[Analytics] How China’s ‘technological independence’ strategy will transform its economy

An important concern for the international community in the post-COVID-19 era is the direction of US–China relations and the sustainability of China’s economic development. Jianmin Jin specially for the East Asia Forum.

China’s political leadership recently released two development proposals — China’s 14th Five-Year Plan (2021–2025) and the Long-Range Objectives Through the Year 2035 — that clarify the policy orientation and intentions of Beijing.

The proposals mark the end of the export-led economic strategy that has driven development for 40 years and a shift towards a ‘dual-circulation’ growth pattern driven by domestic demand supplemented by external demand.

This new strategy places innovation at its core and it positions technological independence as a strategic pillar of national development.

‘Indigenous innovation’ (zizhu chuangxin) has been a strategic emphasis for decades in China. Led by the state-owned sector, China’s indigenous innovation policy has achieved some success, including technologies development in high-speed rail, ultra-high voltage transmission and military applications. The policy has also led to a large number of scientific papers and patents that serve as intermediate outputs for research and development.

In a globalised environment, China’s innovation had once largely leaned towards applied development. The country earned the moniker ‘world factory’ for importing materials, key parts and manufacturing equipment to then assemble for export. Forced to meet the fast-changing demands of the international consumer market, China adopted an ‘import, localise, absorb’ approach to technology, given a vacuum of indigenous technology at home.

Such a technological development pattern put China in a low value-adding position and technological regulations of the more advanced countries made it difficult for China to introduce higher technology. The launch of ‘Made in China 2025’ was a response from policymakers and industry to this perceived internal crisis.

In the digital era, the United States has been promoting the ‘Advanced Manufacturing Partnership’, ‘Industrial Internet’ and the strategic project ‘Industry 4.0’ aiming to advance the manufacturing industry. These movements gave stimulus to China, sensing crisis. Gaps exist in its technological capabilities and competitiveness — and without intervention these gaps are likely to widen.

At the same time, the recent successes of organic technological innovation in China and Beijing’s ability to rein in COVID-19 have expanded confidence in Chinese digital development.

While China’s indigenous innovation policy was at first a catch-up strategy, the ‘technology independence’ approach could be measured as an intention to overtake those advanced countries that currently dominate global technology.

China had launched a national policy of ‘self-renewal’, a systematic version of indigenous innovation, in 2006. Having joined the WTO, the constant push of globalisation forced China to pursue efficiency mainly based on comparative advantage. As a result, China relies heavily on global supply chains.

China’s semiconductor chips, for example, rely mainly on imports from overseas vendors. According to a survey by US industry groups, the Chinese share of global semiconductor demand is around 35 per cent, while the Chinese share of the world’s integrated device manufacturers — companies capable of designing, manufacturing and selling integrated circuit products — is less than 1 per cent.

The technology and export control measures taken by the United States in the name of national security have caused serious financial difficulties for Chinese companies like ZTE and Huawei. Such regulatory measures also apply to hundreds of blacklisted Chinese tech start-ups. China has become more vulnerable to its own industrial supply chain and has been forced to strengthen it through technological independence measures that aim to protect national security and the economy. In other words, fear of US–China technology decoupling is an external factor accelerating China’s strategy for technology independence.

The issue of trade restrictions should have been resolved by negotiations through an international or bilateral dispute resolution mechanism. Unfortunately, these dispute resolution mechanisms are dysfunctional. Whether or not China’s chosen approach succeeds domestically, it is likely to amplify US–China technology decoupling.

Focusing on its abundance of human resources, data assets and application scenes in science and technology, China is trying to realise technology independence by 2035. But in the digital age where economic and social complexity is increasing and innovation efficiency and speed are required, China must co-create with members of the global innovation ecosystem. Just as China’s government-led indigenous innovation policy was criticised overseas, the global innovation ecosystem requires rule-making and dispute resolution mechanisms.

It will be important for the new Biden administration to recognise the need to recover and strengthen global cooperation in technology.

Dr Jianmin Jin is Chief Digital Economist at the Global Strategy Planning Division, Fujitsu Ltd., Tokyo.