Some naysayers argue that China can't innovate and that the Chinese economy is bound to "hit the wall" like Japan's export-driven economy did in the 1990s. The "hit-the-wall" proponents are wrong.
WASHINGTON – There’s a fashionable theory making the rounds here that China’s booming manufacturing economy will soon “hit a wall” just as did the export-driven Japanese economy in the early 1990s. Relax, the hit-the-wall crowd urges, the Chinese can’t innovate much less maintain their current pace of economic growth.
Not only is this view misguided, it threatens U.S. global competitiveness. One reason is that those who espouse this position are essentially arguing that policy makers do nothing but wait for China’s economy to cool off and fade while we continue to out-innovate them. Problem is, there’s a growing gap in the U.S. between technology innovation and the ability to scale up and produce new value-added products and services.
At the very least, we need to close that gap.
Moreover, some proponents of the hit-the-wall theory are the same Beltway insiders who enriched themselves by helping to ship U.S. manufacturing jobs to China, a ruinous trend that has effectively hollowed out the U.S. industrial base.
Naysayers also point to China’s overheating real estate market as another sign of an impending slowdown, along with a declining rate of growth for China’s GDP. It’s also true that China’s state-run enterprises are a drag on economic growth, and the failings of the central government are, as one observer says, “unbelievable.”
But China watchers note that the stasis created by China’s command economy is slowly being challenged by more nimble provincial and municipal governments. Regional and local officials “are doing everything in their power to make the system work, sometimes against the wishes of the central government,” Dan Breznitz, a China expert at Georgia Tech’s Nunn School of International Affairs, told a recent hearing before the U.S.-China Economic and Security Review Commission. “We should not rely on China failing.”
Robert Atkinson, president of the Information Technology and Innovation Foundation, argues that the dismissive attitude toward China’s innovation drive is predominantly held by “Washington elites.” “There are way too many who have this deeply held view that we just don’t have to worry” because the China can’t innovate,” he told the U.S.-China commission. China “will hit the wall when they get to the stage of Japan, which is a long time from now,” Atkinson predicts. “The Chinese can go 40 or 50 years before they get to that wall.”
Breznitz stresses that China is not Japan. Municipal and provincial officials, he argues, have a clear set of goals, the money and the will to transform China’s economy in hopes of surpassing ours. “It is time that we wake up and smell the jasmine or ginger [tea] because it’s coming,” Breznitz warns.
One could argue that China’s current leaders are taking the nation in a direction that is unsustainable. Beijing’s air pollution is but one example. Another is rising labor costs in China, a trend that has some Western companies looking for ways to pull their manufacturing operations out of China. But penalties related to government economic and other incentives will make these manufacturing “re-shoring” efforts difficult.
Rather than wait for China to hit a theoretical wall, the U.S. must rebuild its manufacturing capacity from the ground up. Atkinson’s foundation is preparing a report to be released in June that will propose the creation of 15 “manufacturing universities” that will be modeled on Germany’s approach to training manufacturing engineers. Such an initiative would augment other efforts to revive U.S. manufacturing so that we can begin the close the gap between laboratory innovation and the introduction of new products and services that can help create a new engine of U.S. economic growth.