SINGAPORE (Dec 24): For months now, the ongoing trade war between the US and China has had the world on tenterhooks. Global markets have sold off heavily on concerns that an agreement that satisfies both sides is unlikely anytime soon. A prolonged trade war and rising tariffs are seen as major dampeners on global growth which, in turn, is leading to more uncertainty in the markets. Earlier this month, on the sidelines of the G20 meeting in Buenos Aires, US President Donald Trump and his Chinese counterpart Xi Jinping agreed to a temporary truce of sorts, deferring additional tariffs for 90 days starting January to let policymakers in Beijing and Washington hammer out a deal. 

The real sticking point in this trade war is not the level of tariffs on American cars or steel, or even the non-tariff barrier on Hollywood movies, or Google’s ability to promote its search engine in China, but the US’ belief that Beijing is using its trade policy to advance its industrial and technological ambitions to become a dominant global tech powerhouse, elbowing it off its perch as the global tech leader. At the heart of it is Beijing’s ambitious Made in China 2025 policy, a 10-year strategic blueprint, first unveiled in May 2015, to help advance China’s march to the top of the global tech ladder.  

Alongside the Belt and Road Initiative, the country’s ambitious global infrastructure outreach plan, the 2025 tech leadership roadmap is a key plank of Xi’s vision to remake China. Until recently, the consensus was China would not budge on the plan because any backing down would be seen as a huge loss of face for Xi. But Beijing’s leaders are nothing if not pragmatic. Over the past week, China has been sending strong signals that it may be ready to scale down and defer key parts of the 2025 plan in an attempt to avoid punitive tariffs that could push its economy into a recession and, indeed, even permanently derail its ambitions to be a tech leader.

What is Made in China 2025 and just why is it so important? Long-term economic roadmaps were in vogue in the 1950s and 1960s, pushed by multilateral institutions such as the World Bank, and embraced mostly by socialist countries, giving the emerging nations lofty long-term goals to aspire to. 

Yet, that never stopped developed nations from launching their own audacious economic plans. These days, almost every country including the developed nations, from Australia to Canada to South Korea, have some sort of industrial policy. The real inspiration for Made in China 2025 may have been Industrie 4.0, a strategic initiative by Chancellor Angela Merkel to establish Germany as a key provider of advanced manufacturing solutions to help promote its technological leadership in industrial R&D. 

Among the goals of Made in China 2025 is increasing the Chinese-domestic content of core materials to 40% by 2020 and 70% by 2025. The plan focuses on 10 key high-tech sectors including semiconductors, robotics, clean-energy vehicles as well as biotechnology, which are dominated by multinationals from Europe and the US.

On the face of it, the plan was ­merely an attempt to move China’s mostly low-end manufacturing up the value chain and close the gap with developed countries in higher-end, or smart and intelligent, manufacturing. Until fairly recently, Chinese policymakers and executives of its tech companies have stressed that China needs to be self-reliant on key technologies such as semiconductors; otherwise, it will forever remain a bit player and contract manufacturer for global giants such as smartphone maker ­Apple. Aside from import substitution, the plan also provided China with a platform from which to eventually leap to become a major industrial and technology powerhouse in direct competition with the US.

What has irked competing economies such as the US, Japan and Germany is not just that the roadmap lays out plans for China producing its own components and intermediate goods to substitute for the technology it imports from other developed nations, but just how far Beijing is willing to go in its pursuit of market share gains and dominance.

Real existentialist threat

Hard-line Trump White House trade policy experts such as Peter Navarro and Robert Lighthizer have long argued that Beijing has been unfairly subsidising Chinese companies and stealing American intellectual property (IP) to advance its ambition. They have pointed to the sheer scale, with hundreds of billions of dollars of state aid — from state-owned banks, investment funds and other state-controlled capital pools — poured into Chinese companies protected by stealth tariff walls and non-tariff barriers with the singular purpose of growing China’s market share globally. 

New York-based think tank Council on Foreign Relations in a recent report described Made in China 2025 as a “real existential threat to US technological leadership”. Coupled with longstanding concerns that China was stealing industrial and technology IP from the US, Japan, Europe and Korea, developed nations now want to stop its advance in its tracks by using Made in China 2025 as leverage. 

For its part, Beijing has maintained that the plan was just an internal development roadmap clearly in line with China’s World Trade Organization obligations. In its attempts to avoid prohibitive tariffs that might cripple key Chinese manufacturers, China is now preparing to delay the initiative and working on a replacement. The Wall Street Journal reported on Dec 12 that the top planning agency and senior policy advisers to Xi are currently drafting a replacement to the 2025 blueprint that could be unveiled early in the new year. Until now, China has been fairly flexible in the negotiations over reducing its huge trade deficit with the US. It has also shown willingness to improve IP protection, but has been very firm on its industrial policy, which has long been viewed as non-negotiable. If it is indeed now ready to make concessions on industrial policy such as Made in China 2025, it will remove the last major stumbling block towards a comprehensive trade deal.

So how much will China concede? Veteran China watchers say while we are likely to see a “temporary change of description” of the 2025 plan, mainly for pragmatic reasons, it is highly unlikely the country will completely abandon its goal to become a tech powerhouse. US officials have been sceptical about China’s willingness to back down from its global technology ambitions. While Beijing has been playing down Made in China 2025 since trade tensions first flared up early this year, it has been pushing ahead with its state-driven industrial policies.

One key concession is likely to be the dropping of the numerical targets for market share by Chinese companies. “This would be trivial because such ‘targets’ either do not exist in the official plan or are merely hopes rather than mandates,” says Jay Huang, tech analyst at Sanford C Bernstein in Hong Kong. Huang notes that some think tanks in their analysis have mentioned market share targets, and media liberally quoting the target figures have led to confusion in Washington that they are official government targets. Another policy change would be significantly reducing supply-side subsidies such as direct government grants as well as cheap land and materials to Chinese industrial companies, particularly state-owned enterprises. This would help level the playing field between state companies, private Chinese firms and foreign companies.

Who will be affected?

Who might suffer if Beijing does make big concessions on industrial policy to Washington to avoid an escalation of tariffs? Huang says heavily subsidised industries and players such as robot makers Estun Automation and Siasun Robot & Automation Co, and state-owned enterprises that rely on strong support from the government such as Wuhan Raycus Fiber Laser Technologies, may be among the firms that are likely to see their subsidies disappear. Moreover, sectors with high artificial barriers to foreign entry like railway and power transmission equipment may also suffer. 

One sector that might escape more or less unscathed is semiconductors, where China has already poured in tens of billions of dollars and now has built sufficient technology in key segments to grow on its own. Beijing had set aside up to US$130 billion ($178 billion) for capital expenditure in semiconductor design and manufacturing of memory chips as well as customised chips between 2017 and 2025 as part of Made in China 2025. The idea was to nearly quadruple the country’s semiconductor industry revenue from US$48 billion in 2015 to US$184 billion in 2030.

In other areas, China might be able to forge ahead without the need for an overly ambitious industrial policy and high tariff walls. In a recent report, US investment bank Morgan Stanley noted that Swiss equipment maker ABB sources locally nearly 90% of the parts it needs to make transformers, electrical equipment and robots in China. If ABB can make robots in China with mostly Chinese materials, Chinese companies can do the same.

By making some concessions on the 2025 blueprint, Beijing probably will be able to retain access to the US talent pool even if the White House trade hawks restrict it from accessing key technologies and clamp down hard on any perceived IP theft. In recent years, Chinese companies have boosted their R&D footprint in the US, particularly in the Silicon Valley, luring away talents from tech giants such as Apple, Facebook, Google’s parent AlphabetTesla and Chinese firms have been particularly interested in boosting their capabilities in artificial intelligence, robotics, cloud services and driverless cars. Alibaba Group HoldingTencent HoldingsBaidu, content platform Toutiao’s owner ByteDance and ride-sharing firm Didi Chuxing have boosted recruitment at their US R&D centres in California.

The real problem with Made in China 2025 is that as a blueprint, it was just badly sold to the world at large. The ambitious industrial policy somehow came to be seen as a plan for global dominance. Competitors do not like to hear that they will soon be dominated by another country. Yet even in high-tech manufacturing, which accounts for just under 13% of its total industrial value-add, China remains a minnow, for now.  Indeed, by any yardstick, the country remains way short of its audacious 2025 goals.

Assif Shameen is a technology writer based in North America

This story appears in The Edge Singapore (Issue 862, week of Dec 24) which is on sale now. Subscribe here