How China has moved so far ahead in industrial policy

How China has moved so far ahead in industrial policy

For more than half a century, concerns about oil shortages or a damaged climate have pushed governments to invest in alternative energy sources.

In the 1970s, President Jimmy Carter installed solar panels on the roof of the White House as a symbol of his commitment to developing solar energy. In the 1990s, Japan offered homeowners groundbreaking subsidies for the installation of photovoltaic panels. And in the 2000s, Germany developed an innovative program that guaranteed consumers who adopted a solar energy system that they would sell their electricity at a profit.

But no country has come close to its size and tenacity Chinas support. The proof is in production: by 2022, Beijing was responsible for 85 percent of all investments in clean energy production in the world, according to the International Energy Agency.

Now the United States, Europe and other wealthy countries are frantically trying to catch up. Hoping to right past industrial policy missteps and learn from China's successes, they are spending vast sums subsidizing homegrown companies while also trying to block competing Chinese products. They have made modest progress: Last year, the energy agency said, China's share of investment in new clean energy factories fell to 75 percent.

The problem for the West, however, is that of China industrial dominance is backed by decades of experience using the power of a one-party state to take over all government and banking power while fueling frenetic competition among private companies.

China's unprecedented production of solar panels and electric vehicles is based on previous development of the chemical, steel, battery and electronics industries, as well as major investments in railways, ports and highways.

From 2017 to 2019, the country spent a whopping 1.7 percent of its gross domestic product on industrial support, more than twice as much as any other country, according to a analysis from the Center for Strategic and International Studies.

That spending included cheap loans from state-owned banks and cheap land from provincial governments, with little expectation that the companies they helped would make immediate profits.

And it was coupled with what the United States and other countries have argued: China's willingness to circumvent international trade agreements, engage in intellectual property theft and use forced labor.

All this has helped put China today in a position to flood rival countries with cheap electric cars, solar cells and lithium batteries, as consumers in the rich world increasingly turn to green technology.

For example, China now controls more than 80 percent of global production at every step of solar panel manufacturing.

“There are enormous economies of scale to be had by going big as China did,” said Gregory Nemet, a professor of public policy at the University of Wisconsin who has studied the global solar industry. When the investments resulted in overcapacity, suppressing the profitability of Chinese companies, Beijing was willing to compensate for the losses.

President Biden and European leaders are determined to develop their country's manufacturing capacity in advanced technologies such as semiconductors, electric vehicles and batteries, in part by adopting some of China's tactics to fuel industries.

China's rise to dominate key global manufacturing sectors has demonstrated the potential and power of national industrial policy, said Jennifer Harris, a former Biden aide who now heads the William and Flora Hewlett Foundation's Economy and Society Initiative.

“Was it wasteful? Absolutely,” she said. “Did it work? Absolute.”

Mr Biden and the heads of European governments are more willing to take Beijing to task for what they say illegal activities such as deliberately subsidizing excess production and then dumping underpriced goods in other countries.

Beijing denies breaking trade rules and says its vast industrial capacity is a sign of success. Xi Jinping, China's top leader, said this month that China had increased the global supply of goods and eased international inflationary pressures while helping the world fight climate change.

Mr. Biden said this month that he would do so impose tariffs up to 100 percent on the import of Chinese green technologies, including electric vehicles. The goal is to further deny China an opening in America.

European officials are expected to impose their own tariffs soon – despite warnings from some economists and environmentalists that the measures will slow progress toward meeting clean energy goals. Europe has become more concerned about security issues as China has shifted its geopolitical stance toward Russia and Iran.

The West's embrace of industrial policy deviates from the ideology of open markets and minimal government intervention that the United States and its allies previously advocated.

Policy largely disappeared as a result of the energy crises of the 1970s reversed when Ronald Reagan was elected president in 1980. Even the solar panels installed on the White House during the Carter administration were removed.

With the exception of certain safety-related industries, the United States has adopted the position that an unfettered market always knows best.

“If the end result was that you had to rely on other countries for important parts, that was OK,” said Brad Setser, a senior fellow at the Council on Foreign Relations.

Joseph Stiglitz, an economist at Columbia University, said the United States has long lacked a broader industrial policy and a coordinated strategy.

“Even the Democrats were afraid to take on a more aggressive role in government,” he said, “and I think that was clearly a big mistake with long-term consequences.”

From the perspective of some Chinese economists, complaints about unfairness from the United States and Europe are a sign of the failure of their own governments.

“The West's decision to adopt neoliberal economic policies was a strategic mistake, which led to the deindustrialization of their economies and created opportunities for China,” said Zheng Yongnian, professor at the Chinese University of Hong Kong.

Whatever mistakes have been made, political leaders in the United States say they are determined not to repeat them.

Last year, the United States and the European Union made “significant progress” in clean energy technology, the International Energy Agency.

And the Biden administration's multibillion-dollar program is one of the most comprehensive applications of industrial policy in American history.

Mr. Biden's tariffs are a targeted escalation of a U.S. trade offensive against China that began under former President Donald J. Trump. Mr. Trump imposed tariffs on imported goods from China worth more than $350 billion a year and drew retaliatory tariffs from Beijing. Mr. Biden has kept those tariffs in place, added or increased them on clean energy and erected new trade barriers with Beijing, including denying China access to advanced semiconductors from the United States.

Mr. Biden's trade agenda is “very, very aggressive,” said David Autor, an economist at the Massachusetts Institute of Technology who has extensively documented the effects of trade with China on the U.S. economy, including factory job losses.

He said there are crucial differences between Mr Biden's trade strategy and Beijing's as both countries seek to lead the clean energy race.

China was more focused on sending cheap exports to global markets, Mr. Autor said, and preventing foreign companies from dominating China's domestic markets.

Mr. Biden, he said, is more focused on keeping imports out of China and denying China access to some key American technologies, such as advanced semiconductors.

At a meeting last week in Italy of the Group of Seven finance ministers, leaders from both sides of the Atlantic warned that the United States and Europe must coordinate their protectionism and their subsidies if they hope to catch Beijing in the race to dominate key industries.

“Excess capacity threatens the viability of businesses around the world, including in emerging markets,” Treasury Secretary Janet L. Yellen said Thursday.

“It is critical,” she added, “that we and the growing number of countries that have identified this as a problem present a clear and united front.”