State-led Development

Short-term Gains for Long-term Losses

Every student in a macro-economics class learns that developing nations may benefit from a measure of economic protectionism before they gradually open up to the outside world. China’s World Trade Organization (WTO) accession agreement did just that and allowed China to protect businesses while they were still in their infancy. However, after 17 years, Chinese companies have become so competitive that their long-term health is being hindered by protectionism and state aid. Unfortunately, in China we still see the significant use of state support and state aid to pursue goals laid out by Chinese authorities. The goals which have the largest impact on European businesses are the Belt and Road Initiative (BRI), the acquisition of foreign technology and the creation of powerful state-owned enterprises (SOEs).

The BRI is an undeniably ambitious and potentially world changing project that is attempting to knit together the vast trade network China has created by investing in foreign infrastructure and providing capital for development opportunities in the surrounding region. However, there are concerns over the transparency and fairness of the tendering process, and questions have been raised by European Chamber members on procurement. At the Bo’ao Forum, President Xi Jinping promised that China would soon accede to the WTO’s Government Procurement Agreement (GPA). Using the same standards found in the GPA would help China implement the BRI more effectively, while showing it is adhering to the principles of free trade.

The most frequently cited worry when businesses discuss Chinese state-led development is China Manufacturing 2025 (CM2025). The Chinese Government outlining a plan to advance the domestic economy is not inherently problematic. However, like the BRI, the policy’s opaqueness and the tools used to generate market gains, such as subsidies, give an unfair advantage to domestic firms. These methods that are employed by CM2025 run the risk of creating overcapacity. In order to fight industrial inefficiency, China instead must ensure openness and access to global supply chains.

Rather than cherry-picking the advancement of certain technologies, the government should establish benchmarks for the market. For example, if a government wants to cut back on automobile pollution it should establish fuel efficiency goals or emission limits rather than forcing automakers to abide by a particular technical roadmap. By not having to conform to these preconceived ideas, auto manufacturers could tackle a problem by crafting a novel and innovative solution.

Acquiring technological competency is a perfectly legitimate practice for any privately-owned enterprise. However, problems arise when the acquisition is opaque and questions of hidden state-led financing are raised. To clear up any misunderstanding when acquiring new technology, it is important to declare state support and ensure that any purchase follows internationally accepted norms on trade – such as the ones put forth by the Organisation for Economic Co-operation and Development.

While the BRI and state-led acquisitions are problematic for European businesses in China, the most important issue for many in the Chinese market is state aid. While some subsidies are given to SOEs for use in tackling domestic issues, using these businesses to address social ills is outdated. A more appropriate method of dealing with social ills is to have funds directly put to use in tackling problems, rather than funnelling money through market players. By removing the social role from SOEs, these businesses would be forced to compete equally alongside their privately-owned counterparts.

State-led industrial policy is not inherently problematic, as other governments have set benchmarks that pushed industrial innovation, created infrastructure projects and provided public goods. However, some of the issues foreign businesses have with China’s current state-led strategy is its lack of transparency, the restrictions on businesses’ ability to innovate and unequal treatment in the market.
This issue of EURObiz examines how the Chinese Government is directing economic development, which presents a series of opportunities and challenges for European businesses operating both in and outside China. By better understanding this issue, your business can hopefully be spared any confusion from having to navigate this increasingly complicated business environment