanded tax incentives to support research would be available to all companies in America. The direct R&D funding would go to universities and Federal labs or to industry-led consortia open to all firms and requiring industry funding. For example, DARPA has long funded, along with the semiconductor industry, a highly successful, but underfunded, program (the Focus Center program, now called STARnet) to support cutting-edge research at universities into the future of semiconductors.
The Chinese authoritarian model of business development may fail, but hope is not a strategy. China’s economic growth in the past three decades is unprecedented, and the United States should not underestimate its ability to adapt and to continue its rise. It has shown skill in taking advantage of the dynamism of a substantial private sector by throwing government resources behind companies that innovate and export. Yet too many analysts still liken China’s economy to the Warsaw Pact economies of the Cold War era; socialist, state-directed economies that could never really progress. A better analogy would be to those countries’ illegally juiced Olympic teams. China generally lets its “capitalist” companies make business decisions on their own and then supports them with purloined technology, massive subsidies, and protected domestic markets. Chinese companies are much more formidable competitors than the Russian and East European companies of the past century.
America shouldn’t copy China’s heavy-handed interventionism any more than it should have emulated the East German swim team. But helping U.S. firms with industry-government partnerships for pre-competitive research and providing a more generous R&D tax credit are not the same as “picking winners.” It is a reasonable and essential strategy to counter China’s massive, government-backed campaign to dominate the critical advanced-technology industries in which the United States still clings to a diminishing competitive advantage.