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China’s industrial policy – no blueprint for Europe

In repointing Europe’s approach to industrial policy, some policymakers have prized China as an example to follow. Luckily, the European Commission is moving towards a European approach.

With the European Union’s (EU) future as an economic powerhouse at stake, policymakers are looking east. German Economy Minister Peter Altmaier called China “a particularly successful country in terms of industrial policy.” Its achievements over the past forty years – and in digital technologies like artificial intelligence more recently – are seen as the fruits of an unabashed use of industrial policy. European politicians are calling for the EU to adopt a similarly active strategy, even to copy China in parts. But they ignore that China’s model is not a viable or desirable blueprint for Europe. 

Railway equipment colossus CRRC or globe-bestriding Huawei – when not seen as threats, companies like these are held up in Europe as dazzling examples of China’s industrial policy successes. But Europeans too easily overlook the idiosyncrasies and downsides of an approach that can only unfold under the extreme conditions of China’s hybrid state capitalism – a system controlled by an omnipresent party-state pulling the strings to shape a self-sufficient superpower. Market forces, entrepreneurship and the logic of profits are only welcome if they advance national strategic goals.  

Subordination to party-state goals risks suffocating China’s entrepreneurial spirit

As a result, market distortions and inefficiencies are common features of the Chinese economy. China’s huge state apparatus easily loses track of things. Uncoordinated initiatives of local governments often lead to multiple hubs that specialize in the same strategic industry – just think of the solar industry or smart manufacturing. Duplicated efforts and misallocated resources are tolerated only because the Chinese Communist Party (CCP) controls everything. Overcapacities and rising debt can be temporarily absorbed and the need to deal with them kicked down the line. But the economy’s subordination to party-state goals risks suffocating China’s entrepreneurial spirit. 

The conditions for industrial policy are very different in Europe. Development priorities are determined in a democratic process, enterprises act as autonomous entities, and social market values are upheld. The Chinese approach should not be replicated. Luckily for Europe, there are many ways to skin a cat. The EU needs to find its own way, choosing from a wealth of industrial policy measures and adapting them to the region without undermining European values, such as respect for human rights and the rule of law, and social market principles, such as fair competition.  

China banks on heavy state interference to foster a few (inter)national champions

The new industrial strategy presented by the European Commission (EC) in early March takes steps in the right direction. For example, where China banks on heavy state interference to foster a few large and successful (inter)national champions, Europe is betting on small- and medium-sized enterprises (SMEs). They are identified as key – yet often forgotten – drivers of Europe’s “twin transitions” to climate neutrality and digital leadership. Accounting for the vast majority of businesses in the EU, they are prized as the “economic and social backbone” of Europe’s economy with a largely untapped potential. If successfully pushed, they could spearhead the upgrade of Europe’s competitiveness. 

The EC acknowledges any European “industrial strategy has to be an industrial innovation strategy at heart.” It calls for more of a trial-and-error approach to research to spur breakthroughs, and for more pan-European industrial alliances, for instance, in clean hydrogen or low-carbon industries, to advance Europe’s green agenda. Experimentation and industrial alliances are also part of China’s model, but they can be given a European stamp by fostering an open yet critical mindset – also with regard to foreign participation. To ensure success, the EC needs to strengthen the single market and protect it from the distortions of foreign subsidies, which in particular benefit Chinese companies.   

Europe needs unbiased assessment of its innovation capacity and sovereignty

But the EC strategy runs the risk of hitting the target while missing the point. Its proposals are based on the assumption of EU leadership in several high-tech sectors. But is Europe really a leader in green technologies, for instance? An unbiased assessment of the status quo is never easy. But it is necessary to identify the chokepoints of Europe’s innovation capacity and sovereignty. An unrealistic self-assessment could lead to wrong priorities being set, and inaction where urgent action is needed. Misguided efforts could put Europe’s competitiveness – let alone its tech leadership – in jeopardy. 

At the same time, the EC wants Europe to achieve greater autonomy in so-called “key enabling technologies” such as quantum technologies and biomedicine – much like China. The global marketplace is becoming an increasingly contested space. This makes it essential that the EU now follows though. Having identified green development as a priority, the EC is asking Europe to seize the opportunity to leverage breakthroughs in industrial and tech innovation. Green development and climate neutrality, in particular, will put Europe’s new industrial innovation policy to the test.

This article was first published by EUObserver on April 8, 2020.