Chinese Business and Economics of Center for Strategic and International Studies (CSIS) senior adviser Scott Kennedy is warning top U.S. government officials to be careful of what they wish for when it comes to emulating China in the area of industrial policy spending.
"The United States needs to remember that it has not fallen behind China,” Kennedy wrote on CSIS.org. “The decision of whether to utilize industrial policy should be driven primarily not by whether the gap between the United States and China is narrowing, but by whether greater government intervention can produce more positive results than a more relatively laissez-faire approach for the country’s current needs...America needs to lead in industries, not industrial policy spending.”
According to CSIS, China spent at least 1.71 trillion yuan (equivalent to $248 billion) in 2019 on industrial policy, or roughly 1.73 of its GDP (1.71 trillion) in 2019. In comparison, the U.S. government spent $84 billion, or 0.39% of its GDP, on industrial policy in 2019.
In China, industrial policy spending can take on the look of several forms, including direct subsidies to certain firms and below-market credit to state-owned enterprises (SOEs). In 2019, the government provided an estimated $63 billion in direct subsidies, with much of the funding going to firms in priority sectors such as software, technology hardware, automobiles, and semiconductors.
On average, SOEs are known to enjoy interest rates that are at least 1% lower than those of private firms, reinforcing the CCP's preference for a strong state sector. In all, the Chinese government provided a minimum of $74 billion in below-market credit to SOEs in 2019, with the report further detailing that China's state-capitalist system is known to pose challenges for U.S. policymakers.
Here in the U.S., Kennedy notes the CHIPS and Science Act that President Joe Biden recently spoke with Michigan officials about is pegged to spend in the neighborhood of $280 billion over the next 5 years in industries that include semiconductor production, energy storage, advanced computing and nuclear physics.
“Ensuring that this law [The CHIPS and Science Act] and the other federal and local laws that will inevitably follow are implemented to maximize their benefits and minimize potential downsides will take continuous vigilance from Congress, the General Accounting Office, other executive branch agencies, the media, industry analysts, think tanks, and other countries," he added.
According to the World Intellectual Property Organization's (WIPO) Global Innovation Index, the United States ranked third overall, behind only Switzerland and Sweden, while China came in at number 12. The U.S. is ranked first in its region, while China is third in its region, behind the Republic of Korea and Singapore.
