Treasury Secretary Steven Mnuchin and an all-star U.S. trade delegation are in China this week to talk about the proposed $150 billion of U.S. tariffs on Chinese goods — and Beijing’s counter-tariffs on U.S. autos, airplanes and soybeans.
The U.S.-China trade imbalance — and record $375 billion U.S. deficit in goods trade in 2017 — looms large behind the threat of a trade war between the world’s two largest economies. But President Trump’s complaints also extend to Beijing’s Made in China 2025 program, an industrial upgrading strategy that aims to shift China’s economy into higher value-added manufacturing sectors, such as robotics, aerospace and energy-saving vehicles.
What is Made in China 2025, and why is it getting so much attention now? Here are four things to know.
1. China wants to compete in advanced manufacturing
The stated objective of this program, which was released in 2015, is for China to become a major competitor in advanced manufacturing, a sector dominated by high-income, developed countries such as United States. To date, China has relied on manufacturing and exporting basic consumer goods like clothing, shoes and consumer electronics to drive the country’s growth. In these lower-value, low-wage sectors, China chiefly competes with other developing countries like Mexico, Brazil, South Africa and Taiwan.
But to escape the middle-income trap that has plagued many developing countries, China needs to move toward high-tech industries. That’s where the Made in China 2025 strategy comes in.
Made in China 2025 involves government subsidies, heavy investments in research and innovation, and targets for local manufacturing content. It also builds on earlier government policies encouraging or requiring foreign companies seeking to access the Chinese market to enter into joint ventures with, and transfer technology to, domestic firms.
2. This is a fairly standard industrialization strategy
Trump argues that Made in China 2025 unfairly disadvantages U.S. companies. But these policies aren’t unique to China — they are standard tools for developing countries playing “catch-up” with the richer, industrialized West.
Other late bloomers — think Japan and the East Asian Tigers of South Korea, Taiwan, Hong Kong and Singapore — used similar policies to foster economic growth and raise incomes. The principle today is also straightforward, from Beijing’s perspective: If foreign multinationals are going to reap large profits from producing and selling goods in the massive Chinese market, then the country should be able to harness that investment to aid its own national development.
Advanced industrialized states, including the United States, relied on state intervention and protectionist policies during their own processes of economic development. The United States used tariffs and subsidies to foster the growth of infant industries, aggressively adopted technology from more advanced countries and strongly regulated foreign investment.
As the world’s second-largest economy, China is now a major economic power but remains a developing country. Average per capita income is just $8,000 compared to $56,000 in the United States. Although China has achieved remarkable success in fostering economic development and reducing poverty, it still faces immense challenges in boosting incomes to anywhere close to the level of advanced economies.
3. Made in China competes with Made in America
China’s continued economic development will bring the country increasingly into direct competition with the United States, which is why Trump has explicitly stated the proposed U.S. tariffs are designed to impede the Made in China 2025 program. But this strategy is unlikely to be effective and risks undermining rather than boosting U.S. manufacturing.
Most of the Made in China 2025 advanced industries are still in development and not yet exporting to the United States. China wants to develop its aviation industry, for example, but is many years away from developing commercial jets that could potentially compete with Boeing. For now, China remains a big buyer of Boeing aircraft.
Currently, the United States imports only limited high-tech products from China — but does import inputs used to manufacture high-tech goods in the United States. The United States does not buy aircraft from China, but imports parts that are used to manufacture aircraft in the United States — and then exported to China and other foreign buyers.
The bottom line is that a proposed 25 percent tariff on “high-tech” imports from China, including aircraft and parts, will harm the U.S. aircraft industry by increasing the cost of inputs and making Boeing’s products less competitive compared to its European rival, Airbus.
4. Will U.S. tariffs actually work?
Since Trump’s tariffs concentrate on inputs, this will raise costs and reduce the competitiveness of U.S. manufacturers across a range of high-tech sectors. And if China slaps retaliatory tariffs on U.S. goods, U.S. manufacturers face the double-whammy of increased costs alongside reduced access to the Chinese market — the largest market for many U.S. exporters.
Moreover, Trump’s tariffs are unlikely to significantly disrupt China’s industrial development via the Made in China 2025 program. My research on international trade negotiations has shown that the U.S. no longer has the leverage to dictate trade terms to China. Trump’s strategy overestimates China’s dependence on the U.S. market, which accounts for just 18 percent of China’s exports — more than 80 percent of China’s exports go elsewhere.
Continuing the aircraft example, China will soon be the world’s largest civil aviation market. Chinese aircraft manufacturers initially will rely on sales to the country’s enormous domestic market; it will be many years before their exports are ready to compete in global markets. China’s aircraft manufacturers also are likely first to target other developing country markets and only much later seek to compete in advanced economies.
China’s own domestic market will provide the primary catalyst for its industrial upgrading. Even if Trump cut off access to the U.S. market entirely, it would not stop the development of China’s advanced industries.
In short, Trump’s tariffs are unlikely to achieve their stated goals. But a trade war between the two countries could rapidly spiral out of control and cause immense damage to the global economy.
Kristen Hopewell is a senior lecturer in international political economy at the University of Edinburgh. She is the author of “Breaking the WTO: How Emerging Powers Disrupted the Neoliberal Project” (Stanford University Press, 2016).