U.S. Leaders Learning the Wrong Lessons from China’s Rise

The Chinese are right to turn their attention to innovation. It is essential to their next stage of development. But innovation cannot be mandated from the top down. Innovation requires — among other important conditions — a culture that values dissent. Thus far, dissent has not featured prominently in China’s economic model. Unless and until that changes, China will struggle to ascend the global value chain.

But at least China’s leaders know what their economy needs, which is more than can be said of ascendant U.S. opinion leaders and policymakers. They seem determined to march the U.S. economy into the suffocating embrace of industrial policy. If it works for the Chinese, then it can work for us, seems to be the mantra of New York Times columnist Thomas Friedman, who wrote:

This is a poor analogy. Just because industrial policy may have facilitated catch‐​up growth in an impoverished country committed to reversing the damage of a two‐​century slumber does not mean it is the right course for a country in the technological vanguard that owes its success to ingenuity, innovation, and entrepreneurship. Chinese leaders can learn from America’s successes and failures, but the only proven model for an economy at the technological fore is one steeped in innovation and entrepreneurship.

However, with over $100 billion in direct subsidies and tax credits already devoted to green technology, President Obama disagrees. He is convinced that America’s economic future depends on the ability of U.S. firms to compete and succeed in the solar panel, wind harnessing, and lithium ion battery markets. Concerning those industries, the president said: “Countries like China are moving even faster… I’m not going to settle for a situation where the United States comes in second place or third place or fourth place in what will be the most important economic engine of the future.”

With all due respect, how does the president know that those will be the most important economic engines of the future? By placing bets on particular industries, the administration is overriding a selective, evolutionary process that has undergirded the world’s most successful innovation machine, while reducing the chances of worthy ideas, firms, and industries leading the next commercial wave. Did President Obama’s predecessors anticipate the arrival of Steve Jobs, Bill Gates, or Marc Zuckerberg and the revolutionary products and services they delivered? Did Washington bureaucrats foresee the advent of specific life‐​extending medicines and devices, like digestible, pill‐​sized cameras? Had those proposing industrial policy in response to a rising Japan in the 1980s and early 1990s prevailed, much of the technology and medical advances taken for granted today would have never come to fruition.

Why the sudden turn to industrial policy last year?

That China emerged from the Great Recession virtually unscathed and on the same 30‐​year‐​long, high‐​growth trajectory, while the United States continues to confront slow growth, high unemployment, and a large public debt (much of it owned by the Chinese), has fueled fear, self‐​loathing and self‐​doubt among U.S. opinion leaders, which has altered their perceptions of the bilateral relationship. Media opinions about how China has thrived at U.S. expense for too long have proliferated. And woven into stories about China’s rise have been unmistakable appeals to U.S. nationalism.

In Chinese reluctance to oblige U.S. policy wishes, readers have been told that China selfishly follows a “China‐​First” policy. In the increasing willingness of Chinese officials to criticize U.S. policies, readers have learned of a new “triumphalism” in China. As a result, once‐​respected demarcations between geopolitical and economic aspects of the bilateral relationship have been blurred, with economic frictions now more likely to be cast in the context of our geopolitical differences. Columnist Robert Samuelson — a one‐​time proponent of the view that globalization means interdependence — now believes that “China’s worldview threatens America’s geopolitical and economic interests.”

Simultaneously, the U.S. business community in China — long‐​time advocates of bilateral engagement and an important counter‐​balance to U.S. import‐​competing industries that constantly clamor for protectionism and other actions against China — began to sound the alarm about increasingly discriminatory and protectionist policies in China. They were right to complain and to enlist the support of U.S. officials to compel the Chinese government to reverse those policies.

But the firestorm over China’s technology transfer and indigenous innovation policies, in conjunction with the infamous Google hacking incident, painted a picture of an increasingly adversarial China, which opinion leaders and the president were quick to embrace. After all, if the United States is going to “win the future,” as the president exhorts, then somebody has to lose. When the imperative of winning the future is cast as “our generation’s Sputnik moment,” the president encourages the view that China as an adversary. And if we are to draw parallels between the U.S.-China economic relationship and the U.S.-Soviet Cold War rivalry, then industrial policy is to be considered a matter of national security.

This adversarial, zero‐​sum characterization of the bilateral relationship is wrong. Regrettably, it is may feed increasing acrimony in the relationship, which in turn could fortify the political case for more industrial policy. The United States is on a slippery slope. Hopefully a new batch of policymakers can reverse course before the U.S. economy and the bilateral relationship suffer further damage.