May 2005
Will Technology Be a Source of Chinese Influence in Asia?
On May 13, AEI and the National Defense University continued their series of seminars to examine the growth of Chinese power and influence in Asia. Panelists discussed the main characteristics of China’s technological development and what effect it will have on the rest of Asia. Presenters and discussants also addressed questions such as: How quickly is China climbing the technology ladder? Will China become a technology developer and exporter over the next decade? If so, how might China differ from the United States and Japan as a technology provider? Will concerns about security and competitiveness limit Chinese access to foreign technology? Will China provide dual-use technology to governments and groups hostile to Western interests?
Ernest Preeg
Manufacturers Alliance
The Chinese advanced technology superstate is a slightly modified version of the Japanese model but deserves to be taken more seriously since China’s rapid technological advancement has only been underway since 1995, when the Chinese leadership made technology and military modernization their top priorities.
There are four basic components of a technology superstate: research and development (R&D), scientists and engineers, foreign direct investment (FDI), and advanced technology trade. Chinese R&D expenditures now surpass Japanese R&D. China has tripled the number of university graduates, with an emphasis on mathematics, science, and engineering. Comparisons with the United States and Europe must consider that a significant number of engineering degrees in those countries go to Chinese students who return home.
In 1993 and 1994, FDI in China began to take off. There was a slight decrease in 1999 and 2000 due to hesitation about joint ventures, but now foreign companies can have wholly owned investments. Last year FDI reached a record $62 billion. High-tech manufactured exports are the bottom line of international competitiveness, and China has been rapidly growing in this area as well. In 1992, China was far below Japan, the United States, and the EU. By 2001, the PRC had moved up to half the Japanese level and is expected to surpass Japan soon (as China did in total exports last year). High-tech exports are growing as a percentage of Chinese total exports, with a clear trend away from labor intensive goods.
There are three dimensions to watch:
1. China as an export platform. Taiwanese, South Korean, and Japanese firms manufacture a large percentage of Chinese exports. The United States was number two until 2002 but has since dropped to number four, leaving a very East Asia-oriented value-added regime. Three years ago there were 200 to 300 R&D centers with foreign participation in China; now there are over 700 such centers--an astonishing increase.
2. Development of Chinese firms. Chinese firms seek to increase brand recognition, build a reputation for quality, and develop leading edge R&D programs. Some prominent Chinese successes are: Lenovo (computers), Huawei (telecommunications), and the Harbin Pharmaceutical Group.
3. Technological innovation. Can China take over U.S. leadership in innovation? This is a major national security and economic issue.
China’s emerging technological prowess has potential geopolitical and geostrategic implications. China will be the economic hegemon in East Asia with corresponding policy leverage. China can also use the Association of Southeast Asian Nations (ASEAN)-China free trade agreement (FTA) to bypass Southeast Asia’s high tariffs. Strategically, the pace of Chinese military modernization has increased rapidly since increasing military and commercial linkages. Five years ago, the Department of Defense assessed the Chinese military as at least twenty years behind the United States. In 2004, the revised assessment was that China would have uneven success in catching up in the next five to ten years. This is an extraordinary change. China will become the number one naval power in East Asia in the next few years.
How should the United States maintain technological leadership? Chinese currency manipulation is a significant factor. The United States should not oppose the ASEAN-China FTA but rather establish FTAs of its own with Asian countries. U.S. domestic economic policy is critical. We need higher savings rates so we do not have to borrow so much. A large proportion of our trade deficit is in the technology and manufacturing sectors. We have major disadvantages in our education performance, stagnant R&D in science and technology, relatively high corporate taxes, and high health care costs--all of which need to be addressed.
What is most lacking is a sense of national purpose. When the Russians launched Sputnik, the United States responded with thousands of Ph.D.s and a man on the moon within ten years. We need a national purpose and a vision. The debate is not focusing on the Chinese challenge.
Tai Ming Cheung
University of California–San Diego
China’s dual-use technological base has several key characteristics. The Chinese leadership has made integrated civilian and military technology development a priority since the late 1990s. In the 1980s and 1990s, the focus was on defense conversion and spinoffs from military to civilian; now the goal is balanced development of a dual-use technology base. Despite pockets of excellence, much output remains low-tech and relatively inefficient.
China is focused on improving innovation capabilities. There are three stages to innovation: imitation, creative imitation, and indigenous innovation. China has been in the second stage since the 1990s; the critical question is whether the Chinese can make the leap to the third stage. China’s leading dual-use sectors are aviation, space, shipbuilding, nuclear, electronics, and information technology.
China’s science and technology development strategy Kejiao Xingguo (Revitalizing the Country through Science, Technology, and Education) focuses on raising innovation capability, especially at the enterprise level. Entrepreneurship is an important driver of this strategy. The dual-use and defense sectors have adopted some Kejiao Xingguo practices, such as boosting investment in education and R&D (although much investment has been spread thinly and thereby wasted) and cultivating key talent (as scientists and engineers from the 1960s and 1970s retire). Despite greater emphasis on the market, China still practices state-based techno-nationalism, focusing primarily at the basic R&D level.
China’s dual-use technology base has both a defense side and a civilian side. Eleven key defense agencies employ about 2 million workers, a total that has declined by about half over the last decade. The civilian component includes non-state and private enterprises; most see military applications as an afterthought. The Chinese government is seeking to increase the participation of private companies in the defense sector by removing barriers.
Defense conversion reduced the disparity of military-civilian production in the Chinese defense industry from 90 percent in 1980 to about 15 percent today. This process has begun to change back, however, with military production projected to make up 70 percent of the output of the defense industry by 2020.
The People’s Liberation Army (PLA) technology requirements in many ways mirror developments in the civilian side. In the 1980s the overlap was very small, but by the late 1990s about 90 percent of PLA technology needs were met from outside of the defense sector. Since the late 1990s, the focus is on both spinoff and spin-on. Today overlapping priorities include high performance computers, super large-scale integrated circuits, applied software, space information systems, and integrated manufacturing systems.
China has four key sources of dual-use and military technologies. Indigenous development is the long-term goal. Russia is the major source for military technologies. China selectively acquires Western dual-use technology by purchasing companies. Commercial joint ventures (especially in semiconductors, computers, and software) are another way to acquire and develop technology. Over the next decade, China will continue to develop technology at an accelerated pace, with the goal of catching up with the world’s advanced powers by 2020.
China’s technology strategy emphasizes prestige; China’s role as the first Asian country to put a man in space is a source of great national pride. The dual-use technology base plays an important role in advancing the PLA’s modernization, especially in information operations. China is currently an importer of defense components, but its dual-use technology base will make China an increasingly important exporter of hardware and technological transfers to other countries, most especially to its Asian neighbors.
As the civilian and military sectors of China’s economy become more integrated, it will become more difficult to prevent China from getting hold of certain dual-use technologies; as a result, export restrictions against China will come under increasing pressure.
Will Martin
World Bank
Mr. Preeg documents the dramatic changes occurring in China’s economy--pointing out that if a country wishes to produce high-tech products, it needs a high-tech labor force. His forthcoming book is an important contribution to understanding China’s transition.
I only want to raise a few issues. China wants to produce high-tech goods, but it will need a high-tech labor force and capital base. China has opened its market and taken advantage of globalization, following the examples of Thailand, Indonesia, and the Philippines in using FDI to build its capacity to produce medium-technology products. It has adopted the right trade regime to encourage exports and export processing. Despite pockets of excellence, China still lags behind much of the rest of the world. Even though China has lots of engineers and investment, it is still not a capital intensive economy. It will take time for the stock of skilled people in China to catch up with the stock in the United States. China is advancing in absolute number but is still low in relative terms.
I have concerns about some of the policy recommendations made here today. You emphasize the U.S. imbalance on the current account deficit and argue that China is engaging in currency manipulation. With a fixed exchange rate, the central bank has to buy foreign currency. Ordinarily we would expect a short-term accumulation in reserves and a corresponding rise in domestic inflation. But we are not seeing that. Instead we have a funny situation of high Chinese savings and investment rates. China’s current account surplus is being driven by the high savings rate, largely due to the lack of a social security safety net. An appreciation of the yuan would produce only a small change in the trade balance (absent fundamental changes in the savings-investment balance). To really have a big change in the current account deficit, there would have to be a change in expenditure relative to income. This would have little effect on the imbalance between the United States and China. The low U.S. savings rate is a principal cause of the United States current account deficit. However, if China did turn around and run a large current account deficit, this would greatly impact world markets and increase global interest rates.
I also found some of the points about currency dispute resolution procedures a little cavalier, since the Bretton-Woods system was based on other countries pegging to the U.S. dollar. I do not really understand the concern over bilateral trade balances. There is no reason to expect U.S.-China bilateral trade to balance even if one’s own house is in order. We would expect to see lots of triangular trade.
National Defense University research assistant Tamara Shie prepared this summary.
