Key technologies – China as a competitor

Part 3 in our series China’s role(s) in the world economy

In part 2 of our series on China’s role in the world economy, we concluded that China is and must be an important partner in climate change mitigation.

This part, however, shows that China will play a very different role when it comes to key technologies of the future, such as digitization or mobility. Here, we argue, China will first and foremost be an increasingly serious and ever stronger competitor for advanced economies.

In the first two decades, China’s reform and opening-up policy initially led to a division of labor based on classic cost advantages. Western companies produced low-cost consumer goods in China with limited technology and high labor intensity.

The goods China exchanged with industrialized countries were mostly complementary and not in competition with Western goods (e.g., textiles for machinery). At the end of the 1990s, the production of technology and knowledge-intensive products increased in China – driven by foreign direct investment and Chinese companies developing their own research capabilities.

A change in this division of labor became apparent as early as the early 2000s, as exemplified by trade relations between Germany and China: Between 1992 and 2010, the share of directly competing trade goods, as usually exchanged by industrialized countries with comparable levels of development, for example, Volkswagen against Peugeot, increased from five percent to twenty percent.

Since then, China has successfully pushed ahead with its ambitions to become a leading technology and innovation location at an ever-faster pace. Critically, the Chinese share of world-class patents has grown by more than 50 percent annually on average since 2010.

World-class patents are the ten percent of all patents that are “particularly technologically relevant, cover a broad number of markets, and are frequently cited in the filing of other patents.”

Therefore, they are significantly more meaningful than the sole number of all patents registered and provide a good insight into the innovative strength and technological development of an economy.

Six selected technology fields that are central to future economic development – digitization, environment, industry, infrastructure, mobility, and energy can be used to illustrate the “rise of the East” with a simultaneous relative “decline of the West.”

Both the USA and the EU have lost significant shares of world-class patents in these fields since 2010, while China has made some rapid gains. The USA remains the undisputed innovation superpower, but in environmental technologies, which are gaining considerable importance against the backdrop of the climate neutrality targets being pursued by more and more countries, China has even overtaken the USA. The EU appears to be left behind not only in this area but also in digitization technologies. Most of the six technology areas and their sub-technologies are also part of “Made in China 2025.”

The figure above shows that in some of these areas, a particular dynamic has unfolded, especially after the introduction of the 2015 strategy, which is likely to be due at least in part to the successful implementation of MIC 2025. It is also clear from the graphs that China’s remarkable technological catch-up process started from a comparatively low level. There is still a clear gap between it and the established industrialized countries in many areas.

However, it is also clear that China can no longer be ignored as a global competitor in critical future technologies and will continue to catch up. The developed countries will not only have to come to terms with this new international competitive landscape but will also have to deal with the fact that China will not only compete with them on an equal footing in the future but will even be superior in important fields of technology.

As a result, the old division of labor described above could be reversed in some areas, and Western countries could become factories for China. This is already the case in battery production, where CATL, a Chinese company, is setting up production in Germany with a “technology in which Germany and Europe have lost touch.” Against this background, Western industrialized countries will, from now on, find themselves in the unusual position of having to catch up.

China’s technological rise, as outlined here, owes much to its specific political and economic system of a state capitalist autocracy. The systemic framework conditions for FDI in China have enabled, at least in part, a forced technology transfer over many years and – in conjunction with intensive state support and a lack of reciprocity – accelerated the catching-up process of Chinese companies.

Western companies have helped, albeit in part involuntarily, to build the Chinese competitors of today and tomorrow. As a result of these developments, Western industrialized countries now perceive China as a systemic rival in terms of economic and social order and no longer assume that China’s reform and opening-up process will also result in a transformation toward liberal democracy and a market economy.

In part 4 of our series on China’s role in the world economy, we look at the international rules-based system. Since China under Xi Jinping has revived and fueled the “competition of systems,” believed dead by so many after the fall of the Soviet Union, we think it has become clear by now that China will be the new rival.