Saving Face and Losing Money

Present and Future Challenges to China’s Global Economic Development Strategy

Mark Godges 高勉正

International Political Economy

June 16th, 2021

Both the countries that China aims to compete with and the countries that contain the resources and manufacturing ability to help China do so are democracies. History shows that democracies will always support each other so if China aims to ever come close to catching up with the United States as an industry leader, it will need to become a democracy itself. The models of Korea’s rise and fall in as a leader in different industries, respectively, shows the importance of relationships in maintaining leadership. In an ever-globalizing world, if China’s leadership and social policies are archaic and medieval while its population continues to grow and catch up to the modern world, the internal division will cause China’s dreams to collapse. Additionally, if China continues to alienate the democracies from whom it needs resources, it will never be able to catch up to the United States. This is shown by a recent deal with the European Union being ripped up because of sloppy diplomatic behavior. Despite the trade deal being decades in the making with trillions of profit potential over decades, it was more important for saving face to sanction members of European Parliament with human rights concerns. The major industries of “Made In China 2025” are telecommunications, electric vehicles, and renewable energy. The most urgent challenge that the executive leadership of China has in catching up with fully developed economies is reckoning with the impact of its own sociocultural decisions. They will continue to have an impact on their economic success in dealing with necessary industry partners if left unaddressed. Korea’s industrial success as a leading “Asian Tiger” provides clues to the importance of relationships in maintaining a strong political economy.

The first example of the sociopolitical world impacting political economy is the example of China’s industrial relations with Taiwan. To be a leader in the telecommunications industry, China needs to build a positive relationship with producers of semiconductors. Due to the Chinese leaderships increasing repression of Hong Kong since 2019, Beijing has alienated the leadership of Taiwan and its military where it could have found an ally. This was evidenced by Taiwan’s recent decision to elect Tsai Ing-wen in a relative landslide. As Taiwan is the leading manufacturer of semiconductors, this mistake has cost Beijing dearly in the race to outpace the United States in the industries of telecommunications and AI. In order for Samsung to accelerate its production to the next level, it needed to acquire manufacturing capabilities from overseas. The willingness of the United States and post-World War II Japan to collaborate was based on shared democratic values. Had North Korea happened to have the resources, they would not have gained this foreign help like the Republic of Korea could. “Korean firms had to start from 1 kbit D-RAM, but it was the decision of the private firms to skip the 1–16 kbit D-RAM to enter directly into 64 kbit D-RAM. How was that possible? Access to the external knowledge base also holds the partial key to this question. The time that Korean firms, including Samsung, were considering the production of 16 kbit D-RAM was the transition period in the world D- RAM industry from 16 to 64 kbit. Samsung was able to buy 64 kbit D-RAM design technology from Microelectronic Technology, a small US-based venture company and manufacturing technology from the Japan-based Sharp.” (Lee, Lim, 472) If a company can access external knowledge from industry leaders, they can develop similar strategies in their own countries. However, continual access to this knowledge, for example, in the form of exchange, will only go as far as policy will allow.

The United States, indeed, much of the free world will be reluctant to share production, manufacturing, or distribution leadership with the PRC so long as they view its leadership as a threat. The Republic of Korea and the United States are allies. So when Hyundai needed a hand, the United States was quick to show them the way. Taiwan’s semiconductor manufacturing leadership could have done the same. Unfortunately, saving face was more important to the current administration in Beijing than saving money. For example, In the case of Hyundai, it bought design technology from Vitelic but tried, without success, to develop its own manufacturing technology ŽC. Kim, 1994. Later, Hyundai had to borrow manufacturing technology from the Texas Instrument company. Thus, such stage-skipping catching-up was made possible by an access to the external knowledge base in the form of licensing… some foreign companies were willing to sell Samsung their 1 Mbit D-RAM design technology, but Samsung refused to purchase since it thought it could develop it on its own.” (Lee, Lim, 472) When it comes to technological development, the relationship to manufacturers in high tech developed economies is crucial. The problem for Beijing, is managing diplomatic disaster while attempting to gain access to industries held down by American, Taiwanese, Japanese or other laws.

The second example of the sociopolitical world impacting political economy is the example of China’s industrial relations with the Congo. To be a leader in the electric vehicle industry, China needs to build a positive relationship with producers of cobalt. Due to the Chinese leaderships lack of understanding of labor rights, worker’s rights, mutually beneficial deals for the working class, Beijing has further alienated the leadership of the Congo where it could have found an unwavering ally. This was evidenced in recent comments by Congo’s president about the renegotiation of deals with China, because “they come with empty pockets and leave billionaires”. As Congo is far and away the leading producer of Cobalt, this mistake has cost Beijing dearly in the race to outpace the United States in the industries of electric vehicles.

Since Cobalt is a natural resource, it cannot be reproduced with training and domestic Research and Development policy. LG, proved with industries relying on knowledge and not hands, foreign expertise is more important than foreign minerals. “Although it recruited PhDs from both the USA and Korea, the main leading research groups were those from LG who intensively absorbed new knowledge on digital TV and carried out R&D activities [29]. Samsung also did not have human resources. When Samsung’s research team was established, all the members except for the project leader were newly recruited researchers [25]. One interesting thing about the Samsung’ domestic research team was the fact that they recruited in 1989 only those engineers who had no experience with analogue TV but had majored in digital signaling in Korean or foreign schools. This practice can be considered as an “unlearning” along Nonaka [30–31] such that any new project had better be started with personnel free from the influence of old routines or preconceptions [32]. The leading researchers were recruited from those of the US firms to the US branch of the firm.” (Lee, Lim, Song, 48) Unfortunately, China does not have this luxury when it comes to the Congo. If the leadership of China squanders its relationship with the DRC because of the inability to shift their own cultural workplace norms, then they will have lost their electric car vehicle market forever. With electric vehicles being a key component of Made in China 2025, leaders may have to make the same decision as with Taiwan — is saving face more important than saving money?

The third example of the sociopolitical world impacting political economy is the example of China’s industrial relations with the United States and Canada. To be a leader in the renewable industry, China needs to build a positive relationship with the leading manufacturers of either solar, wind, or biofuels. The United States and Canada combine to lead all three. Due to the Chinese leaderships kidnapping of Canadian nationals and holding them hostage, Beijing has alienated the leadership of the United States and Canada where it could have found, at least, an amiable and interdependent competitor. This is evidenced by deepening ties and cooperative development in the G7, and strategically opening up trade to democratic countries. As the United States and Canada are the leading producers and manufacturers of renewable energy globally, this mistake has cost Beijing dearly in the race to outpace the United States in the industries of electric vehicles. Had the United States and China increased interdependence, China would be able to lead the world in renewable energy. The United States has more international students from China than any other country except India. Foreign industrial knowledge exchange is a mutual benefit so long as there is mutual economic exchange. If the “advanced capabilities” in renewable energy industries originate in the US and Canada, they can create a global monopoly on those industries. Should there be an interdependent relationship, China would stand to gain from that global monopoly — strategically and economically. However, if political maneuvering takes precedence over economic development, commercial policy leaders in the US and Canada may choose to lock Chinese companies, producers, and distributors out forever. Lee describes the necessity on holding monopolies on the source and reproduction of industry knowledge. For example, “The long-term accumulation of advanced capabilities by domestic firms represents a necessary condition for catching up to a level of world leadership. Other system factors besides public policy and financial organizations that are already relevant in the first stage also become significant. These factors include high-quality human capital from advanced educational organizations, public research organizations, networks of related firms, and vertical links with suppliers and users. Some of these system factors are sectoral, but several of them are national and therefore affect all sectors” (Lee, Malerba, 344) Lee also describes the idea of the “incumbent trap” where those who lock others out of industries will eventually fail.

If the United States, Canada, or other members of their alliance see their global leadership slipping, they may consciously choose to exalt new foreign industries in countries which are diplomatically palatable to them. If China maintained a strong interdependent economic relationship, it would be increasingly difficult for the United States and Canada to “choose” a successor state. “The first window of opportunity (for growth) is the appearance of a new technology or radical innovation. When a new technology or radical innovation is introduced, the incumbent may fall behind if it is locked-in to the existing technology, where it holds a dominant position. This situation is known as the “incumbent trap” (Chandy and Tellis, 2000). The incumbent tends to stick to existing technology because its capabilities and investments are related to such technology.” (Lee, Malerba, 344) If executive leadership in Beijing were willing to make diplomatic sacrifices for economic gain — they would be in a strategic interdependent position with the G7 right now. In lacking the flexibility to change unpopular international positions, they have once again has chosen to save current face and lose future money.

The foreign policy choices regarding China’s diplomacy with necessary economic partners and the resulting consequences for their global economic standing will largely depend on their leadership. At present, there are three potential scenarios. The first, is that the current administration in China understands that digging heels and gnashing teeth will not be a preferable option when facing down the G7 combined with their allies in both the developed world in the global south. He will make the necessary compromises to get China back into the good graces of the free world in the north, south, east, and west and global integration will be possible. The second scenario is that the current administration in China continues down the road of “China First” (i.e. Chinese trumpism) and cuts off long-term economic gain for the short term political gain, making both China and the world worse off. The third scenario which may occur is a transition of power in China which not only changes domestic Chinese policy but also its relationship with the outside world. This would change the world positively forever but is probably just as unlikely as scenario number one. In all likelihood, scenario number two will occur, because people never learn from history. One can only hope the political economy of the future will be spurred by young minds with hearts to the future rather than old minds with eyes to the past. Only then will China be able to catch up to the alliance of fully developed economies.

References:
Abramovitz, M., 1986. Catching up forging ahead, and falling behind. J. Econ. Hist. 46 (2), 385–406
Lee, K., Lim, C., 2001. Technological regimes, catching-up and leapfrogging: findings from the Korean industries. Res. Policy 30, 459–483.
Lee, K., Lim, C., Song, W., 2005. Emerging digital technology as a window of opportunity and technological leapfrogging: catch-up in digital TV by the korean firms. Int. J. Technol. Manage. 29, 40–63.
Lee, K., Malerba, F., 2017. Catch-up cycles and changes in industrial leadership. Res. Policy 46, 338–351