Conflict and Leadership
China’s Way Out in an Intensifying Power Competition Game

In this globalised world, it isn’t showing strength in an arms race which determines the position and destiny of a great power, but rather having the most advantageous industrial structure and policies, high technology, and the broadest market. The most essential facet of the ongoing strategic competition between the US and China is that it is a race between a power that is trying to recapture its dominance of an entire industry value chain and another which is implementing proactive industrial upgrades. 

Compared with rising powers throughout history, China has been exposed to even-harsher pressure from the top levels of power. It has to wisely navigate the paradigm shift in the US-China bilateral relationship, and live with the “new normal” of comprehensive power competition, from trade and technology to the finance sector and humanitarian endeavours, and proactively enhance its capacity for high-tech self-innovation while contributing to healthier regional and global economic geometry.

This is a world which is undergoing profound changes unseen in a century, as Chinese President Xi Jinping put it. The ongoing strategic competition between the US and China is widely perceived as a pivotal element in the changing dynamics of the modern world. Tracking economic and military trade statistics among China, the US, Russia, Germany, Japan and India since 2016, the bilateral relationship between US and China could be positioned as moving from economic cooperation into economic conflict, with the year of 2018 as a watershed. This closely relates to the changing nature of power competition games in today’s world, and for an emerging China that has no historical example to follow, continuing to climb toward the upper end of global industrial value chains is the only way out.

Why a turning point?

The major reasons for the current tension between the US and China are two-fold. The direct reason is the widening strategic disparity between the US and China in positioning this bilateral relationship. Since the very beginning of the 21st century, the Bush administration had started to position China as a strategic competitor, rather than a strategic partner, in terms of geopolitical and military relations. This mentality has remained, despite the Bush administration’s later focus on fighting terrorism and its acknowledgement of the necessity of developing constructive cooperation with China. The Obama administration announced that the US would “pivot” or “rebalance” toward the Asia-Pacific, when the US started to recover from the financial crisis and the US military left Iraq. Nevertheless, until the end of the Obama administration, US strategic competition with China was largely restricted to the military sphere and to the Asia Pacific region.

The official consensus between Washington and Beijing that cooperation should take the upper hand in the full picture of the bilateral relationship was wrecked during the Trump administration. Soon after President Trump took the stage, a strategic US competition with China unfolded rapidly in the economic, political, humanitarian, diplomatic, security, as well as international relations spheres.

This is reshaping US-China relations, and the current strategic competition between the two powers is unprecedented in its prominence since the end of the Cold War.

This turning point in US-China bilateral dynamics reflects a more profound underlying reason — China’s economic transformation toward the upper end of global industrial value chains. Take the industrial value chains of automobile and mobile phone manufacturing, for instance. The global automotive industrial value chain involves key links such as raw and close-to-raw materials, car components, finished vehicles, and services, whereas the global mobile phone industrial value chain involves R&D, component production, product assembly, marketing, sales, and branding. Data about China’s share in these links reveals that the Chinese economy, while already dominating links like raw materials, components, and product assembly, is expanding vigorously in its offering of R&D, branding, and services. This is a fundamental structural change taking place in the overall Chinese economy, the scale of which has reached $14.343 trillion in 2019, accounting for more than 16% of the global economy.

When we talk about strategic competition today, we mean something very different from what this term once meant. Contests of military power and GDP weight are still relevant, but for an existing power, the marginal cost of using ‘hot’ wars to curb the rise of an emerging power is soaring. In this context, building a complete industrial value chain and seizing advantage from lower to upper ends — based on proper industrial policies — has gained unprecedented significance in the game of great power competition.

In this globalised world, advantages belong to nations which offer the best industrial structure and policies, as well as high technology and access to the broadest market; these determine the position and destiny of a great power, rather than just military strength.

The most essential facet of the ongoing strategic competition between the US and China is that it’s a race between a US that is trying to seize back the dominance of the entire industrial value chain, and a China which is witnessing proactive industrial improvement. When mapping industrial policies over the course of American history since the late 18th century, one could conclude that the industrial policies advanced by Trump’s administration are unprecedentedly comprehensive. Current US industrial policies aim to realise direct, vertical control of entire global industrial value chains, encompassing the resumption of labour-intensive industries, sustaining capital-intensive ones, and maintaining absolute dominance in cutting-edge technologies. These cutting-edge technologies, underlined by the Trump administration, include Artificial Intelligence (AI), Advanced Manufacturing, Quantum Information Science and 5G. In some of these cutting-edge industries, China is accumulating a certain advantage, a tendency which has incurred imminent and surging pressure from Washington. 

No historical example to follow

The dilemma facing China is that the faster its economy catches up, the greater the structural conflict between with the US becomes. Looking back into history, there has been no historical example for China to copy, as shown in Table 1. 

Rising powers throughout history have all been exposed to friction with the dominant power of the time during their development trajectories. Compared with other emerging powers, the US had far less pressure, as it did not face direct suppression from the UK during its emergence, and relied less upon the then-UK-dominated international economic system. Both Germany and the Soviet Union were severely suppressed by the then-dominant power, and ended up in fierce conflicts with their rivals. Japan, which was aligned with US-dominated international economic institutions during the post-war era, encountered sharp suppression from the US and faced huge pressure during its economic emergence in the 1980s.

China, at the moment, finds itself in an even more arduous situation than that which faced Japan during its ascent. China still heavily relies on the international economic order dominated by the US, while Washington is much less tolerant of China growing within the framework of US-dominated institutions. For China, a peaceful, stable external environment still best suits its development demand. Amid such circumstances, China has to wisely navigate the paradigm shift in the US-China bilateral relationship, and live with the “new normal” of a comprehensive power competition which has affected trade, technology and finance, as well as humanitarian endeavours, and find optimal ways to improve its own industrial strength while contributing to healthier regional and global economic geometry.

Conflict and Leadership
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Alexei D. Voskressenski
Despite the fact that China defends the existing world system, and has postulated the need for greater justice based on a win-win approach, the world somehow got the impression that the gains from the new conditions is mainly redistributed in Beijing’s favour, writes Alexei Voskresensky, Director of the Centre for Comprehensive Chinese Studies and Regional Projects.

Significance of self-innovation 

Despite the great pressure which has accompanied its emergence, China has demonstrated a resilience that Japan once lacked in adjusting its fragile reliance on the US economy while hedging the risk of disengagement from Washington. At the same time, Beijing is seeking a common ground and shaping the momentum of cooperation while living with disparities in the US-China bilateral relationship, which will be even more important in the post-COVID 19 context. The global community, which has witnessed the ‘butterfly effect’ of the pandemic, urgently needs big powers to maintain strategic cool-headedness and join hands to provide more public goods and mitigate socioeconomic risks.

At the moment, one of China’s top priorities is to create a more intrinsic impetus for its economic development. In its meeting on July 30, 2020, the CPC Central Committee Political Bureau provided signals regarding the economic work it will complete in the remaining months of 2020 ahead of the upcoming 14th Five-Year Plan. It stressed the need to “fight a protracted war” to steer the world’s second-biggest economy and maintain strategic focus for high-quality development amid full uncertainties. A new development pattern known as “dual circulation” - using the domestic market as the economy’s mainstay while facilitating better interconnectivity between markets at home and abroad - has been proposed as a way of fostering economic resilience and sustainable development.

In order to achieve this new “dual circulation” development pattern, several pillars have to be consolidated. First and foremost is China’s technological self-innovation. Over past two decades, China has made great progress in its scientific and technological development. The nation’s R&D expenditure has risen from $4.2 billion in 1995 to $315 billion in 2019; its imports and exports of high-tech products have reached $96.5 billion and $107.7 billion in 2019, up from merely $2.6 billion and $1.2 billion in 1995. But horizontally, China still lacks behind in terms of its export volume of charges for the use of intellectual property (see Figure 1).

According to World Bank data, the world’s total volume of export charges for the use of intellectual property (IP) reached $397.233 billion in 2019. Among this, the top 10 players with the largest shares (by country as listed in Figure 1) are the US, Japan, the Netherlands, Germany, the UK, Switzerland, France, Ireland, Singapore and Sweden. While the US accounts for 32.5% of the world’s total export volume of charges for IP use, the share of the Chinese mainland is only 1.7%. 

Figure 1 Share in international export market of charges for the use of intellectual property, 2019 (BoP, current US$)

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Source: World Bank Database 

The trajectories of emerging powers from a historical perspective indicate that the US restrictionon China’s technological imports and exports may become even harsher in the coming years. No matter how trade negations with the US proceed, China has to make endeavours to become a strong scientific and technological power. In this regard, China’s self-innovation trajectories in aeronautical and space technology since late 1990s have provided a lot of inspiration. Independent innovation in the development of key technologies lays a solid foundation for participation in strategic competition, otherwise technological and economic growth could be severely hampered by external constraints. Correspondingly, China’s patent production, utilisation and rewarding mechanisms also need to be further improved, so as to remove obstacles in deepening collaboration between the industrial sectors, academia and government agencies. 

Second, as China enjoys a vast domestic market that provides substantive support for independent technological innovation, it also needs to actively seek alternative partners for technological imports and exports. In this regard, the Belt and Road Initiative has served as an overarching arena for building platforms for further cooperation, deepening existing cross-border technological cooperation with partners such as Russia, Brazil, and the ASEAN and African countries in telecommunications, electronics, agriculture and other spheres, and broaden import and export markets for high-tech products. 

Last but not least, China needs to seize revolutionary opportunities in the digital economy.  This helps shape new industrial types and enhance the competitiveness of Chinese enterprises. According to the Guideline for high-quality trade development jointly issued by the CPC Central Committee and the State Council in November 2019 , trade digitalisation would be a key priority to spur China’s trade development. This specifically means fostering a digital data-driven development pattern, especially in order to promote Chinese enterprises’ capacity-building in trade digitalisation and intelligent management. Meanwhile, China will boost the construction of comprehensive cross-border e-commerce pilot zones, and proactively participate in the rule-making for the global digital economy and digital trade.

In current global value chain (GVC), China is playing an increasingly important role as both a supply and a demand hub in traditional trade and simple GVC networks, though the US and Germany remain the most important hubs in complex GVC networks, according to Global Value Chain Development Report 2019.  Such a growing role is prominent, especially in terms of information and communication technology (ICT). Huawei, a leading global provider of ICT solutions which sets a strategic focus on the Internet of Things, cloud computing, 5G and AI, has spent over 600 billion yuan on R&D over the past decade, and has established worldwide research centres with around 15,000 employees engaging in basic research. This company held more than 85,000 active patents by the end of 2019. With more enterprises like Huawei serving as global technological standard-setters, China will contribute enthusiastically to the changing dynamics of GVC networks and accumulate more comparative advantages to fuel its economic rise.

The Cannikin Law, or the Wooden Bucket Theory, indicates that it is the shortest stave that determines a bucket’s capacity. For a rising China facing intensifying pressure from the US, its “shortest stave” — its inadequate capacity for independent technological innovation, which undermines China’s GVC participation — has to be fixed squarely. This lays a sturdy foundation for resilient, market-orientated innovation systems, and for the construction of a strong innovation-oriented power to truly stand the test of time.

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The US Department of State has posted a video about the dangers posed by 5G technology on its Russian-Language Twitter account, where China’s Huawei is named as the greatest threat. The video is based on a series of accusations against Huawei and actually urges the views to steer clear of it. This material could be posted by the media or on the site on an NGO. But it has been posted by an official source, the foreign policy department.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.