If there was any doubt that the “state” was back and the “market” stood discredited, COVID-19 put paid to that. Surgical masks were in short supply, essential medicines disappeared and most of all, vaccines were unavailable to those who needed it most. India came through with shining colours, but the same cannot be said for Africa.
China was one power which never really gave up on industrial policy. Even before Xi Jinping dramatically changed its trade policy after assuming office in 2013, state owned enterprises (SOEs) occupied pride of place in the Chinese scheme of things. A CCP member is invariably embedded in the board of important Chinese companies. And in all instances of forced transfer of technology and “theft” of IPRs, the Chinese state has played an important part. Besides, the system of state subsides offered to domestic companies is so non-transparent that the WTO system has simply failed to identify them, much less take China to task. It is customary to say that China is politically communist and economically capitalist, but that description is too facile and overlooks the complexity and the opacity of the Chinese system.
The US, to be fair, tried hard complaining to China for years hoping that the latter would take remedial measures. China stalled successfully and played for time. The “Made in China 2025” plan was released in 2015, but the World did not give it adequate attention. The main features of the plan were:
- To have manufacturing which is innovation-driven, emphasize quality over quantity, achieve green growth
- To comprehensively upgrade Chinese industry, making it more efficient and integrated so that it can occupy the highest parts of global production chains with the goal of raising domestic content of core components and materials to 40% by 2020 and 70% by 2025
- To focus on 10 priority sectors: 1) New advanced information technology; 2) Automated machine tools & robotics; 3) Aerospace and aeronautical equipment; 4) Maritime equipment and high-tech shipping; 5) Modern rail transport equipment; 6) New-energy vehicles and equipment; 7) Power equipment; 8) Agricultural equipment; 9) New materials; and 10) Biopharma and advanced medical products.
The scary thing about the above plan is that China is on track to achieve substantially all the goals listed above.
This is the main reason why the US frets about China being the pacing challenge and overtaking it as the preeminent superpower. The response of the US has been to put in place technology-denial regimes based on the principle of “small yard, tall fence”. Most importantly, the US in 2022 unveiled its own industrial policy: The Inflation Reduction Act and The CHIPS Act both of which were based on granting huge subsidies for domestic manufacturers in the US and putting Chinese and other producers at a severe disadvantage. In typical American fashion, the legislation passed was geopolitically blind in the sense that Europe, Japan and Korea which were after all American allies, were also penalised. They are now in conversation with the US to get exemptions for their firms.
The EU, not to be left behind, has just unveiled a 400-page report made by former EU politician Mario Draghi who has called for radical steps to restore EU’s competetiveness. He has recommended annual state subsidies amounting to a whopping 1 Trillion USD for an indefinite period. He has also recommended a host of other steps, especially in the defence arena which will ostensibly make the EU a more autonomous power viv-a-vis the US. It still remains to be seen how the EU will fund such a mammoth industrial policy. Seen in conjunction with the infamous Carbon Border Adjustment Mechanism (CBAM), it is hard to avoid the impression of EU going fully protectionist.
With the three main global economic actors, namely, the US, China and the EU completely abandoning the Washington consesnsus and opting for massive industrial policy, two major implications are noteworthy: (1) The trade and investment landscape hitherto based on globalisation and global value chains is sought to be dismantled bit by bit and a new resilient value chain put in its place. How successful this enterprise will be remains to be seen, but the portents are ominous. (2) More crucially, how do countries like India cope with this panoply of measures put in place by the big players, when they neither have the wherewithal nor the clout to meaningfully counter it. This should serve as a wake-up call for countries of the Global South.
Diplomacy and Geopolitics 