Copying from and competing with China

Dani Rodrik has a very good piece on the Chinese industrial policy. He makes a simple point. 

Chinese government pursued an aggressive industrial policy that focused on its interests. Far too often, its practices conflicted with the standard global conventions and tilted the playing field to favour its companies. It ended up hurting competitors. But instead of pursuing policies that responded to their interests, both in terms of appropriate industrial policy and actions to combat Chinese practices against a level playing field, the competitors have allowed a free pass for China and are now blaming China. The time has now come for others to both copy and take on China, and protect their own interests. 

For sure, there are limits to how much India or any other country can splurge with financial resources. But it is also not desirable to do so. Instead there are other levers of policy. On the WTO, several years back, India should have, for example, aggressively pursued this.

Further, the Chinese have pursued non-reciprocal trade policies, state-supported industrial espionage, and arm-twisted foreign companies into technology sharing partnerships. Political leaders and bureaucrats across the world, especially in developed countries, have been complicit in this. In fact, whole countries (see Italy here) and industries have been sold out in private deals which have come at the cost of national interests.

But the most important and essential response would be for India to aggressively pursue its version of industrial policy. There are several things to copy from China. Take this example of the Chinese industrial policy on medical supplies. Post pandemic, we have come to realise that this industrial policy bet has helped China reap strategic benefits. 

In fact, one could safely argue that food and healthcare are two areas where a large country like India should unabashedly seek reasonable self-sufficiency by whatever means possible. Given the dominance of China in several sectors and its now clear willingness to abuse its dominance, it is critical for other countries to diversify away from China. 

A NYT article by Keith Bradsher argues that China's industrial policy has helped the country position itself as the overwhelming dominant global supplier of medical equipment and gears. The scale is staggering,

Before the pandemic, China already exported more respirators, surgical masks, medical goggles and protective garments than the rest of the world combined, the Peterson Institute for International Economics estimated. Beijing’s coronavirus response has only added to that dominance. It increased mask production nearly 12-fold in February alone. It can now make 150 tons per day of the specialized fabric used for masks, said Bob McIlvaine, who runs a namesake research and consulting firm in Northfield, Ill. That is five times what China could make before the outbreak, and 15 times the output of U.S. companies even after they ramped up production this spring... Ma Zhaoxu, vice minister of foreign affairs, said that from March through May, China exported 70.6 billion masks. The entire world produced about 20 billion all of last year, with China accounting for half.

And it has emerged from very active industrial policy,

Factory owners get cheap land, courtesy of the Chinese government. Loans and subsidies are plentiful. Chinese hospitals are often told to buy locally, giving China’s suppliers a vast and captive market... For years, China’s leaders have worried that the country depended too much on foreign sources for everything from medical supplies to microchips to airliners. It has used subsidies, economic targets and other government inducements to emerge as a powerhouse in those important industries. When Chinese leaders grew concerned about pollution and dependence on foreign oil, for example, they helped local makers of solar panels, wind turbines and high-speed rail equipment clobber the competition. They have taken similar steps to dominate industries of the future, like the next generation of wireless data transmission, known as 5G... American companies have been reluctant to make big investments in fabric manufacturing because they worry that mask demand will be temporary...

Chinese makers of medical gear enjoyed generous government subsidies. Shenzhen Mindray, a maker of ventilators and other intensive care equipment, received up to $16.6 million a year over the past three years, according to company documents. Winner Medical, a mask manufacturer, received $3 million to $4 million a year. Guangzhou Improve, a producer of masks and test kits, received $2.5 million to $5 million a year... Hospitals began to buy locally. Three years ago, the central government required purchasers to buy from domestic producers that could meet requirements. Local governments followed. Sichuan Province, for example, cut in half the number of categories for which medical equipment and supplies could be imported. Only the top hospitals could import anything, the provincial government said, while lower-ranked hospitals had to buy everything in China. At least three other large, populous provinces — Liaoning, Hubei and Shandong — made similar announcements.

Merely giving subsidies and providing favourable competitive environment is not enough. Quality and productivity are equally important. As Joe Studwell has shown in the context of South East Asian economies, without export competition, such support only ends up being captured by powerful local elites. 

The subsidies ensured that Chinese firms got the runway to refine their technologies and business models and deliver their products at the lowest cost. The production cost and scale have marginalised foreign competitors in even their own domestic markets. 

Industrial policy also requires cultivating manufacturing culture and creating ecosystem. The latter is a point highlighted here. The Times writes,

Rakesh Tammabattula, an entrepreneur in the Los Angeles suburbs, shifted his business making nutrition supplements and moisturizer to the production of medical masks and hand sanitizer in response to the epidemic. To do that, he needed a machine that could compress and cut fabric to make masks. He discovered that the machines were made only in China. He had to charter a jet to fly the huge device — 36 feet long, six feet high and five feet wide — from southern China to Los Angeles. “It’s not that we can’t make this,” said Mr. Tammabattula, the chief executive of QYK Brands. “It’s just that we haven’t focused on it.”... In Los Angeles, Mr. Tammabattula has found that even producing hand sanitizer is hard. He has been unable to find any company in the United States that still makes plastic bottles with pump handles. He imports them, on expensive chartered aircraft, from China. Mr. Tammabattula has applied for a federal loan for small businesses trying to produce medical supplies, but the paperwork has proved extensive, daunting and slow, he said.

The government has a crucial co-ordinating role to play in fostering the growth of manufacturing. Take the examples of places like Morbi (HT: Ananth) or Meerut or Sonipat or Wagle. A recent newspaper report informs that Morbi in Gujarat, known for tiles and timepieces, is make a big push to become a major toy manufacturing hub by manufacturing for brands like Mattel, LEGO, and Hamleys. The town has over 300 SMEs manufacturing clocks, gift articles, and electronics items and employing over 35,000 workers. It makes over 90% of the country's clocks. With their regular business down, the firms in Morbi are exploring other areas and see an opportunity in the toys sector. In particular, they want to replace Chinese suppliers of small electronic equipment to Indian manufacturers of consumer appliances, gift items, and toys. 

The level of co-ordination required for Morbi to succeed is significant. Market forces and industry associations cannot do it on their own. Governments will have to support identification and mobilisation of prospective suppliers, and co-ordinate local manufacturers to focus on local suppliers. Both sides will have to feel confident enough that the other side will keep their part of the contract.  The new suppliers will have to get the confidence of reasonably assured market demand to make the investments for the business pivot. Similarly, the manufacturers will have to get the confidence that the supply will be of good quality and at a competitive enough price.

Public policy can facilitate the matching by channeling industrial policy incentives to bridge the market confidence deficit on both sides. Besides, it will have to offer some form of level playing field protection against cheap Chinese imports. Instead of picking winners within the sector itself, industrial policy should be confined to facilitating the catalysis of good quality and cost-competitive local manufacturing of small electronic equipment.

It requires co-ordination across central government Ministries as well as between central and state governments, besides among private sector participants, to synchronise industrial policy. It requires stable policies and consistency in their implementation. It also requires patient and persistent effort over a few years involving the nuts and bolts of implementation to develop the eco-system and catalyse the market.