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A long march to high-tech self-reliance would hold back China

Best response to US protectionism is more trade with other global partners

| China
A chipset designed by HiSilicon: China's state-led attempts to develop advanced chipmaking capabilities have been expensive failures.   © Reuters

Self-reliance strikes a powerful cultural chord in China, bringing to mind 1940s slogans coined by Mao Zedong as he ground out bloody victories in the country's civil war. Over recent months the notion has enjoyed a resurgence, reawakened by President Donald Trump's moves to deny critical technologies to companies like Huawei in the ongoing U.S.-China trade war.

It is hardly surprising that China's leadership find such threats unacceptable, and thus is talking up its ability to develop indigenous technologies in areas like semiconductors. But that does not make the idea of a push for technological self-reliance any more sensible, given the most plausible route to rapid Chinese development still lies with greater integration with the world economy, not less.

China's Vice Premier Li Keqiang made no mention of self-reliance when he spoke at the July 1-3 "Summer Davos" meeting of the World Economic Forum in the coastal city of Dalian. Instead, against the backdrop of a slowing Chinese economy and falling foreign investment, Li pledged to accelerate China's openness to international companies in sectors such as financial services.

President Xi Jinping has made frequent mentions of the idea over recent years, however, notably in a speech last September, in which he suggested China would be forced to take "the road of self-reliance" as it attempted to become an advanced nation. Coming at a time of worsening trade tensions with the U.S., his remarks were viewed as a call for Chinese technological independence in an era of rising protectionism.

The decision by Xi and Trump at the G-20 summit in Osaka in late June to resume trade talks and avoid further tariffs, at least for now, will do little to stem this feeling of Chinese vulnerability. Trump has proved himself thoroughly unpredictable, and temporary cessations of hostility can be quickly undone.

Although a world leader in sectors from high-speed rail and electronic payments to supercomputers, China remains reliant on foreign know-how in many others. Semiconductors are a particular weak point, as U.S. threats to deny components to both Huawei Technologies and ZTE, another telecoms group, have shown.

"These attacks on Huawei have been a massive wake up call to business leaders and politicians about the reality of China's position," I was told on the sidelines of the Dalian gathering by Nina Xiang, author of Red AI, a new book about her country's stubborn technological limitations in areas from artificial intelligence to robotics. Whatever its chances of success, a renewed push to develop indigenous technologies is now all-but inevitable, she suggests.

In all this the U.S. and China find themselves in a curiously symmetrical position, as hard-liners in both nations come to fear the other side turning economic interdependence into a weapon.

Trump's advisers point to China's frequent use of economic coercion as a tool of diplomacy, from recent threats to limit supplies of rare earth metals to its temporary ban of Australian coal imports in February, following Australia's decision to block Huawei's involvement in developing fifth-generation wireless networks. They conclude the U.S. must -- through greater self-reliance, in a sense -- take steps to avoid being put in a similar position as China's economic sway increases.

Trump's recent actions have led China's leaders to reach a similar conclusion. The resulting fog of mutual distrust has led some to predict the two nations might decouple, creating something akin to the two entirely separate economic zones of the Cold War.

This outcome has never been likely, at least in the short term, given how complex and entangled the duo's economies have become. But a smaller and more gradual process of separation between the U.S. and China is quite plausible, reversing some of the rapid integration that developed over a couple of decades of globalization.

This need not be a catastrophe for either side, but it would hurt China in particular, if it made it harder for Chinese companies to gain access to the kind of technologies they need to compete with the world's best.

Most Chinese industries remain deeply dependent on foreign know-how. Its corporations paid $29 billion worth of licenses and royalties for intellectual property in 2017, more than half of which came from the U.S., Germany and Japan alone, according to a new report released at the world economic forum this week by  McKinsey & Co., a consulting company.

For Beijing's trade hawks this is a rationale for self-reliance. But in truth China is now likely to need greater exposure to foreign know-how, especially in lagging industries like aircraft manufacturing or advanced industrial materials. In sectors where China is already world class, such as making high-speed trains, it prospered by bringing in foreign expertise. The sensible approach to areas in which it is much less good, like making passenger planes, is to do the same.

The notion of self-reliance has already pushed China into bad policy choices, and now risks doing so again, with semiconductors the most obvious example. Over recent decades its leaders have launched repeated state-led attempts to develop advanced silicon chipmaking capabilities. Almost all have been expensive failures.

Chinese companies like Huawei's HiSilicon spinoff do now produce chips for use in many of its smartphones and laptops. But the world's most advanced component makers remain in countries like the U.S. Most analysts agree China remains as much as a decade behind leading rivals like Taiwan's TSMC.

Officially, China wants more than three quarters of its semiconductors to be made domestically by 2030, up from around a third now. But the odds are slim that it can achieve anything close to this target by throwing around public money or launching further plans in the vein of its existing "China 2025" manufacturing strategy. Even if it did, the remaining imports would almost certainly still be the most important, given they would be the most complex, high-end chips.

McKinsey points to four advantages that helped countries like Japan and South Korea clamber up the tech ladder: sizable investment, large markets, access to advanced know-how and policies that encourage both competition and innovation. China does well on the first two, but struggles with three and four.

This leaves China's leaders in a bind. There is not much they can do about America's trade belligerence, beyond continuing to try and strike a deal that might defuse tensions overall. But there is plenty it can do to make its economic system more open to international investment, and its policies less focused on state interference.

Even if this does not placate Trump, it will still help China's economic prospects. If the U.S. grows less willing to develop commercial ties, there are plenty of other advanced countries that will. Either way, encouraging Chinese companies to remain enmeshed in global networks of trade and innovation remains the most likely route to development. A return to Mao-era slogans is hardly likely to do the trick.

James Crabtree is an associate professor in practice at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is author of "The Billionaire Raj."

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