October 29, 2018 • 24 mins
The New Economy kicks off with Bloomberg reporter Kevin Hamlin’s quest for a curious text called The Green Book, a publication that supposedly provides a vivid look into the long term trade goals of China’s state-sponsored push to dominate technologies of the future. Also, Stephanie sits down with Bloomberg’s Tom Orlik to discuss whether China could possibly achieve their lofty goals, and what consequences their success—or failure—would have.
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Speaker 1 (00:01):
Hello, and welcome to the New Economy. I'm Stephanie Flander's
head of Bloomberg Economics. If you didn't know about the
New Economy Forum already, probably should. On November six, eighteen,
Bloomberg will be gathering leaders from all corners of the
world to Singapore to talk about the challenges we face
(00:22):
in a shifting global economy and how we're going to
solve them. It's the brainchild of Mike Bloomberg, so naturally
it's ambitious. It's possible the four hundred odd participants won't
solve all of the world's problems in two days, but
he's expecting them to at least make a start. There
are a bunch of critical issues on the agenda, including
global economic management, climate change, technology, and global governance. In
(00:47):
these six New Economy podcasts, I want to start a
conversation about some of those taking advantage of Bloomberg's army
of top class journalists and analysts, especially the economists and
economic reporters I have working for me at Bloomberg econom X. First,
I wanted to talk about trade. Now, for most of
my career in journalism and economics, international trade policy has
(01:10):
not been where the action was, you would put it
under the category of important, but slow moving and often
mind numbingly dull. Not anymore. Now everybody wants to talk
about trade, and not just because Donald Trump has rediscovered
the tariff. With US protectionism on one side and China's
aggressive state industrial policies on the other, neither of the
(01:31):
world's two largest economies wants to play by the rules.
The result could be a very different global trading system
and a very different global economy. I'm going to get
into some of that later with Bloomberg's chief economist Tom Wrlick,
but first, Bloomberg's China economy reporter Kevin Hamlin has been
on a curious literary quest from his office in Beijing. Okay,
(01:58):
let's go in and see what we find. This is
a big section on economics that was me looking for
a mysterious Chinese tone called the green book. I'm checking
out a lot of green books here, but none of
them so far the one that I want. This book
(02:19):
with its green cover, plays a controversial but little known
role in the trade water between China and the US
that searches books in stock. She's now checking that out.
The US Chamber of Commerce says it's a guiding hand
behind China's plan to dominate tend strategic industries of the future,
like new energy vehicles and robotics. The Chinese government that
(02:41):
denies the book has any official impact on policy. When
I started investigating the Green Book, I discovered that many
trade experts hadn't heard of it. I asked the Chinese
government to talk to me about it, but I had
a brick wall of silence. So I started trying to
find hard copy, and THEO is not in stock. They
do not have the Green Book here anyway. Let's come
(03:05):
back to my search for the Green Book a little later.
Well understand its role better if we look first at
how China and the US came to be at loggerheads
over trade. Remember the good old days when Donald Trump
and China's President she Jimping met in Florida back in
April last year. Here's what Trump had to say then,
(03:27):
the relationship developed by President She To myself, I think
he's outstanding to look forward to being together many times
in the future, and I believes very potentially Beast albums
will be going away. So how quickly things change. Here's
Trump talking about China this year. China has taken out
(03:53):
hundreds of billions of dollars a year from the United States,
and I explained to President She, we can't do that anymore.
China has become very spoiled, the European Union has become
very spoiled. Other countries have become very spoiled because they
always got a dent of whatever they wanted from the
United States. Fast forward to today, and China and the
(04:14):
US are slugging it out in a trade war. Trump
has branded China strategic competitor, and it's not just him.
Tensions over China's trading behavior started to build not long
after China join the World Trade Organization back in two
thousand and one. In the US and Europe, blue collar
workers were losing jobs because of low cost imports. Then,
(04:37):
after the global financial crisis erupted in two thousand and eight,
a backlash gathered force. In the US, blue collar workers
were angry about free trade and the impact of Chinese
competition on US jobs. Both were themes that would later
help Trump get to the White House. There was another
key factor too. When China joined the w t O,
(04:57):
negotiators assumed it would slowly open its mark gets to
foreign competition and shift to a more liberal economic model,
despite some incremental progress that fell far short of expectations.
Here's Harvard University law professor Mark Woo. People have been
aware of these issues, but there are always either an
optimism that China itself would adapt and so the problems
(05:19):
with diminished over time, or that some of us who
have been warning about this may have overblown the scale
of the problem. After She Jim Pin came to power
in China seemed to move backwards, and so Trump's focus
shifted more and more to his repeated allegations that China
plays unfair on trade. We asked Timothy Stratford, a former
(05:40):
assistant US Trade representative, to illustrate why China is often
seen as an unfair trader. But suppose you're an American
company you're planning to spend five billion dollars to build
a new plant. If you build it in China, you
have a pretty good assurance that you're going to be
able to sell your product widely throughout China and also
of course back in the US because the US has
(06:02):
an open, open market. So with your five billion dollar investment,
you'll have access to you to the largest markets in
the world. If you build the same plan in the
United States, you'll have market access in the US, but
you may not have nearly as good a market access
in China because China tends to protect its domestic manufacturers.
(06:24):
So if you build it in China, you can get
access to both markets. If you build it in the US,
the access to the China market is more problematic. And
if you're the U S government, you say, well, that
is hurting us. Something has to change. There's more. Of course,
(06:45):
the US has China forces technology transfers, provides massive government
subsidies to industry, and steals intellectual property. The final straw
is something called Made in China Plan that aims to
make China leader in ten advanced into streets now dominated
by the West. Here's Stratford on the impact Made in
China had on the US, the breadth and the specificity.
(07:11):
It seemed to put the last nail on the coffin
who was kind of a lightning rod. That that focused
all of the I mean, that really made clear what
what people were concerned about. That brings us back to
the green book. I'd heard about targets China sets where
(07:31):
it's companies to dominate some industries, and I knew these
targets infuriate the US, but Made in China has very
few targets. That's when a contact told me to find
the Green Book. I'm looking at quite a few green books.
None of them are the one I want. Oh wait
a minute, No, that's a book on the rise and
(07:54):
decline of nations. There's another large book. It took a
couple of hours, but eventually I found it. It was
in the second bookshop. I visited the Sedan bookstore in Beijing.
That's for it. It's Made in China Major Center Technology
Breakthroughs green Book. We found it. It seems to be
(08:15):
the edition it's formerly called the Maid in China Major
Technical Roadmap. It's two ninety six pages are full of targets.
Take integrated circuits, a product crucial to making electronic devices.
The Green Book sees China taking a fifty six share
(08:36):
of the global market and the domestic market by If
such targets are met, they would virtually lock foreign supplier
out of China's market, and Chinese companies would make huge
gains against foreign companies in global markets. The Green Book
was first published in October fifteen by a body called
the National Manufacturing Strategy Advisory Committee. Than four hundred high
(09:01):
ranking industry representatives and specialists and twenty five academics contributed
to it. Former Vice Premier marka I attended the first
meeting of the committee that produces the book. The establishment
of the Advisory Committee was designed to improve policymaking, Mas
said at the time. China says the Green Books targets
are unofficial, but the US Chamber of Commerce beliefs the
(09:23):
book exists to keep industrial targets out of official documents
where they would attract more scrutiny from foreign governments. Foreign
companies may already be losing business because of the targets.
This is Jake Parker, vice president for Operations of the
U S. China Business Council in Beijing. The Chinese government
name contextualizing as guiding documents, but what we're seeing is
(09:45):
those targets are being met, and we're seeing increased reports
of US companies being excluded from a certain Chinese domestic
government resuremental processes or tenders because those tenders have an
increasing requirements for of domestic content requirement thresholds. The greatest
risk for foreign companies, though, is that targets trigger another
(10:09):
round of massive overcapacity from China that might trigger repeating
on a bigger scale what happened in the solar and
wind power industries before numerous foreign firms in those sectors
were wiped out by Chinese competitors backed by government subsidies
and cheap funding from state owned banks. China says there's
nothing to worry about. It promises that made in China
(10:31):
policies will be applied equally to both local and foreign
companies in China. But many foreign experts share the concerns
of Scott Kennedy, the U S China expert at the
Center for Strategic and International Studies in Washington, The chances
of creating massive waste across the system are just monumental.
The Chinese, though, may just not care about that waste
(10:51):
and believe that increased market share and dominance of the
industries will eventually allow them to recoup the profits. I've
been listening to that with Bloomberg chief economist Tom Orlick,
who has just moved to Washington for US after eleven
years in Beijing. So, Tom, we seem to have gone
(11:12):
from miles little red book to the Green book, leaving
aside Kevin's epic quest for that. You know, just as
a practical matter, what probability do you put on China
actually meeting these targets. I mean, governments say all the
time they want to do WYE and Z and dominate
that industry. We don't normally expect them to actually do it.
They're going to get there in some important cases. In
(11:33):
other important cases they're not going to get there. Um. Yes,
all countries in the world have a very similar set
of plans. They want to be good in AI, they
want to be good in bio farmer, they want to
be good in nano technology. China doesn't differ in that respect.
Where China differs is that they have some unique resources
that they can bring to bear on the problem. China
(11:55):
has the second biggest and the fastest growing market in
the world. All companies US, European, Japanese have to be
in the China market if they want to have a
successful global future. That gives China enormous leverage which it
can bring to bear and which it uses to engineer
technology transfer from leading companies in the rest of the
(12:16):
world to join venture partners in China. China state ownership
is not intrinsically an advantage in terms of innovation. Indeed,
it's probably a disadvantage in terms of innovation. But when
you have a state and banking system, and you have
state and enterprises and important sectors, you've also got an
important engine for catching up. You can provide the funding,
(12:38):
you can provide the technicians, you can provide the industrial
backbone for not innovating past the technology frontier, but rapidly
catching up to the technology frontier. And what we've seen
twenty years ago in areas like steel, more recently in
areas like solar panels, is that that combination of resources
can be formidably effective. When I was learning economics and
(13:01):
what I get was the heyday of the Washington Consensus,
I suspect, you know, the one thing you was drilled
into is governments can't pick winners. And they used to say,
you know, losers can pick governments. You know, these companies
would come and ask for subsidies, and usually they were
a bad bet. But governments shouldn't get into the business
of picking particular technologies and particular companies. And yet this
(13:21):
is exactly what China's planning to do and has already
been quite successful doing when we look at places like
South Korea and other things. I mean, these kind of
directed lending programs can be successful, but they can also
waste a lot of money and lead to a lot
of As Kevin said, you know, you've got now a
lot of industries with excess capacity and and and excess debts.
(13:44):
Do we think there are going to be a lot
of a lot of wastage out of this? Is it
actually going to help their development in the long run?
I kind of would turn it on its head a
little bit, Stephanie. Where I think about China's wasted resources
is where they are plowing credit to old line industries
and bridges to nowhere infrastructure projects. With the China Plan Um,
(14:10):
what they're trying to do is to ply money into
projects which push forward the technology frontier in China. So, yes,
they're going to have some hits and they're going to
have some misses. But putting money into robotics, putting money
into trying to develop semiconductor foundaries, putting money into trying
to develop new energy vehicles, your chances of boosting productivity
(14:31):
over the long run with those type of investments is
going to be much higher than continuing to bankroll the
debts of an old steel firm, or building lavish new
government offices for some municipality. Okay, so let's think about
the impact on the rest of the world. I mean,
you've said you started off as a classic economists saying
(14:52):
that they succeed in some areas and not in other areas,
which is, you know, phenomenally unhelpful for the industries in
those sectors. I'm sure for the companies in those sectors.
But I know you have done some work for for
for us looking into who would be the biggest losers,
at least by country if China succeeded in these goals
and how did what were the results of that? I
(15:13):
think we can we can talk about that. We can
also I can also try and add a tiny bit
of value for our corporate customers stung by your rebuke. UM. So,
I think one way to think about it is how
high are the technology barriers, UM and how large are
the potential economies of scale in sectors where there are
relatively low technology barriers and there are large economies from
(15:36):
scale from people who can make big investments, China is
going to have a huge advantage. We see that in steel,
for example, low barrier to entry, big economies of stay
at scale. China invested and then they dominated semi conductors,
very high technology barriers. China has made billions of dollars
of investments in trying to catch up with Taiwan and
(15:57):
the United States in terms of semiconductor fabrication, and they've
not done it. UM. So I think one way of
thinking about the outlook on a sector by sector basis
is how high is your how how wide is your moat,
how high is your technology barrier, and what are the
economies of scale in your sector? UM. Coming back to
your question on a sort of country by country analysis, UM,
(16:19):
we ran the numbers. We looked at sectors covered in
the plan, and we looked at which countries around the
world have the biggest presence in those sectors. So who
has the most to lose? The somewhat surprising a conclusion
is actually the US doesn't have much to lose. The
US isn't doing much in the China sectors. Maybe aircraft
(16:41):
would be the exception. The countries with the most to
lose UM career stands up that is near the top
of the list. Germany is near the top of the list. UM.
So the sort of somewhat ironic conclusion is that the
US is America first trade policy is actually potentially doing
a big favor for other more vulnerable European and Asian economies.
(17:02):
But I guess the the US counter to that would be, well,
we may not be in those sectors now, but we
could have been trying to compete in these sectors. We
could have laid out our own plan. I think President
Obama even tried to have his own plan for sectors
that they should get into, and China is sort of
stealing that from under them. I think. I think that's
(17:24):
certainly true. What I also think it goes to, though,
is the relationship between the trade and the geopolitics. Right. Um,
the US might not be the country that loses out
if China makes big strides in new energy efficient vehicles
or robotics or the parts which go into mobile phones, um.
(17:44):
But the U s does fear the consequences of arising
China China that overtakes the United States as the world's
biggest economy um, And they would feel those consequences even
more if China was not only the world's biggest economy
but the biggest supplier, the monopoly supplier of all of
the parts which went into the product which US companies
(18:05):
currently currently produced. You identify a lot of Asian exporting
economies on those lists of potential losers in robotics and
other areas you mentioned some Is this going to be
destabilizing for the region if they get this kind of dominance?
Is that how you know the Japan's and the careers
is that do they feel that this is a very
(18:27):
aggressive attack on their market? So far, Stephanie, I mean
the rise of China has been a net positive for
the Asia region in terms of the economy. China has
provided the assembly point for the screens, semiconductors, batteries that
(18:48):
are produced in Japan, Korea, Taiwan snapped together in the
factories on the Pearl River Delta and then shipped off
as smartphones to consumers in the in the U S
and Europe. UM what the made in China plan represents
is sort of a threat to that win win situation. UM.
China is saying, you know what, We're not content just
(19:11):
to be the place where these parts snapped together. We
want to be the place where they're designed and manufactured.
And if that happens, then you see the competive advantage
of your um Japanese, Korean and Taiwanese firms being chipped away,
more of the value added being captured by China, and
of course that would be a risk to to growth
in those Asian neighbors. Are they going to fight back?
(19:32):
I mean, we're somewhat assuming that they're going to be
able to move forward in these markets without a big
backlash for the moment, anyway, we've we've been saying that.
But do you think we're now at this later stage
of Chinese development? You know, people can see China coming,
They're going to be much less generous in trade and
(19:54):
maybe even using the bto against China. Do you think
that's going to happen? Um, that the risk of signing
terribly pretentious. I think there's a game theory problem which
a little bit explains the relationship between China and other countries.
Is that the stag and the hounds problem. So you've
got a bunch of hounds surrounding a stag and they
can capture it, but only if they work together. If
(20:15):
one of them gets distracted, the stag can leap out. Um,
And that's a little bit like the relationship between China
and all of its trade partners and all of the
corporations that want to do business in China. Yes, if
the US and Taiwan and Germany and Korea and Japan
and all of the many corporations in these countries could
cooperate and come up with a coherent plan and stick
(20:37):
to that plan, that could be effective in ending force
technology transfer, for example. But the reality is that those
countries and certainly those corporations who compete with each other,
can't cooperate effectively. And what China has proved supremely effective
at doing over the last few decades, and I'm sure
will continue to be effective for doing in the decades ahead,
is providing distractions from one or the other of the
(20:59):
hounds so that they can continue to escape, continue with
their programs of technology transfer, and continue catching up to
the productivity frontier. So with that visual image in our minds,
there's a lot of countries who would panic, and certainly
companies that would panic if China succeeded, and some of
(21:21):
those really ambitious targets. On the other hand, we know
that the regime has got quite a lot vested in it,
and we might worry, given this sensitive stage in its
development that China is app we might worry about the
implications of them failing very obviously in this aggressive, ambitious plan.
So how much do they have vested in it? How
(21:42):
important is it for the stability of the regime for
them to succeed. So one one one important difference between
China and the US is obviously the political system. I
remember thinking back to the Obama Romney election. One of
the big issues in that action was an investment the
government had made in some kind of sustainable technology, and
(22:04):
that investment had failed, and the Robney camp kept hammering
the point that this was an example of government even
overreach and the Obama administration had wasted taxpayers money. Of course,
Obama went on to win the election, but this was
a kind of a point of contention and a point
which was in Romney's favor. The Chinese government wastes billions
of dollars on a daily basis um, and the Chinese
(22:25):
political system means that that isn't a problem um. And
what that means is, of course, is not good to
waste money. But when you're trying to innovate, when you're
trying to learn, wasting money is part of the process,
and China's ability to waste money without it mattering UM
in the grand scheme of things in terms of political stability,
(22:45):
I think actually is a positive in terms of their
capacity to innovate. UM. To come back to your other question,
is it better if China succeeds or is it better
if China fails. I'm afraid I'm gonna have to fall
back on another economist answer. I think either extreme is undesirable.
An extreme where China has succeeded in all of its
plans and all high value added industry is located in
(23:06):
China and the entire manufacturing based in the rest of
the world is hollowed out is clearly undesirable. UM. At
the other end of the spectrum, a scenario of total
failure by China, where China is stuck at the low
end of the value chain, continues to waste money on
steel and cement and bridges to nowhere UM, clearly that's
undesirable as well. I think ultimately where we're going to
(23:28):
come out is that China's um innate and systemic advantages
give them the edge in certain sectors. Their sectors where
the technology barrier isn't high, and where economies of scale
are large, and in other areas where the technology barrier
remains high and the economies of scale are relatively small,
(23:48):
we're going to see the US, Germany, Japan, Taiwan career
continuing to have an edge. I love your comment about
the sort of time horizons and the ability to waste money.
I think that's the one thing if, if if the
average politician in Europe or America could have one thing
from the Chinese, it would be that same ability to
(24:09):
plan over the long term and not always be thinking
about the next selection, the pesky irritations of democracy which
they have to put up with, at least for the
time being. Tom Alick, thank you very much, and we
will continue to see whether any of those targets in
that Green book are met. Do you have the Green
Book by any chance? I'm going to call Kevin and
(24:30):
ask him to photo copy it for me. Thanks very much,
Thanks Stephanie, thanks for listening to The New Economy. Today's
episode was reported by Kevin Hamlin with editor Jeff Black
and produced by Magnus Hendrickson, with special thanks to Tom Warlick.
Francesca Levy is the head of Bloomberg podcast,
Hello, and welcome to the New Economy. I'm Stephanie Flander's
head of Bloomberg Economics. If you didn't know about the
New Economy Forum already, probably should. On November six, eighteen,
Bloomberg will be gathering leaders from all corners of the
world to Singapore to talk about the challenges we face
(00:22):
in a shifting global economy and how we're going to
solve them. It's the brainchild of Mike Bloomberg, so naturally
it's ambitious. It's possible the four hundred odd participants won't
solve all of the world's problems in two days, but
he's expecting them to at least make a start. There
are a bunch of critical issues on the agenda, including
global economic management, climate change, technology, and global governance. In
(00:47):
these six New Economy podcasts, I want to start a
conversation about some of those taking advantage of Bloomberg's army
of top class journalists and analysts, especially the economists and
economic reporters I have working for me at Bloomberg econom X. First,
I wanted to talk about trade. Now, for most of
my career in journalism and economics, international trade policy has
(01:10):
not been where the action was, you would put it
under the category of important, but slow moving and often
mind numbingly dull. Not anymore. Now everybody wants to talk
about trade, and not just because Donald Trump has rediscovered
the tariff. With US protectionism on one side and China's
aggressive state industrial policies on the other, neither of the
(01:31):
world's two largest economies wants to play by the rules.
The result could be a very different global trading system
and a very different global economy. I'm going to get
into some of that later with Bloomberg's chief economist Tom Wrlick,
but first, Bloomberg's China economy reporter Kevin Hamlin has been
on a curious literary quest from his office in Beijing. Okay,
(01:58):
let's go in and see what we find. This is
a big section on economics that was me looking for
a mysterious Chinese tone called the green book. I'm checking
out a lot of green books here, but none of
them so far the one that I want. This book
(02:19):
with its green cover, plays a controversial but little known
role in the trade water between China and the US
that searches books in stock. She's now checking that out.
The US Chamber of Commerce says it's a guiding hand
behind China's plan to dominate tend strategic industries of the future,
like new energy vehicles and robotics. The Chinese government that
(02:41):
denies the book has any official impact on policy. When
I started investigating the Green Book, I discovered that many
trade experts hadn't heard of it. I asked the Chinese
government to talk to me about it, but I had
a brick wall of silence. So I started trying to
find hard copy, and THEO is not in stock. They
do not have the Green Book here anyway. Let's come
(03:05):
back to my search for the Green Book a little later.
Well understand its role better if we look first at
how China and the US came to be at loggerheads
over trade. Remember the good old days when Donald Trump
and China's President she Jimping met in Florida back in
April last year. Here's what Trump had to say then,
(03:27):
the relationship developed by President She To myself, I think
he's outstanding to look forward to being together many times
in the future, and I believes very potentially Beast albums
will be going away. So how quickly things change. Here's
Trump talking about China this year. China has taken out
(03:53):
hundreds of billions of dollars a year from the United States,
and I explained to President She, we can't do that anymore.
China has become very spoiled, the European Union has become
very spoiled. Other countries have become very spoiled because they
always got a dent of whatever they wanted from the
United States. Fast forward to today, and China and the
(04:14):
US are slugging it out in a trade war. Trump
has branded China strategic competitor, and it's not just him.
Tensions over China's trading behavior started to build not long
after China join the World Trade Organization back in two
thousand and one. In the US and Europe, blue collar
workers were losing jobs because of low cost imports. Then,
(04:37):
after the global financial crisis erupted in two thousand and eight,
a backlash gathered force. In the US, blue collar workers
were angry about free trade and the impact of Chinese
competition on US jobs. Both were themes that would later
help Trump get to the White House. There was another
key factor too. When China joined the w t O,
(04:57):
negotiators assumed it would slowly open its mark gets to
foreign competition and shift to a more liberal economic model,
despite some incremental progress that fell far short of expectations.
Here's Harvard University law professor Mark Woo. People have been
aware of these issues, but there are always either an
optimism that China itself would adapt and so the problems
(05:19):
with diminished over time, or that some of us who
have been warning about this may have overblown the scale
of the problem. After She Jim Pin came to power
in China seemed to move backwards, and so Trump's focus
shifted more and more to his repeated allegations that China
plays unfair on trade. We asked Timothy Stratford, a former
(05:40):
assistant US Trade representative, to illustrate why China is often
seen as an unfair trader. But suppose you're an American
company you're planning to spend five billion dollars to build
a new plant. If you build it in China, you
have a pretty good assurance that you're going to be
able to sell your product widely throughout China and also
of course back in the US because the US has
(06:02):
an open, open market. So with your five billion dollar investment,
you'll have access to you to the largest markets in
the world. If you build the same plan in the
United States, you'll have market access in the US, but
you may not have nearly as good a market access
in China because China tends to protect its domestic manufacturers.
(06:24):
So if you build it in China, you can get
access to both markets. If you build it in the US,
the access to the China market is more problematic. And
if you're the U S government, you say, well, that
is hurting us. Something has to change. There's more. Of course,
(06:45):
the US has China forces technology transfers, provides massive government
subsidies to industry, and steals intellectual property. The final straw
is something called Made in China Plan that aims to
make China leader in ten advanced into streets now dominated
by the West. Here's Stratford on the impact Made in
China had on the US, the breadth and the specificity.
(07:11):
It seemed to put the last nail on the coffin
who was kind of a lightning rod. That that focused
all of the I mean, that really made clear what
what people were concerned about. That brings us back to
the green book. I'd heard about targets China sets where
(07:31):
it's companies to dominate some industries, and I knew these
targets infuriate the US, but Made in China has very
few targets. That's when a contact told me to find
the Green Book. I'm looking at quite a few green books.
None of them are the one I want. Oh wait
a minute, No, that's a book on the rise and
(07:54):
decline of nations. There's another large book. It took a
couple of hours, but eventually I found it. It was
in the second bookshop. I visited the Sedan bookstore in Beijing.
That's for it. It's Made in China Major Center Technology
Breakthroughs green Book. We found it. It seems to be
(08:15):
the edition it's formerly called the Maid in China Major
Technical Roadmap. It's two ninety six pages are full of targets.
Take integrated circuits, a product crucial to making electronic devices.
The Green Book sees China taking a fifty six share
(08:36):
of the global market and the domestic market by If
such targets are met, they would virtually lock foreign supplier
out of China's market, and Chinese companies would make huge
gains against foreign companies in global markets. The Green Book
was first published in October fifteen by a body called
the National Manufacturing Strategy Advisory Committee. Than four hundred high
(09:01):
ranking industry representatives and specialists and twenty five academics contributed
to it. Former Vice Premier marka I attended the first
meeting of the committee that produces the book. The establishment
of the Advisory Committee was designed to improve policymaking, Mas
said at the time. China says the Green Books targets
are unofficial, but the US Chamber of Commerce beliefs the
(09:23):
book exists to keep industrial targets out of official documents
where they would attract more scrutiny from foreign governments. Foreign
companies may already be losing business because of the targets.
This is Jake Parker, vice president for Operations of the
U S. China Business Council in Beijing. The Chinese government
name contextualizing as guiding documents, but what we're seeing is
(09:45):
those targets are being met, and we're seeing increased reports
of US companies being excluded from a certain Chinese domestic
government resuremental processes or tenders because those tenders have an
increasing requirements for of domestic content requirement thresholds. The greatest
risk for foreign companies, though, is that targets trigger another
(10:09):
round of massive overcapacity from China that might trigger repeating
on a bigger scale what happened in the solar and
wind power industries before numerous foreign firms in those sectors
were wiped out by Chinese competitors backed by government subsidies
and cheap funding from state owned banks. China says there's
nothing to worry about. It promises that made in China
(10:31):
policies will be applied equally to both local and foreign
companies in China. But many foreign experts share the concerns
of Scott Kennedy, the U S China expert at the
Center for Strategic and International Studies in Washington, The chances
of creating massive waste across the system are just monumental.
The Chinese, though, may just not care about that waste
(10:51):
and believe that increased market share and dominance of the
industries will eventually allow them to recoup the profits. I've
been listening to that with Bloomberg chief economist Tom Orlick,
who has just moved to Washington for US after eleven
years in Beijing. So, Tom, we seem to have gone
(11:12):
from miles little red book to the Green book, leaving
aside Kevin's epic quest for that. You know, just as
a practical matter, what probability do you put on China
actually meeting these targets. I mean, governments say all the
time they want to do WYE and Z and dominate
that industry. We don't normally expect them to actually do it.
They're going to get there in some important cases. In
(11:33):
other important cases they're not going to get there. Um. Yes,
all countries in the world have a very similar set
of plans. They want to be good in AI, they
want to be good in bio farmer, they want to
be good in nano technology. China doesn't differ in that respect.
Where China differs is that they have some unique resources
that they can bring to bear on the problem. China
(11:55):
has the second biggest and the fastest growing market in
the world. All companies US, European, Japanese have to be
in the China market if they want to have a
successful global future. That gives China enormous leverage which it
can bring to bear and which it uses to engineer
technology transfer from leading companies in the rest of the
(12:16):
world to join venture partners in China. China state ownership
is not intrinsically an advantage in terms of innovation. Indeed,
it's probably a disadvantage in terms of innovation. But when
you have a state and banking system, and you have
state and enterprises and important sectors, you've also got an
important engine for catching up. You can provide the funding,
(12:38):
you can provide the technicians, you can provide the industrial
backbone for not innovating past the technology frontier, but rapidly
catching up to the technology frontier. And what we've seen
twenty years ago in areas like steel, more recently in
areas like solar panels, is that that combination of resources
can be formidably effective. When I was learning economics and
(13:01):
what I get was the heyday of the Washington Consensus,
I suspect, you know, the one thing you was drilled
into is governments can't pick winners. And they used to say,
you know, losers can pick governments. You know, these companies
would come and ask for subsidies, and usually they were
a bad bet. But governments shouldn't get into the business
of picking particular technologies and particular companies. And yet this
(13:21):
is exactly what China's planning to do and has already
been quite successful doing when we look at places like
South Korea and other things. I mean, these kind of
directed lending programs can be successful, but they can also
waste a lot of money and lead to a lot
of As Kevin said, you know, you've got now a
lot of industries with excess capacity and and and excess debts.
(13:44):
Do we think there are going to be a lot
of a lot of wastage out of this? Is it
actually going to help their development in the long run?
I kind of would turn it on its head a
little bit, Stephanie. Where I think about China's wasted resources
is where they are plowing credit to old line industries
and bridges to nowhere infrastructure projects. With the China Plan Um,
(14:10):
what they're trying to do is to ply money into
projects which push forward the technology frontier in China. So, yes,
they're going to have some hits and they're going to
have some misses. But putting money into robotics, putting money
into trying to develop semiconductor foundaries, putting money into trying
to develop new energy vehicles, your chances of boosting productivity
(14:31):
over the long run with those type of investments is
going to be much higher than continuing to bankroll the
debts of an old steel firm, or building lavish new
government offices for some municipality. Okay, so let's think about
the impact on the rest of the world. I mean,
you've said you started off as a classic economists saying
(14:52):
that they succeed in some areas and not in other areas,
which is, you know, phenomenally unhelpful for the industries in
those sectors. I'm sure for the companies in those sectors.
But I know you have done some work for for
for us looking into who would be the biggest losers,
at least by country if China succeeded in these goals
and how did what were the results of that? I
(15:13):
think we can we can talk about that. We can
also I can also try and add a tiny bit
of value for our corporate customers stung by your rebuke. UM. So,
I think one way to think about it is how
high are the technology barriers, UM and how large are
the potential economies of scale in sectors where there are
relatively low technology barriers and there are large economies from
(15:36):
scale from people who can make big investments, China is
going to have a huge advantage. We see that in steel,
for example, low barrier to entry, big economies of stay
at scale. China invested and then they dominated semi conductors,
very high technology barriers. China has made billions of dollars
of investments in trying to catch up with Taiwan and
(15:57):
the United States in terms of semiconductor fabrication, and they've
not done it. UM. So I think one way of
thinking about the outlook on a sector by sector basis
is how high is your how how wide is your moat,
how high is your technology barrier, and what are the
economies of scale in your sector? UM. Coming back to
your question on a sort of country by country analysis, UM,
(16:19):
we ran the numbers. We looked at sectors covered in
the plan, and we looked at which countries around the
world have the biggest presence in those sectors. So who
has the most to lose? The somewhat surprising a conclusion
is actually the US doesn't have much to lose. The
US isn't doing much in the China sectors. Maybe aircraft
(16:41):
would be the exception. The countries with the most to
lose UM career stands up that is near the top
of the list. Germany is near the top of the list. UM.
So the sort of somewhat ironic conclusion is that the
US is America first trade policy is actually potentially doing
a big favor for other more vulnerable European and Asian economies.
(17:02):
But I guess the the US counter to that would be, well,
we may not be in those sectors now, but we
could have been trying to compete in these sectors. We
could have laid out our own plan. I think President
Obama even tried to have his own plan for sectors
that they should get into, and China is sort of
stealing that from under them. I think. I think that's
(17:24):
certainly true. What I also think it goes to, though,
is the relationship between the trade and the geopolitics. Right. Um,
the US might not be the country that loses out
if China makes big strides in new energy efficient vehicles
or robotics or the parts which go into mobile phones, um.
(17:44):
But the U s does fear the consequences of arising
China China that overtakes the United States as the world's
biggest economy um, And they would feel those consequences even
more if China was not only the world's biggest economy
but the biggest supplier, the monopoly supplier of all of
the parts which went into the product which US companies
(18:05):
currently currently produced. You identify a lot of Asian exporting
economies on those lists of potential losers in robotics and
other areas you mentioned some Is this going to be
destabilizing for the region if they get this kind of dominance?
Is that how you know the Japan's and the careers
is that do they feel that this is a very
(18:27):
aggressive attack on their market? So far, Stephanie, I mean
the rise of China has been a net positive for
the Asia region in terms of the economy. China has
provided the assembly point for the screens, semiconductors, batteries that
(18:48):
are produced in Japan, Korea, Taiwan snapped together in the
factories on the Pearl River Delta and then shipped off
as smartphones to consumers in the in the U S
and Europe. UM what the made in China plan represents
is sort of a threat to that win win situation. UM.
China is saying, you know what, We're not content just
(19:11):
to be the place where these parts snapped together. We
want to be the place where they're designed and manufactured.
And if that happens, then you see the competive advantage
of your um Japanese, Korean and Taiwanese firms being chipped away,
more of the value added being captured by China, and
of course that would be a risk to to growth
in those Asian neighbors. Are they going to fight back?
(19:32):
I mean, we're somewhat assuming that they're going to be
able to move forward in these markets without a big
backlash for the moment, anyway, we've we've been saying that.
But do you think we're now at this later stage
of Chinese development? You know, people can see China coming,
They're going to be much less generous in trade and
(19:54):
maybe even using the bto against China. Do you think
that's going to happen? Um, that the risk of signing
terribly pretentious. I think there's a game theory problem which
a little bit explains the relationship between China and other countries.
Is that the stag and the hounds problem. So you've
got a bunch of hounds surrounding a stag and they
can capture it, but only if they work together. If
(20:15):
one of them gets distracted, the stag can leap out. Um,
And that's a little bit like the relationship between China
and all of its trade partners and all of the
corporations that want to do business in China. Yes, if
the US and Taiwan and Germany and Korea and Japan
and all of the many corporations in these countries could
cooperate and come up with a coherent plan and stick
(20:37):
to that plan, that could be effective in ending force
technology transfer, for example. But the reality is that those
countries and certainly those corporations who compete with each other,
can't cooperate effectively. And what China has proved supremely effective
at doing over the last few decades, and I'm sure
will continue to be effective for doing in the decades ahead,
is providing distractions from one or the other of the
(20:59):
hounds so that they can continue to escape, continue with
their programs of technology transfer, and continue catching up to
the productivity frontier. So with that visual image in our minds,
there's a lot of countries who would panic, and certainly
companies that would panic if China succeeded, and some of
(21:21):
those really ambitious targets. On the other hand, we know
that the regime has got quite a lot vested in it,
and we might worry, given this sensitive stage in its
development that China is app we might worry about the
implications of them failing very obviously in this aggressive, ambitious plan.
So how much do they have vested in it? How
(21:42):
important is it for the stability of the regime for
them to succeed. So one one one important difference between
China and the US is obviously the political system. I
remember thinking back to the Obama Romney election. One of
the big issues in that action was an investment the
government had made in some kind of sustainable technology, and
(22:04):
that investment had failed, and the Robney camp kept hammering
the point that this was an example of government even
overreach and the Obama administration had wasted taxpayers money. Of course,
Obama went on to win the election, but this was
a kind of a point of contention and a point
which was in Romney's favor. The Chinese government wastes billions
of dollars on a daily basis um, and the Chinese
(22:25):
political system means that that isn't a problem um. And
what that means is, of course, is not good to
waste money. But when you're trying to innovate, when you're
trying to learn, wasting money is part of the process,
and China's ability to waste money without it mattering UM
in the grand scheme of things in terms of political stability,
(22:45):
I think actually is a positive in terms of their
capacity to innovate. UM. To come back to your other question,
is it better if China succeeds or is it better
if China fails. I'm afraid I'm gonna have to fall
back on another economist answer. I think either extreme is undesirable.
An extreme where China has succeeded in all of its
plans and all high value added industry is located in
(23:06):
China and the entire manufacturing based in the rest of
the world is hollowed out is clearly undesirable. UM. At
the other end of the spectrum, a scenario of total
failure by China, where China is stuck at the low
end of the value chain, continues to waste money on
steel and cement and bridges to nowhere UM, clearly that's
undesirable as well. I think ultimately where we're going to
(23:28):
come out is that China's um innate and systemic advantages
give them the edge in certain sectors. Their sectors where
the technology barrier isn't high, and where economies of scale
are large, and in other areas where the technology barrier
remains high and the economies of scale are relatively small,
(23:48):
we're going to see the US, Germany, Japan, Taiwan career
continuing to have an edge. I love your comment about
the sort of time horizons and the ability to waste money.
I think that's the one thing if, if if the
average politician in Europe or America could have one thing
from the Chinese, it would be that same ability to
(24:09):
plan over the long term and not always be thinking
about the next selection, the pesky irritations of democracy which
they have to put up with, at least for the
time being. Tom Alick, thank you very much, and we
will continue to see whether any of those targets in
that Green book are met. Do you have the Green
Book by any chance? I'm going to call Kevin and
(24:30):
ask him to photo copy it for me. Thanks very much,
Thanks Stephanie, thanks for listening to The New Economy. Today's
episode was reported by Kevin Hamlin with editor Jeff Black
and produced by Magnus Hendrickson, with special thanks to Tom Warlick.
Francesca Levy is the head of Bloomberg podcast,
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