Selective Industrial Policy: Economically and Politically Appealing? The Case of China

Industrial policy, aimed at affecting the evolution of specific industries (usually manufacturing) through state intervention in order to effect national efficiency and growth (Chang, 1998), can be both economically and politically appealing for a state like China. This article objects to the neoliberal argument that free markets are the optimal policy approach for enabling increased output, growth, and efficiency. The paper instead aligns with the infant industry argument and cites China’s growth to support its case. Plus, the author argues that domestic models of states are often the deciding factor on whether protectionism is deemed to be politically appealing or not. Again, concluding that China’s leader’s protectionism is also politically appealing, given that it is an inward-looking regime.

Adopting industrial policy is how many industrialised states developed. Extensive infant industry protection was central to economic development in the USA and UK, evident through the use of tariffs, export subsidies and other protective measures (Chang, 2014). Thus, the neoliberal view remains faulted, especially as it assumes a country’s technological capabilities as given. Capabilities are built over time, and producers often benefit from a period of insulation that allows them to advance such capabilities, subsequently making them more competitive. Therefore, leading to long-term growth. Also, through this logic, it can be inferred that industrial policy is only truly effective if protected industries become internationally competitive eventually (Chang, 2014).

China, which has realised exponential growth since the 1990s, is evidence for industrial policy effectiveness. The Chinese government implemented a ‘Made in China 2025’ strategy, which set goals to enable national champions to win market share in strategic industries. This initiative’s success has been aided by combined policy support, which has exceeded 500 billion RMB from 2006 to 2013. The aid has gone into several avenues and increased Chinese domestic investment and entry by 270% and 200%, respectively, subsequently leading to a 40% increase in China’s world market share (Barwick et al., 2019). The Chinese government’s specific policies include setting output and capacity goals, offering subsidies for entry, and improving overall capability by setting industrial policy across the various areas of a sector (Barwick et al., 2019).

Figure 1: Chinese output in Billions RMB in specific sectors that had selective IP

                                                                                                                    Source: voxeu.org

China’s successful implementation of industrial policy further establishes that government expenditure in public goods alongside protection is also necessary for producers within a state to become internationally competitive. The government must invest in structures necessary for producers to become competitive to counter the underinvestment that would occur if left to free-market mechanisms. These supporting mechanisms may include education and training alongside infrastructure aid. Thus, to strengthen the case for selective industry policy, it can be argued that cases in which industrial policy has failed have been due to the unsuccessful implementation of this policy, rather than a result of an inherently unsuccessful policy outlook.

Figure 2: Chinese GDP increase (in Billions of USD)

To address the political aspect of industrial policy, it is often argued that choosing protectionist policies in a globalised system is unappealing. This argument is based on the idea that nations aim to uphold a good reputation, and disobeying the World Trade Organisation rules can have costs in both multilateral and bilateral forums. Furthermore, imposing tariffs may harm some domestic firms who rely on imports within the production process. Most importantly, as free trade enables short-term gains, it is likely that those in elected positions favour trade openness to get re-elected (Sheldon, 2005). However, these assumptions are only true for democratic, outward-looking models. China’s one-party system means its leaders do not share the same re-election concerns as European democratic leaders, for instance. Furthermore, it is evident that in an inward-looking system, the ruling coalition’s domestic legitimacy is based upon nationalist sentiment over international reputation (Solingen, 2007). Therefore, industrial policy is politically appealing for the Chinese Communist Party, alongside making economic sense, which further strengthens legitimacy.

To conclude, as illustrated in this article and the story of many developed nations, the case of China attests to the effectiveness of industrial policy in the long-term. Though there is truth in the argument that such protectionist policies may not necessarily be politically appealing, it is important to differentiate between types of domestic regimes to identify to whom this argument applies. For undemocratic, inward-looking nations, it is often the case that industrial policy bolsters the regime’s legitimacy, especially if it leads to economic growth. However, in analysing the case of China, it is important to recognise that as it becomes more powerful globally, it may change its behaviour as it seeks to gain international influence. This will effectively switch China from being a purely inward-looking state. Furthermore, in analysing policy-cases of nations, such as tariffs, it is important to distinguish between protectionism and industrial policy, with the former being ad-hoc or reactionary and the latter being implemented through an established strategy.

Bibliography
Barwick, P.J. et al. (2019). China’s industrial policy: An empirical evaluation (No. w26075). National Bureau of Economic Research. p1-45.

Chang, H. et al. (2014). Policy Alternatives 1. In: Reclaiming Development: An Alternative Economic Policy Manual. London: Zed Books. p55-81.

Sheldon, K. (2005). Exchanging Development for Market Access? Deep Integration and Industrial Policy under Multilateral and Regional-Bilateral Trade Agreements. Review of International Political Economy. 12 (5), p750-775.

Solingen, E. (2007). Alternative Logics on Denuclearization. In: Nuclear Logics. Princeton: Princeton University Press. p23-54.