China’s 2015 industrial masterplan, Made in China 2025, is at the core of the current trade war between the U.S. and China. The plan identifies ten industries that China wants to become globally competitive in by 2025, and globally dominant in during this century. The plan focuses on areas such as artificial intelligence, robotics, quantum computing, aerospace, and biotech – all high-tech fields currently dominated by foreign companies. Although China’s science and technology companies are still lagging behind foreign firms in most fields, they are catching up faster than anticipated.
As China’s economy transitions away from labour-intensive heavy industries, the Chinese leadership considers a shift into higher-tech manufacturing as a vital part of its development. Through initiatives such as the Made in China 2025 program, China is seeking to upgrade its economy and achieve a middle-class standard of living for its population. The benefits from China’s rise in the science and technology sector have been felt at home and around the world; its success as a manufacturer of solar panels is a case in point. But for many in Washington, China’s rise in the tech sector threatens U.S. economic and military superiority.
U.S. President Donald Trump’s tariffs on imports targets many of the industries highlighted in the Made in China 2025 plan. For years the U.S. government has accused China of mercantilist policies, for not playing by the international trade rules, and for accessing markets and technologies without fully granting access to its own. And as China is now moving up the value chain and is increasingly in competition with the U.S. in key industries, it seems that the rivalry between the U.S and China in the advanced science and technology sector will not disappear anytime soon and is even poised to intensify.
Discussion hosts: Iris Jin, senior program manager, trade, investment, innovation, and Canada-China relations, Asia Pacific Foundation of Canada, and Charles Labrecque, project specialist, Asia Pacific Foundation of Canada.
After the most spectacular economic growth in human history over the last four decades, China is continuing to make both bold plans and great leaps in the high-technology sectors. Beijing’s ambitious blueprint, known as ‘Made in China 2025,’ targets some of the most important high-tech sectors of the 21st century. China is an emerging superpower that has the capacity and the determination to become one of the world’s leading players in advanced science and industry. In that sense, the United States may have reason to fear that this potential challenger may replace its long-held dominant position in the world economy, including in many high-tech areas.
It is this concern that has led President Donald Trump and his hawkish advisors to take measures to contain China’s rise in general and its fast progress in high-tech sectors in particular. As part of Trump’s campaign promise to reduce the massive U.S. trade deficit with other countries, he has implemented numerous tariffs against China and other countries, including Canada, triggering retaliatory responses from targeted countries. Trump has also instructed the U.S. Congress to enhance screening mechanisms that make Chinese acquisition of U.S. advanced technologies more difficult.
Given the fact that the ongoing U.S.-China competition in both trade and the tech sectors is in nature a rivalry between the world’s existing hegemonic power and its rising challenger, it is likely to persist into the foreseeable future. While the U.S. fear of China’s rise is understandable, Trump’s confrontational approach in labelling China a national security threat and in applying hostile policy measures are difficult to justify. These measures are likely to be counter-productive, pushing Beijing to be more resolute in competing with the United States.
From Canada’s perspective, such a protracted trade war between its two largest economic partners is definitively serious. First, there will be a detrimental impact on the Canadian economy. When and if the U.S. and China begin to escalate in imposing more punitive tariffs against each other, Canadian firms will have to go through a difficult adjustment process while facing a very unpredictable future. Canadian high-tech firms functioning in both the U.S. and China will need to know if they are in the middle of a trade war that will affect their own supply chains, product processing, and marketing outlets. The bottom line, quite literally, is at stake for many Canadian companies.
Second, Canada should not be put in a position of having to choose sides in a fight between Washington and Beijing. So far, Ottawa has been leaning toward its traditional ally south of the border: slowing down potential free trade talks with Beijing so the Trump administration is not offended during the current delicate NAFTA renegotiations, for example, and rejecting the offer for a Canadian construction company to be taken over by a Chinese state-owned enterprise citing national security concerns, even though the transaction had literally no sensitive technologies involved. But given the recent tariffs imposed on Canadian steel and aluminum by the Trump administration using national security as an excuse, such a cautious approach seems to be falling on deaf ears.
Therefore, a sound policy option for Canada is not to treat China as a potential enemy, nor to view the United States as a permanent friend. Where trade, investment and technology are concerned, Ottawa needs to make independent assessments based on its own national interests, especially in the uncertain environment of rising protectionism under the Trump administration. Canada should not be a pawn of Washington in its trade war with Beijing, especially when its own key sectors are being targeted by similar tariffs. It must balance its strategic position between the two superpowers, seeking leverage if necessary in strengthening its own economic, trade, and technology positions.
Canada has made tremendous progress at innovation-performance during recent years. Yet there is still room for improvement, especially at the commercialization stage where we still lag other developed countries. This is not an easy task given the challenges we face, chiefly a small market that has made commercialization of innovation difficult. Among all possible alternative ‘remedies,’ an open innovation approach is being considered where Canada can take advantage of the strengths and resources of international partners along the course of innovation. Although China cannot be the only country that Canada engages with in open innovation, it does present a worthwhile opportunity, with the two countries aligned in many ways.
First, China has gradually become a hub and source of innovative ideas that offers itself as a viable partner with Canada in original R&D projects. Although China ranks at a lower level of scientific and technological advancement compared to developed Western economies, the country has taken massive strides in progressing, becoming a formidable player in critical fields such as nanotechnology and biotechnology. China is one of only four countries (alongside India, Israel, and Brazil) with which Canada has established formal agreements for technological collaboration, reflecting the fact that “our engagement with China should now be a two-way street” (McCuaig-Johnston). One area that China has championed on an international scale is the broadly defined ‘alternative energy’ frontier, which is not surprising as the country’s energy consumption is outpacing production amid pressure to find alternative solutions.
Second, China holds significant capacity for transforming innovative ideas into marketable products, and can help Canada overcome shortcomings in necessary talents and infrastructure. Chinese universities produce the largest number of engineering and science graduates, creating virtually an unlimited pool of skilled human resources. This vast research infrastructure will be further enhanced through China’s commitment to increasing national R&D expenditure. While business R&D has lagged government expenditure in Canada, China has witnessed the opposite, with greater growth of business expenditure rather than government expenditure on R&D.
Finally, we need to think about innovation capabilities, beyond the narrowly defined R&D, to include complementary proficiencies such as in manufacturing. We all remember how the ultra-effective Japanese automobile launches were supported by the country’s superior manufacturing capabilities.
Third, China is endowed with a market highly conducive to commercialization, which provides a promising path for commercializing Canadian innovations. It may be one of the few countries alongside the U.S. whose domestic market could sustain a breakthrough innovation. Obviously, a large market size, an evident feature of the Chinese marketplace, reduces costs for the commercialization of innovation. While individuals often consider its institutional environment detrimental to innovation, the country’s transitional, formal, and informal institutions may in fact facilitate product introductions more efficiently, allowing firms to move to the market more quickly and make subsequent improvements with new product launches. Considering Canada’s limit in market size and lack of a risk-taking investment culture, China could also serve as a test base for Canadian inventions before they are reintroduced into the domestic market.
Despite the many benefits of engaging a technologically-advancing China, taking a completely open approach with China in innovation remains a bold proposition, asking: How could we collaborate with China without jeopardizing our IP and our companies? I leave this question to my colleague Margaret McCuaig-Johnston.
China has such a huge market that many Canadian companies are now wanting to do business there. And China has been ramping up its R&D through massive investments in top-of-the-line research labs and talent, with US$350 billion invested in R&D annually. Canadian researchers may be able to benefit from that investment by partnering with well-funded companies and sharing space in their research facilities.
So how best to take advantage of these opportunities with an eye to long-term success, not just short-term engagement? And how can we do so without jeopardizing our intellectual property (IP) and our companies with technology problems such as those identified in a March 22nd report of the U.S. Trade Representative?
The fact is that for decades Canadians have been collaborating with Chinese counterparts in science and technology. The Canadian International Development Agency (CIDA) and the International Development Research Centre (IDRC) oversaw projects that linked Canadian researchers and experts with groups in China that had real on-the-ground challenges. Canadian researchers have helped build the ‘new China’ through scientific collaborations, especially in medical and agricultural research. And companies like Nortel and Bombardier were there early on and helped China to leapfrog to the newest technologies.
With Canada’s help, China has now built its capacity to a point where it is positioning itself to take the global stage in key technologies. Our engagement with China should now be a two-way street, with both countries benefiting from collaboration. That is the approach used by the Canada-China Joint Committee on Science and Technology, and by the funded program managed under the Joint Committee for companies and researchers from both countries.
China stands 22nd on the Global Innovation Index, while Canada remains higher at 18th. So how can Canada engage with China without losing its own competitive position?
Researchers should identify partners carefully to ensure that they are at or near the cutting edge of their field of research; they should be a partner from whom we can learn. They should carefully negotiate Memoranda of Understanding (MOUs) and IP agreements, ensuring that compensation comes back to Canadian universities. Chinese officials point out that we are weak on commercialization. But it is at the commercialization stage that Canada’s IP is often at risk, as Chinese players can absorb our market-ready technology. Therefore, China’s recognition of our ‘weakness’ gives us reason to avoid that more vulnerable area and focus on fundamental and basic science, as well as ‘Big Science’ projects where exchanges advance the global good and don’t jeopardize IP.
Canadian companies should also be careful. China now prefers the joint venture (JV) model, and it is important to negotiate JVs that are equal for both companies – 50/50, not 80/20. And some manufacturing, jobs, and R&D serving the Chinese market should remain in Canada. To protect IP, it is better to collaborate with a partner whose needs are complementary – for example, a Canadian wastewater treatment company partnering with a Chinese mine, rather than one that makes similar technology and absorbs ours over time – or “re-innovates” it, as the Chinese policy calls it.
Finally, it is important for both researchers and companies to invest time in building and deepening relationships. Canada can benefit from trusted Chinese-Canadians who can ensure a smooth negotiation of documents and good communications in the lab.
We should be under no illusion – China’s strategies and plans are very clear: It intends to be the world leader in science and technology by 2050, and that means moving past Canada, the EU and yes, the U.S. We will have to be very deft at collaborating with a growing dragon without getting singed.