ECON3820
Understanding China
Sem 2, 2023
Scott Waldron
Week 5
Industry policy, global value chains
and national security
1
Recap from Week 4
Components and levers to guide China’s economic development
2
1. Macro-economic
• Diminishing returns to investment (K)
• Pathways out and their limits
• ↑ investment // consumption // social welfare
• Efficiency / productivity (A)
• Innovation
• Within absorption capacity
2. Ownership
• Corporatisation and the private sector
• The State holds “commanding heights”
3. Industry policy and upgrading in global value chains
• The topic today

In the news last week
3Sectoral composition of the economy
• Sectors
• Industries
To promote industries that advance social welfare or the national interest
• Catch up or fast-tracking to the future
• “Pick winners”
Rather than leaving it to the market, a case for State intervention
• Market failure and government failure
Industry policy used by all countries
• Trade protection, subsidies or tax credits, public spending on R&D, government procurement
East Asia NIEs widely-cited model
• The corporatist, development state
• With the objectives of increasing economic growth, industrialisation and international competitiveness
China’s industry policy
• Started with similar objectives to NIEs – competitiveness and catch-up in technologies
• But very different in form – different institutional starting points (Naughton, 2021)
• And increasingly turned to objectives of national security in key technologies (Naughton et al., 2023) and resources (energy, food)
Key themes
• Some contending objectives & trade-offs above (!?)
• Domestic and international dimensions – opposite sides of the same coin
Industry policy
Naughton et al., 2023
4
科技自立自强
Mastering choke point
technologies 卡脖子技术
林毅夫 New Structural
Economics : A Framework for
Rethinking Development
新型举国体制
集中力量办大事
Used for feats like 3 gorges dam,
high speed rail, manned spaceflight
Signature programs in China’s industry policy
Absorption of foreign technology
• Domestic content requirements
• Technology transfers from foreign joint ventures
• Gradual introduction of competition
Supply-side structural reform 供给侧结构性改革 (2014 - ongoing)
• Correcting imbalances from high-investment model and GFC stimulus (see Week 4)
• Includes cutting excess capacity
Made in China 2025 中国制造2025 (in 2015)
• Aimed at upgrading industry structures and value chains
• New technologies
• “Self-reliance” mentioned 21 times
• Debate in China on whether government subsidies promote innovation or productivity (!!!)
• MIC25 raised objections from the US – distortionary subsidies
• Vanished from official statements
Innovation-driven development strategy” (2016) (国家创新驱动发展战略)
Other (Naughton, 2023)
• Rmb10 trillion government guidance funds during 2014 to 2018
• Not all industry-selective
Integral to the XJP transition to high-quality development
6Dual circulation policy 双循环体系 (2020)
MERICS-
ChinaMonitor_Globalization_2
Continuation of previous industry policies
• “We should reshape new industry chains and
comprehensively increase technological
innovation and import substitution”
• Aims to reduce the vulnerabilities of exposure to
export markets 国际大循环
“Production, distribution, circulation and consumption
will rely more on the domestic market”.
But at same time
“Tighten the dependence of international industry
chains on China to form a powerful countermeasure
and deterrence so that foreign parties do not cut off
supplies”
Contradiction?
• Pursuing both self-sufficiency and
internationalization
• But best seen as shifting the terms of
internationalisation in China’s favour
Dual circulation
But in between these periods, already
declining % of X in economy
商务部 2013：出口对GDP的贡献被高估|出口|商务部|增加值
Exports of goods and services as % of GDP
Trade (imports and exports) (% Of GDP)
Foreign Direct Investment, Net Inflows
(BoP, Current US$)
DC and domestic consumption (!?)
Back to macro settings (Week 4)
11
学习时报 (23/08/17)：给老百姓直接发现金刺激消费，在我国不可行 - 时事
财经 - 红歌会网
Household consumption low in China
(But growing)
Trying to grow by edict
Not stimulus
Commodity chains Global commodity
chains
Global value chains
Structures in
int trade &
development
• Economic
imperialism
• Rise of the NIEs • Rise of MNCs
Intellectual
influences
• Dependency theory
• Structuralist
development
economics
• Comparative
development
literature
• Multinational
corporations
• International business
/ industrial
organization
• Global production
systems
Level of
analysis
Macro (states) Meso (sector) Micro (firms). Technical
& organisational
Source: Revised from Bair, 2005
But globalisation
under pressure
(below)
Global chain frameworks
GVCs concerned with:
• The relationships between chain participants – in a system
• How can
• States, societies and firms
• Develop the skills, competencies and services
• to participate in chains
• and accrue more value from that participation

Principles of VCA (1)
Gereffi, international trade and industrial upgrading in the apparel commodity chain
Principles of VCA (2)
Types of upgrading
• Product upgrading
• Process upgrading
• Inter-chain upgrading
• Intra-chain upgrading – toward the “lead firm” position
“Lead firm” position in the chains
• Firms with the scarce attributes, that controls the chain
• Varies by commodity & type of chain
Driving points of chains
• Demand/buyer driven chains
• Supply/producer driven chains
• Trader driven chains
• [Multi-polar driven chains]
OBM –品牌制造/运营
OEM –订单加工
ODM - 原始设计制造
Principles of GVCs (3)
Barriers to entry
• Can be high for firms, societies and governments in the developing world
• Can be constructed by firms (technology, human resources, brands)
• Some barriers endogenous to chain – e.g. established relationships in chains
• Some exogeneous to chain – policy (e.g. subsidies and tariffs), infrastructure
Governance structures
• Forge repetitive linkages between chains actors
• Rule making (e.g. standards), monitoring (audits), and implementation
(industry organisations)
• Relationships between actors – spot markets, futures, contracts, vertical
integration
Issues of:
• Monopolies, rent extraction, power relations
• Where value is accumulated
• Inclusion and exclusion
浙江日报 (zjol.com.cn)
China very interested in GVCs
• Research on GVCs from 2010
• Inter-ministry guidelines. 7部门下发<关于加强国际合作提高我国产业全球价值链地位的指导意见>
• As an approach to trade policy (FTZs, FTAs, BRI, WTO)
Gao (2023) China and Global Trade Order Post Ukraine War:
From Value Chains to Values Chains by Henry S. Gao :: SSRN
China moving to central stage in many GVCs
17Li, Meng, Wang (2019) Recent patterns of global production and GVC participation. Chapt 1. World Bank Document
(oecd.org)
18
China’s firm growing and internationalising
But
The “Go out” program – 走出去
Leading Chinese companies
• Producer-driven chains (e.g. Hai’er, Hisense, BYD)
• Trader-driven chains (Alibaba, Pinduoduo, JD ….. COFCO?)
• ICT (Huawei, Xiaomi, Lenovo)
An imperfect indicator An observations:
• Catch-up. China modest progress in capturing established industries
(aircraft and chips)
• Leap-frog. Rapid progress in “new “ technologies (batteries, solar, EVs)
19
China’s changing position in GVCs ?
The flying geese formation
• Costs and FDI
But then ….
China as a neo-imperialist power
• BRI
• dependency revisited?
Global firms are eyeing Asian alternatives to Chinese
manufacturing (economist.com)
Discontents from China’s integration into GVCs
The sheer scale
De-industrialisation
• In developed countries
• US-China trade deficit
• In the developing world
• Oks and Williams, The Long, Slow Death of Global Development - American Affairs Journal
• Casualisation and the service sector
• Globalisation now questioned as a force of welfare maximisation (Krugman, 1991)
National security
• Key technologies held by a country with different values / not an ally (e.g. Huawei)
• The weaponisation of inter-dependence [Australia, but esp Lithuania]
In an era of geopolitical and natural shocks, disruption, re-shoring and friend-shoring
Globalisation in reverse? Spring2023_Goldberg-Reed_unembargoed.pdf
The role the State
China engaged in global capitalism without relinquishing State control. More than MNC micro/technical driven globalization
• Currency manipulation
• Aggressive industry policy
• State banks, securities, brokerages
• Sovereign wealth funds (China Investment Corporation)
• US$2-3 trillion in assets
• Various entities (incl Huijin 中央汇金)
• Functions include crisis management and financial statecraft
• Currency purchases, fend off takeovers, industry policy, BRI
Contending explanations for China’s ascendency in GVCs
21
Domestic industry policy
and the role of the State

Macro-imbalance
Ingenuity, hard work, low-cost, efficiency and
value
Klein and Pettis, 2021
The domestic and
global mirror
China’s perspective
22
Entered into an established global economic order:
• Comply with WTO rules
• Competed successfully
• Using a different economic model
• Legitimate interest in influencing the order
Perceived discrimination against China
• e.g. Huawei, Trump tariffs, US export controls
• Imposing values in trade
Seen as an attempt to
• Upended China’s efforts to reshape global trade
• Contain China
Hypocrisy (你可以我不可以)
“In some way, deglobalisation is de-Chinazation . 俄乌冲突对国际经贸格局的影响 – CNKI
“We are at a time when it is getting harder and more dangerous, but if we do not advance, we will retreat, and we must advance.
We must be prepared to withstand the major test of high winds and even turbulent waves”.
23
Waves of Structural Deglobalization: A
World-Systems Perspective
Workbook question
24
China has moved to central place in in the functioning of many global value chains. Choose one sector e.g.
• a commodity
• or sector (textiles, ICT, consumer goods, services).
Has China’s domestic industry policy played an important role in integration and expansion into GVCs?
• If so, how?
• If not, want other explanations more important / convincing?
Remember
• Only need to outline main concepts
• Use concepts from lecture but may look up other sources
• E.g. Li, Xin., Meng, Bo. and Wang, Zhi (2019) Chapter 1. Recent patterns of global production and GVC
participation in Global Value China Development Report 2019, OECD. https://www.oecd.org/dev/Global-Value-
Chain-Development-Report-2019-Technological-Innovation-Supply-Chain-Trade-and-Workers-in-a-Globalized-
World.pdf
• Good practice for the exam!