The Trade Numerologist: What China’s “Made In 2025” Strategy Means for Global Trade
This column is based on data from Global Trade Atlas.
One of the key chess pieces is in the ongoing US-China trade spat is a classic Beijing industrial plan. In 2015, China released a new ten-year program aimed at making and exporting cutting-edge technologies.
This so-called "Made in 2025" strategy uses a classic cocktail of government subsidies, state-guided production and tariff policies, and aims to use state industrial policies to establish China as the world's dominant high-tech manufacturer by 2049, the hundredth anniversary of the establishment of the current communist regime.
For Chinese leaders, it's no longer enough to command markets in making finished consumers goods like iPhones, shoes and toys. Beijing wants the country's factories to manufacture the more lucrative parts that are in the middle of the supply chain, and develop the next generation of fancy tools, gadgets and weapons. Importantly, as wages for Chinese workers and other costs increase, China wants to increase profit margins and increase its overall prosperity and wealth.
Chinese officials believe their factories are still too reliant on other countries to supply key intermediary elements of the production process, such as electronic circuit boards and semiconductors. Electronic and electrical components were two of the top three Chinese import categories during the first quarter of 2018.
Top Chinese imports (&change), first quarter, 2018
- Electronic components $118.6 billion (+27.5%)
- Oil & gas $78.3 billion (+28.6%)
- Electric components $46.5 billion (+23.1%)
- Ores, slag, ash $34.4 billion (+3.5%)
- Optical, medical equipment $23.8 billion (+8.8%)
- Cars, trucks $20 billion (+13.1%)
- Plastics $17.6 billion (+3.1%)
- Organic chemicals $16.4 billion (+13.4%)
- Copper $11.7 billion (+23.6%)
- Oil seeds, grains $9.7 billion (-0.8%)
China's aim is to become the leading producer of advanced satellites, electric vehicles, robotics and advanced artificial intelligence software. The goals of the policy are wide-ranging, from permitting its private tech companies like ZTE and Huawei to compete with the likes of Apple and Microsoft, to building up its military and affirming its presence to the US as a strategy counterweight in the Pacific rim.
"Beijing's ultimate goal is to reduce China's dependence on foreign technology and promote Chinese high-tech manufacturers in the global marketplace," James McBride writes in a recent paper on "Made in 2025" for the Council on Foreign Relations. As Mr. McBride points out, China buys 60% of the world's semiconductors but makes only 13% of them.
Indeed, according to trade data, China is the world's largest importer of electronic circuits.
Imports of electronic circuits (&change) first quarter, 2018
- China $70.7 billion (+38.9%)
- Hong Kong $36.7 billion (+17.9%)
- Singapore $14.2 billion (7.4%)
- Taiwan $11.8 billion (+21.4%)
- Malaysia $8.5 billion (+21.4%)
- South Korea $8.5 billion (+5.5%)
- US $8.4 billion (+1.7%)
- Japan $4.8 billion (+9.3%)
- Germany $4.8 billion (+21%)
- Mexico $4.1 billion (+18.8%)
Policy scholars refer to the development of these technologies as the fourth industrial revolution, and it has set off a global arms race. Germany has a similar plan, in fact, although it's much less focused on exports and more on technological research.
What the Chinese "Made in 2025" plan will likely mean is an aggressive expansion of the country's high-tech production and exports, and a potential evaporation of Chinese markets for Western tech companies.
The problem for the US and Europe is, in part, that much of what remains of its manufacturing base is high-tech industrial production. It's already lost shirts and shoes to China. It can't afford to lose cars and semiconductors.
A second risk, in the eyes of the West, is security. Washington and Brussels don't want Beijing getting its hands on key military applications like drones, lasers and other sophisticated weapons systems.
US officials name the "Made in 2025" strategy as one of the key reasons it's waging its ongoing trade war with China. This year, it targeted one high-tech good, solar panels, with new tariffs.
The two economic superpowers are still trading jabs, and tariffs on over $100 billion worth of annual trade. Earlier this month, China announced a new round of tariffs on US imports, putting a 25% on $16 billion worth of annual imports.
The US is trying to claw back some of what it gave away when China joined the World Trade Organization in 2001. It had seemed like a perfect bargain. China was the hot new market, and the West had dozens of the world's major corporations eager to invest in Asia.
The deal has paid off in part, because China is a huge market, and because it has become part of a global supply chain, importing parts and components to make finished goods.
Chinese imports of electronic components, first quarter
- 2009: $45.9 billion
- 2010: $65.3 billion
- 2011: $79.1 billion
- 2012: $80.4 billion
- 2013: $110.2 billion
- 2014: $90.6 billion
- 2015: $92.7 billion
- 2016: $83.4 billion
- 2017: $93.1 billion
- 2018: $118.6 billion
But with blue-chip US companies like Apple, Caterpillar and General Electric operating the factories in China importing those parts, and selling their goods there, Beijing has leverage in the ongoing trade dispute, and a competitive incentive to keep the "Made in 2025" strategy on track.
The Trade Numerologist is IHS Markit's unique weekly look at global trade by award-winning journalist John W. Miller, formerly of the Wall Street Journal, using proprietary numbers from IHS Markit's Global Trade Atlas database, the world's most complete and accurate set of trade numbers.
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