Letter IEDI n. 1088—Industry 4.0 and the China-US Technological War
In 2019, the US and China staged an escalation of diplomatic and trade tensions under the pretext of the significant imbalance in their foreign trade balances. This negatively affected both the world industry and global GDP that year. In 2020, due to COVID-19, the relationship between the countries continued to be strained.
Today's Letter IEDI addresses this issue from a perspective not always adequately emphasized. Based on a study carried out by economists Antônio Carlos Diegues (Unicamp) and José Eduardo Roselino (UFSCar), it tackles the technological dimension of the Sino-American dispute for a leading position in industry 4.0 and in the digitalization of the world economy.
In the work, entitled “Industrial Policy, techno-nationalism and industry 4.0: the technological war between China and the USA”, the authors analyze the Chinese technological development strategy towards industry 4.0, seeking to understand the role of industrial policy in China's strategy for socioeconomic development.
They emphasize that one of the main reasons for the Chinese success in recent decades is the high degree of pragmatism and the capacity for permanent reconfiguration in both the political and institutional dimensions of this strategy.
They also emphasize that Chinese industrial policy should not be understood in a homogeneous way, since different objectives coexist, according to specific realities of the local productive structure. There are actions aimed at segments of low technology intensity and there are policies aimed at sectors close to the international technological frontier, such as artificial intelligence, 5G and intelligent services.
Thus, they note that a successful strategy to leverage the development of an emerging country must be prepared to deal with the productive structure heterogeneity that is typical of these economies. In other words, it needs to bring some activities out of backwardness, push others towards the technological frontier and improve growth conditions for all. To account for this heterogeneity, the study approaches the strategies of Chinese companies from three segments.
The first of them comprises the large traditional state-owned enterprises, which operate mainly in the petrochemical complex, in basic and in metal-mechanical industries, obtaining most of their revenues in the domestic market. Their strategies are focused on the search for productive and technological modernization and updating, which are indirectly coordinated by the Chinese government, through SASAC, the holding of state-owned companies.
The second segment is that of large private companies mainly focused on the local market. For them, the main objective of the Chinese industrial and technological policy is to accelerate the “catching up” of their competences in relation to those of their international competitors, mainly through improvement in R&D, design and branding capabilities.
The third segment comprises technology-based firms that are close to the international technological frontier and are central to the Chinese strategy of advancing the digital economy and industry 4.0. Among the main examples are the telecommunications companies Huawei, ZTE, Vivo, Oppo, Xiaomi, semiconductor companies such as SMIC and Hisilicon, as well as numerous other information technology firms with a strong presence in artificial intelligence, such as Baidu, Alibaba, Tencent, Iflatek, Megvii.
For the latter, China's main strategy is to foster learning through the consolidation of the national innovation system. They are the spearhead of Chinese ambitions to take a leading role in the economy of the future and, therefore, their activities have received special attention in several recent plans, such as Made in China 2025, the Internet Plus Strategy and the Next Generation Artificial Intelligence Development Plan. These plans were the subject of Letters IEDI n. 827 of Nov 26, 2018 and n. 961 of Nov 29, 2019, among others.
There are, however, important obstacles to be overcome by China's development strategy towards industry 4.0 that should not be underestimated. This is what Diegues and Roselino highlight in their study.
According to the authors, it is in the smart services segment that the Chinese economy seems to have greater relative prominence in technologies associated with industry 4.0. Via the integration between Artificial Intelligence and Big Data, Chinese companies have advantages over their international competitors, including the Americans.
These advantages are evidenced by the construction of smart cities in several Asian metropolises based on the Alibaba City Brain and the establishment of TaoBao Villages as a way of integrating the rural productive structure into the company's global marketing platform. This is also seen in the almost ubiquity of the WeChat platform in all aspects of everyday Chinese economic and social life.
It is in the technological infrastructure enabling smart factories and services that China's greatest weakness lies and where the greatest potential for conflict with the US is concentrated, according to the authors. The most sensitive point is the areas of semiconductors' new generation. The Chinese disadvantage stems from the high technological dependence on semiconductors (but not only on them), and is an important obstacle to the full development of industry 4.0 in China.
No wonder the semiconductor sector received special attention from the Biden Plan, which aims to modernize and increase the competitiveness of the US industry, as discussed in Letter IEDI n. 1083, of May 28, 2021. In addition to this “positive reaction”, the US and some of its allies have also sought to restrict the access of Chinese companies, such as HUAWEI, ZTE, SMIC, to state-of-the-art semiconductor technologies, enhancing this weakness in China's development strategy.
This discriminatory movement, according to the authors, occurs both by imposing restrictions on sales of chips already manufactured by TSMC to Chinese companies and by blocking the acquisition of state-of-the-art machines that would allow the Chinese to develop their own productive capacity in semiconductors. This is the case, for example, of the American pressure to restrict the sales of equipment from the Dutch ASML to SMIC, the biggest chip maker in China.
Based on this scenario, Diegues and Roselino conclude that, despite the notorious Chinese advances in numerous segments of the industry 4.0, the restrictions recently imposed by the Western powers highlight the magnitude of the challenges to be overcome and the strong technological dependence that still exists in relation to the USA.
This dependence, mainly on semiconductors, together with the growing restrictions on the penetration of Chinese companies in some strategic markets—such as the dispute over 5G standards—imposes limits on Chinese aspirations and fuels the continuity of the Sino-American conflicts in the construction of a “world 4.0.”
Although circumventing all these limitations in the medium term is not trivial, one must take into account the fact that Chinese industrial policies have shown, in recent decades, an unquestionable success in stimulating domestic technological advances. For this reason, the framework identified by the authors of the study makes it clear that the tensions between the US and China are far from over, even though they will assume different characteristics from those of Donald Trump's time in the US presidency.