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China's Economic Mercantilism

July 24, 2013
Chinese mercantilist policies include standards and currency manipulation; promulgation of domestic technology standards; onerous regulatory certification requirements and discriminatory government procurement activities.

As the Information Technology and Innovation Foundation (ITIF) writes in Enough is Enough: Confronting Chinese Economic Mercantilism, through the mid-2000s Chinese economic policy largely focused on actively encouraging foreign direct investment (FDI) in the country, promising to be a low-cost production platform for foreign multinational corporations (MNCs).

But by 2006, that began to change, as China made the strategic decision to shift away from attracting the commodity-based production facilities of foreign MNCs toward a “China Inc.” development model focused on helping Chinese firms, often at the expense of foreign firms. The path to prosperity and autonomy now became “indigenous innovation” (in Chinese, zizhu chuagnxin), with a focus on helping Chinese firms move up the value-chain to higher-value-added production activities.

To get there, China has embraced economic mercantilism on an unprecedented scale, using a wide array of policies to assist Chinese firms while discriminating against foreign establishments attempting to compete in China.

These policies include a range of “forced localization” measures such as mandatory intellectual property (IP) or technology transfer, entrance into joint ventures, or domestic production as a condition of market access.

For example, U.S. companies including Ford Motor Co., DreamWorks Entertainment, and Fellowes have all been forced to enter into joint ventures and build new production or R&D facilities as a condition of entering the Chinese market.

And when China completed a high-speed rail contract in 2009, it stipulated that the winner would have to take a 49% equity stake in a new Chinese high-speed rail company, surrender its latest designs, and produce 70% of the systems in China.

Meanwhile, IP theft remains rampant in China, with the country the world’s largest source of global IP theft (accounting for 50% to 80%) and costing the U.S. economy at least $50 billion in losses annually.

And that’s just the tip of the iceberg, other Chinese mercantilist policies include standards and currency manipulation; promulgation of domestic technology standards; onerous regulatory certification requirements; discriminatory government procurement activities; subsides (loans, tax breaks, land grants, etc.) for state-owned enterprises; and even direct discrimination against foreign firms.

To be sure, despite these hurdles, with a marketplace of over 1 billion consumers, an increasingly highly educated population with access to hundreds of thousands of skilled scientists and engineers, and a relatively stronger economic growth rate, MNCs will continue to place large amounts of FDI in China, building new production, distribution, and R&D facilities.

In fact, China alone attracted more than one-tenth of global FDI projects in 2012, as it attracted $120 billion in inbound FDI, leading all nations but the United States (although inbound U.S. FDI tends to not be “greenfield” investments creating new businesses or establishments but rather foreign acquisitions of preexisting U.S. business).

That said, rising wage and other production costs (though even now these remain far below Western-economy levels) alongside concerns about China’s mercantilist policies, notably IP theft and standards manipulation, are increasingly causing MNCs to investigate alternative countries as more appealing destinations for FDI.

For countries in Eastern Europe, Latin America, or the Subcontinent looking to attract some of this FDI looking for a new home, the message is clear: an attraction, not a compulsion, strategy works best. 

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