Belt and Road Read online

  The image of the original Silk Road is particularly misleading in this context. Transportation and communications networks are no doubt a precondition for the development of global value chains. But the crucial element is the set of industrial policy decisions by which countries strive to move into new chains or segments in an already-occupied value chain. China wants its industrial policy to be sufficiently coordinated with those of countries that occupy other segments and chains. In return, it can offer cheap financing and its experience of an economic model that has proved very successful in boosting industrialization and urbanization on an unprecedentedly fast timescale.

  In practice, Chinese industry may need reliable suppliers of parts or intermediate goods, or it may build assembly plants overseas to avoid import tariffs, while keeping the bulk of the production chain in China. It may try to create new opportunities to export raw materials or intermediate goods produced in China or, conversely, to secure raw materials for its own industry on a stable basis. Given how important services have become to the integrity of global value chains, increasing service exports will also be a strategic goal for the Belt and Road.

  Chinese policymakers are aware that some heavy industry in China will have to move abroad, and they have started looking at Central Asia, with its lower production costs, as a possible destination. As governments and the private sector in the region invest in energy development, transportation infrastructure, and residential construction, the demand for steel products in Central Asia is expected to boom in coming years, but Chinese producers have to compete with Russian, Turkish, and Ukrainian steel enterprises that benefit from easier trade regimes. These competitors would lose that advantage if Chinese companies established steel production units in Central Asian countries, which are rich in mineral resources and have low labor costs. In the integrated framework of the Silk Road Economic Belt, new transportation infrastructure could both boost demand for steel and prepare the ground for China to import steel from Central Asia as it moves into higher-value products and value-chain segments: grain-oriented silicon steel (electrical steel), steel sheet for nuclear power stations and steel for high-speed rail bogie frames and train wheels.

  Soon after the launch of the Belt and Road, Hebei Province announced plans to move capacity for 5.2 million tons of steel, 5 million tons of cement and 3 million units of glass abroad by 2018. The targets for 2023 are even more ambitious, with capacity for 20 million tons of steel, 30 million tons of cement and 10 million units of glass waiting to be relocated abroad. Many projects are already underway. State-owned companies will help set up a 600,000 ton steel project in Thailand. In 2017 Tsingshan Group Holdings, a state-backed steel producer based in Wenzhou on China’s southeastern coast, opened a two-million-ton stainless-steel plant on the Indonesian island of Sulawesi that accounts for 4 per cent of the world’s stainless-steel production. The mill was built using a $570 million loan from the China Development Bank. Interestingly, Tsingshan’s Indonesian plant is now exporting 300,000 metric tons of semi-finished stainless-steel slabs to the United States through a Pittsburgh joint venture. Tsingshan is expanding its Indonesian plant, and Jiangsu Delong, a Chinese producer based in Jiangsu province, is building another plant nearby. In Europe, after China’s giant Hesteel took control over a Serbian mill in June 2016, the plant outside the small city of Smederevo could export tariff-free into the EU and to the US markets with minimum tariffs—until, of course, the 2018 additional Trump tariffs against European producers took effect.7

  The problem of overproduction thus has a number of possible solutions. First, current production may find new markets in Belt and Road countries. This will boost steel prices, helping Chinese companies and stabilizing the steel sector. Second, unused production capacity may find new outlets. Third, some of China’s production capacity may actually be moved abroad. Gaining access to new cheap-labor pools and more favorable trade regimes, it can be placed on a sustainable path, guaranteeing cheap imports for Chinese industry, while simultaneously addressing some of China’s environmental challenges. And to the extent that Chinese companies increasingly build plants overseas, these plants will become prime customers for machinery produced in the motherland.

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  “Digitalization has brought the Chinese people the historic opportunity of a millennium,” wrote the Chinese researcher Zhi Zhenfeng in a commentary on Xi Jinping’s speech to the National Cybersecurity Work Conference. “During the extended period of agrarian society, China was an economic power in the world, creating a resplendent culture, but it later missed out on the industrial revolution, missed an historic opportunity to progress along with the world, and it gradually slipped to a position where it was passively subjected to abuse.”8

  If the Belt and Road is to be understood as a form of transnational industrial policy, then China’s own industrial strategy cannot be considered independently. While occupying the center of the initiative, the task of upgrading and accelerating technological development would be impossible without a full network of international industrial relations—as China’s recent manufacturing strategy, Made in China 2025, puts it, a “new wave” of “industrial revolution” is tantamount to “reshaping the structure of the international division of labor.” China will be able to focus on new technologies only to the extent that it can develop the highly elaborate global value chains upon which technological innovation depends. The strategy, approved in July 2015, unabashedly claims: “We will strive to transform China into the global manufacturing leader before the centennial of the founding of New China, which will lay the foundation for the realization of the Chinese dream to rejuvenate the Chinese nation.” The present moment, however, is fraught with danger. China finds itself on the cusp of falling into a middle-income trap. After the global financial crisis, developed countries have been attempting to revive their industrial sectors, as a response to both electoral discontent about job losses and the sense that manufacturing is entering a significant new revolution. Meanwhile, developing countries are seeking to expand their share of global industrial labor and are investing in industrial capital to develop their export markets. Manufacturing in China is under enormous pressure from this “two-way squeeze” between developed and developing countries. The current model cannot address this challenge. Only a significant expansion in the technological content of Chinese manufacturing will do: “With resource and environmental constraints growing, costs of labor and production inputs rising, and investment and export growth slowing, a resource and investment intensive development model that is driven by expansion cannot be sustained. We must immediately adjust the development structure and raise the quality of development.” The strategic task of transforming Chinese manufacturing “from large to strong” will be realized with the transformation from Made in China to Created in China, from China Speed to China Quality, and from Chinese Products to Chinese Brands.9 In comparison to previous plans, Made in China 2025 expands its focus to capturing global market share, not just dominance in the China market, and is part of a broader strategy to use state resources to alter and create comparative advantage in strategic advanced technology industries on a global scale.

  International industrial capacity cooperation under the Belt and Road encompasses arrangements by which Chinese companies can obtain technology from foreign entities. In May 2015, the State Council issued the Guiding Opinion on Promoting International Industrial Capacity and Equipment Manufacturing Cooperation, which identifies eleven sectors as priorities for international expansion: (1) steel and nonferrous metals, (2) construction materials, (3) rail equipment, (4) power generation and infrastructure, (5) resource development, (6) textiles, (7) automotive, (8) information technology, (9) machinery, (10) aviation, and (11) shipbuilding. Many of these sectors include activities Chinese industry wants to move abroad; in other cases, such as information and communications technology, the opinion calls for “promoting innovation upgrading” and “raising international competitiveness.” To do thi
s, authorities are directed to “encourage telecoms operating enterprises and Internet enterprises to use methods, including mergers and acquisitions and investments in infrastructure and facilities operations, to ‘Go Out’.”10

  As early as 2006 the Overseas Investment Industrial Guiding Policy had identified certain categories of “encouraged-type overseas investment projects;” (1) investments that enable the acquisition of resources and raw materials that are in short supply domestically and which are “in urgent demand for national economic and social development;” (2) investments that support the export of products, equipment, technology, and labor for which China has a comparative advantage; and, (3) investments that “are able to clearly enhance China’s technology research and development capacity, including an ability to use international leading technology and advanced management experience and professional talent.” A recent State Council opinion clarifies and supplements this approach. In its Guiding Opinion on Further Guiding and Standardizing the Direction of Overseas Investment, issued in August 2017, the State Council reaffirmed the importance of “catalyzing the ‘Going Out’ strategy for products, technologies, and services.” It also aims to expand the speed, scale, and efficacy of China’s outbound investment, so as to promote the “transformation and upgrading of the domestic economy” and “international industrial capacity cooperation.” In addition, the 2017 Investment Opinion redefines the broad categories of “encouraged” investments. Technology acquisition and utilization is a key consideration in determining whether a sector is “encouraged.” For instance, the opinion encourages investments that strengthen “investment cooperation” with “overseas high and new technology and advanced manufacturing industry enterprises,” as well as investments that promote the “sending out” from China to the world of “advantageous manufacturing capacity, advantageous equipment, and technology standards.”11 The Made in China 2025 strategy calls for “supporting enterprises to make acquisitions, equity investments, and venture investments overseas, and to establish R&D centers and testing bases and global distribution and services networks overseas.”

  In the past China has often tried to encourage technology transfers from Western multinationals. The difference now is that Made in China 2025 aims to develop the major industries of the future and the technologies being procured in Europe and the United States are less the finished product than the critical knowledge base for indigenous technological revolutions. Worldwide acquisitions by Chinese companies now resemble acquisitions by leading Western companies. They are not safe capital investments but ways to accelerate internal innovation processes and move into fast-growing business areas.

  That transformation—so abundantly proclaimed in official Chinese documents—convinced Western governments and companies that the current wave of technology transfers may well be the last, drying up the source of Chinese high-value imports, investment and licensing fees. It is hardly surprising, then, that the strategy led to increasingly negative responses from Berlin, Brussels and other capitals. A strongly worded report from the European Union Chamber of Commerce in China argued that China’s top-down approach to drive industrial development would hurt the Chinese economy, while pointing out that “it would likely lead to the same tensions that have plagued China’s trade relations with Europe and others over overcapacity in sectors like steel and aluminum.”12

  In Germany the general view of China has been steadily changing, as many in the German industry realize that the times when the two economies benefited from perfect complementarity are almost certainly behind us. The strategic industries where China wants to become the dominant global player are just those that Germany chose for its own industrial plans: robotics, automated vehicles, aerospace, artificial intelligence. Whereas one or two decades ago Germany could export its machinery to China sure in the knowledge that no Chinese firm could make the same sophisticated machines—and these were the machines China needed for its industrial and infrastructure boom—now Chinese competitors are present in the same sectors, a shift that was accelerated by European suppliers selling co-designed parts to the Chinese. In early August 2018 the German government decided to ban for the first time the sale of a German company to a Chinese suitor—a watershed moment. The decision to block the sale of machine tool company Leifeld Metal Spinning AG to a Chinese company came after an extensive review that led the government to conclude that such a transaction would be a risk to “public order and safety”. Chancellor Merkel’s government wants to keep the company’s expertise in the field of rocket and nuclear technology out of Chinese hands. It remained unclear whether national security arguments were being used to address economic concerns about the loss of key technologies to China.13

  Much of the battle is one for control of global standards, an enormous source of revenue. The multinationals owning key patents incorporated in global standards, for example in communications, receive billions of dollars in royalties each year, including in China. As China became an electronics manufacturing center, newspaper headlines screamed about license fees paid to owners of the European GSM and American CDMA telecom standards patents. The Chinese government estimated that the percentage of fees to foreign companies on wholesale prices constituted 20 per cent of handsets, 30 per cent of computers and 20–40 per cent of machine tools. Chinese DVD player makers claimed they paid $10 in royalties for each product they sold for about $30.14

  There is no way to enter the global market without adopting the standards everyone else is using, so there is no alternative to paying for them—unless one develops new standards and manages to get them widely accepted. This is where the Belt and Road comes in. “The return on investment for a port in Sri Lanka or a rail line in Thailand matters less to Chinese officials than the ability to push participating countries to adopt Chinese standards on everything from construction to finance to data management.” China is already highly successful in exporting key technical standards for the construction of high-speed rail, circumventing those set a long time ago by Western players and putting in place guaranteed streams of revenue. “To the extent that China’s standards supplant Western ones, it will represent a direct threat to the profitability of non-Chinese companies.”15

  It is indeed a high stakes battle, as the case of fifth generation mobile communications technology perfectly illustrates. In the second half of 2016, the body that decides global standards for mobile data held three meetings with the goal of agreeing on a particular standard, the Enhanced Mobile Broadband coding scheme. After the Chinese computer manufacturer Lenovo voted to adopt a standard led by American firm Qualcomm rather than a Huawei alternative, its founder Liu Chuanzhi, was forced to explain the seeming break with national unity and loyalty. Remarkably, Liu revealed he had spoken to Huawei founder Ren Zhengfei, who confirmed he had no issues with Lenovo. “We both agree that Chinese companies should be united and must not be provoked by outsiders,” he added, before speaking about his company’s efforts over the past thirty years and expressing zero tolerance for any questioning of the loyalty of the “national brand.” The dispute highlights how much national champions are expected to benefit from the definition of which technologies will be used to power the coming revolution in autonomous cars and the internet of things.

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  Because Germany’s top firms have become so dependent on the Chinese market, the government in Berlin has avoided confronting China head-on.16 The United States took longer to react, but when it finally did the response was considerably more aggressive. The ongoing dispute was initially centered around the country’s trade deficit with China but quickly turned to Made in China 2025. The confrontation started on April 3, 2018 with the US proposing 25 per cent in added duties on roughly 1,300 Chinese products, such as industrial robots and other machinery. This would impact $50 billion, or 10 per cent, of total US imports from China. The determination claimed that China uses foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, to requ
ire or pressure technology transfer from US companies and that its regime of technology regulations forces US companies seeking to license technologies to Chinese entities to do so on non-market-based terms that favor Chinese recipients. The list of products covered by the proposed tariffs was obtained from those benefiting from Chinese industrial policies, including Made in China 2025.

  China responded the next day with its own plans for 25 per cent tariffs on 106 American products, including soybeans, automobiles and aircraft, that would also impact about $50 billion of imports from America. In the April 5 statement threatening more tariffs, President Donald Trump stressed that “the United States is still prepared to have discussions” with China. Neither country said when the duties would kick in, but Chinese government officials commented privately that Beijing would be unwilling to negotiate with the United States on any curbs on Made in China 2025. Unsurprisingly, China perceives the American demands as an attempt to stop China’s economic development and technological progress.

  “President Trump has made it clear we must insist on fair and reciprocal trade with China and strictly enforce our laws against unfair trade. This requires taking effective action to confront China over its state-led efforts to force, strong-arm, and even steal US technology and intellectual property,” said US Trade Representative Ambassador Lighthizer. “Years of talking about these problems with China has not worked. The United States is committed to using all available tools to respond to China’s unfair, market-distorting behavior. China’s unprecedented and unfair trade practices are a serious challenge not just to the United States, but to our allies and partners around the world.” The Chinese government’s technology transfer and intellectual property policies are part of China’s stated intention of seizing economic leadership in advanced technology as set forth in its industrial plans, such as “Made in China 2025.”17