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SEEKING RECIPROCITY

Heavily criticized by US President Donald Trump for excessive state subsidies, the “Made in China 2025” program has been dragged into Washington’s trade war with Beijing. At the core of the program is technology and artificial intelligence.

Last month, a study entitled “China’s AI Development 2018”was released by Tsinghua University, a major research institution in Beijing. It showed the country’s AI market was worth 23.7 billion yuan($3.5 billion) in 2017 and is projected to nearly double this year as funding pours into the industry. The study notes that from 2013 to the first quarter of 2018, China’s investment in AI accounted for 60% of the world’s total. The country was ranked first in the world for the number of AI-related patents and published the largest number of AI-related research papers. The State Council, China’s defacto cabinet, has predicted that China’s AI sector will grow into a 1 trillion yuan ($147 billion) industry by 2030.

According to China’s Ministry of Science and Technology nearly 19,000 scientists and technicians were actively involved in artificial intelligence research last year and the number will continue to rise. There are currently more than 4,000 AI enterprises with half of them startups. Part of a white paper released by the ministry focuses on the highly successful “cluster system” such as the one in Zhongguancun, which is situated in the Haidian district of Beijing and is known as China’s “Silicon Valley”. Already there are more than 1,000 companies there with 56% classified as “early” startups. Retail, healthcare, education and service sectors, as well as the auto industry, are areas highlighted for “smart solutions.”Yu Zhou an associate professor of earth science and geography at Vassar College in New York and the author of“The Inside Story of China’s High-Tech Industry: Making Silicon Valley in Beijing” wrote in the Asia-Pacific Journal that since the mid-1980s, Zhongguancun has “transformed from a quiet suburb designated for scientific research and higher education into a bustling hub of high-tech businesses, and research and development labs.”

Chinese tech giants such as Baidu, Alibaba and Tencent (collectively known as BAT), JD.com, the massive e-commerce and logistics group, voice AI specialist iFlyTek and others are pumping billions of yuan into artificial intelligence projects. In January, a $2.1 billion blueprint was unveiled to build an AI industrial park in the suburbs of Beijing. Not even the trade war with the US, or the slowing economy, will curtail the program. John Lee, who was a visiting fellow at the Mercator Institute for China Studies in Berlin, wrote in The Interpreter, which is published by the Lowy Institute, an influential Australian think tank, that “even if Washington could strong-arm US firms into cutting off China for strategic reasons, their advanced high-tech competitors are unlikely to follow”. Lee noted that increased state and private funding in China for AI has created a “virtuous cycle” of talent and technical advance which is starting to manifest in academic research,industry recognition and marketable applications. At the same time, some Chinese tech firms are searching overseas for talent. They are aggressively hiring in Silicon Valley and at leading US universities. Baidu, Didi Chuxing and Tencentall run AI research labs in the US.

Given the undeniable progress, it’s interesting that the real prospect of a trade war with the United States appears to have put Beijing on the defensive, especially when it comes to its “Made in China 2025” policy. During the past three months, according to the Asia Times, a senior official and a respected academic have both played down the country’s high-tech prowess.“China still lags decades behind developed countries,” Xin Guobin, the vice-minister of industry and information technology, told a forum in Beijing. Liu Yadong, the editor-in-chief of the Science and Technology Daily, was even more candid in his assessment. Speaking to a select audience at a seminar in the Chinese capital in June, he made an astonishing admission “The large gap in science and technology between China and developed countries in the west, including the US, should be common knowledge, and not a problem,” Liu said. “But it became problematic when the people who hype (China’s achievements) … fooled the leadership, the public and even themselves.”

In a piece published on March 2018 by the Council of Foreign Relations (CFR) entitled “Why Does Everyone Hate Made in China 2025?” by Lorand Laskai, a research associate in the CFR’s Asia Studies Program, Laskai notes that on the same day that President Trump’s administration announced $60 billion in tariffs against China, the Office of the United States Trade Representative (USTR) released the results of its Section 301 investigation into China’s unfair trade practices.

The nearly 200-page USTR report presents a searing indictment of China’s disregard for intellectual property, discrimination against foreign firms, and its use of preferential industrial policies to unfairly bolster Chinese firms. The report singles out Made in China 2025 as a prime example of Beijing’s egregious behavior and is mentioned one hundred and sixteen times. In contrast, China’s cyber security law, which is a matter of serious concern for many U.S. multinationals, is only mentioned thirteen times. And for good reason, writes Laskai. Beijing’s grand plan to upgrade its manufacturing base has upset governments around the world, confirming their suspicion that China is not looking for a “win-win” in trade relations as it claims.

Made in China 2025 is a blueprint for Beijing’s plan to transform the country into ahi-tech powerhouse that dominates advanced industries like robotics, advanced information technology, aviation, and new energy vehicles. Laskai points out that this ambition makes sense within the context of China’s development trajectory: countries typically aim to transition away from labor-intensive industries and climb the value-added chain as wages rise, lest they fall into the so-called “middle-income trap.” Chinese policymakers, writes Laskai, have diligently studied the German concept of “Industry 4.0” which demonstrates how advanced technology like wireless sensors and robotics, when combined with the internet, can yield significant gains in productivity, efficiency, and precision.

However, writes Laskai, China’s intention is not so much to join the ranks of hi-tech economies like Germany, the United States, South Korea, and Japan, as much as replace them altogether. Made in China 2025 calls for achieving “self-sufficiency” through technology substitution while becoming a “manufacturing superpower” that dominates the global market in critical high-tech industries. That could be a problem for countries that rely on exporting high-tech products or the global supply chain for high-tech components.

Critics point out, for example, that China’s self-sufficiency “quotas” violate World Trade Organization (WTO) rules against technology substitution. Made in China 2025 lays out targets for achieving 70% “self-sufficiency” in core components and basic materials in industries like aerospace equipment and telecommunication equipment by 2025. That could devastate countries like South Korea and Germany, where hi-tech sectors constitute a large share of industrial output and exports.

The supply chains for hi-tech products usually span many borders, with highly specialized components often produced in one country and modified or assembled somewhere else. Rather than abiding by the free market and rule-based trade, writes Laskai, China appears to be intent on subsuming the entire global hi-tech supply chain through subsidizing domestic industry and mercantilist industrial policies. Semi-official documents lay out even more specific quotas for Chinese manufacturers. Although officials at China’s Ministry of Industry and Information Technology (MIIT) insist these targets are not “official policy”, a report by the Mercator Institute for Chinese Studies argues that officials are using internal or semi-official documents to communicate targets to Chinese enterprises in order not to openly violate WTO rules.

Equally problematic to Beijing’s goal of “self-sufficiency” and becoming a “manufacturing superpower” is how it plans to achieve it. Chinese officials, writes Laskai, know that China lags behind in critical hi-tech sectors and hence are pushing a strategy of promoting foreign acquisitions, forced technology transfer agreements, and, in many cases, commercial cyber espionage to gain cutting-edge technologies and know-how. Washington and other capitals are only beginning to grapple with the repercussions of Chinese investment and technology transfer agreements. Unlike cyber theft, neither is illegal per se. Surging Chinese investment in the United States and Europe have been a recurring story over the past few years. However, lawmakers are increasingly concerned that such investments, especially in high-tech sectors, are not just a product of market forces, but guided by Beijing as well.

Technology transfer agreements and restrictive market practices in China itself present a similar problem. Foreign companies often enter agreements to transfer valuable intellectual property to a Chinese partner in exchange for market access. These agreements can be exploitative and highlight the asymmetries in market access between China and the rest of the world. Speaking about Chinese takeovers of German firms, Germany’s Economy Minister, Sigmar Gabriel, has said Germany “should not sacrifice its companies on the altar of free markets” while China denies German firms equal access to invest in the Chinese market.

The keyword in the US administration’s tariffs against China is “reciprocity.” That’s the right approach, writes Laskai, noting that an Asia Society task force concluded last year that the United States should urgently insist on reciprocity with China even if it adds tension to the relationship between the two countries.