Trans-Pacific View | Economy

How Should the US Respond to China’s New Five-Year Plan?

As the CCP doubles down on technological “self-reliance,” it’s time to refresh American economic statecraft.

By Emily Jin and Coby Goldberg for
How Should the US Respond to China’s New Five-Year Plan?
Credit: Illustration by Catherine Putz

While Americans went to the polls this week, the Chinese Communist Party (CCP) leadership gathered in Beijing to discuss Party politics and economic strategy. They finalized a five-year plan to guide economic strategy through 2025 and laid out a special 15-year strategy called “Vision 2035” that will see the country through “the long-term goal of basically achieving socialist modernization by 2035,” according to an official communique delivered at the meeting’s close.

Innovation was at the heart of CCP discussions, mentioned 15 times in the 22-paragraph official communique (Party Secretary Xi Jinping only got nine mentions). The CCP is doubling down on its drive toward “scientific and technological independence and self-reliance,” according to the meeting readout, suggesting deep investments in technologies like semiconductors, 5G, and artificial intelligence (AI) at a time when the United States is ramping up its efforts to stymie China’s technology ambitions. China’s evolving strategy requires a fresh American policy response.

The CCP initiated a shift to an “innovation-driven development” strategy in the 2015 five-year plan. The 2015 plan mentioned innovation more than 200 times, setting the goal of increasing Chinese R&D spending from 2.1 percent of GDP in 2015 to 2.5 percent by 2020, and of increasing the annual revenue of high-tech enterprises from 22 trillion RMB to 34 trillion RMB. At the same time, the CCP introduced Made in China 2025, an initiative that identified 10 priority sectors in which the government would foster national champions, push technology transfers from foreign firms to Chinese firms, and promote a “Going Out” strategy for domestic businesses. Chinese state planners have subsequently expanded on this work, releasing detailed plans to establish technology leadership across one hundred sectors.

Though China fell short of some of the benchmarks set in 2015, it has made considerable progress toward putting “innovation” at the center of its development. The focus on high-tech innovation in the five-year plan gave valuable momentum to key technology sectors, helping move Chinese manufacturing up the value chain. The AI market has exceeded 50 percent annual growth, furthering the country down the path to “cultivate an artificial intelligence industry ecosystem” as the 2015 plan hoped. Overall, China climbed to 14th place in the Global Innovation Index, a 15-spot jump since 2015.

But China’s technological ambitions did not go unnoticed. The 2015 plans, particularly the flashily named Made in China 2025 initiative, worried American policymakers, who expanded the frequency and intensity of American economic statecraft to blunt China’s technology development. Unilaterally, the U.S. government has a well-established system for enacting economic statecraft, and this system has been bolstered in the past few years. The Department of Commerce broadened the policy goals of the Entity List beyond the traditional purview of national security concerns to include human rights abuses and intellectual property theft. The administration has used the Entity List to target a growing number of Chinese companies. Under the Export Control Reform Act of 2018, the Department of Commerce has begun to use the Emerging Technology Technical Advisory Committee to identify sensitive and dual-use technologies. Since 2018, a newly empowered Committee on Foreign Investment in the United States (CFIUS) has clamped down on technology transfers to China through increasingly extensive investment review mechanisms. On the multilateral front, the U.S. has engaged in an extensive campaign to persuade like-minded partners to ban Chinese equipment from their 5G networks. A growing coalition of countries, including the United Kingdom, Sweden, and Australia, have joined the Trump administration in taking forceful measures against Huawei.

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Even though the administration has a substantial policy arsenal and increasing international support, its economic statecraft against Chinese technology giants has often proven inconsistent. Its enactment and subsequent repeal of a ban on ZTE rang alarm bells in Beijing while undermining American credibility as it demonstrated lack of clear policy goals. Moreover, when it comes to 5G network development, even some of the United States’ closest allies have resisted the administration’s appeals to ban Huawei equipment.

But if the Trump administration has not always succeeded in persuading allies of the urgency of cracking down on Chinese components, its message has hit home in Beijing, driving Zhongnanhai to accelerate efforts to secure self-reliance in core technologies including blockchain, artificial intelligence, 5G, and big data. This newest five-year plan, to be released in full in March, will provide valuable insight into how China’s leaders plan to navigate the country toward the newest stage in development despite a hostile United States.

“The plenary session proposed that innovation should persist in being at the core of our country’s innovation drive,” the meeting communique affirmed. “It is necessary to strengthen the national strategic scientific and technological strength, enhance the technological innovation capabilities of enterprises, stimulate the creative vitality of talents, and improve the technological innovation system and mechanism.” These proposals build on remarks Xi gave to a conference for economists organized to solicit inputs for the five-year plan this August, in which he emphasized the importance of “accelerating the transformation of scientific and technological achievements into actual production, moving up the industrial value chain, and securing supply chains.”

U.S. policymakers should chart a new economic statecraft in response to direction coming from Beijing. Domestically, the U.S. government needs to assess the economic impact of its economic statecraft against China in the technology domain. U.S. export controls, for example, have substantial economic impact and unintended consequences on American high-tech industries. U.S. policymakers should engage with private sector actors to understand how supply chain decoupling impacts domestic high-value industries.

Internationally, the United States needs to continue to coordinate with partners and allies to secure their buy-in. Specifically, the United States could take the lead on establishing a shared CFIUS-like process amongst the Five Eyes, while also promoting common standards for R&D in key sectors. Over time, the U.S. could include countries outside of the Five Eye in this multilateral mechanism.

The United States currently outpaces China in many domains of the future – semiconductors, aerospace, and biotechnology, to name a few – as the two countries’ relative shares of value-added patents in these domains show a disparity that may temporarily placate U.S. policymakers. However, this absolute advantage could potentially be eclipsed if the U.S. government does not refine its economic statecraft to preserve its innovative capacity and bolster its international leadership in technology development.

Momentum for strong U.S. government action to boost competitiveness could be sapped as China turns away from the sorts of phrases that have drawn media attention of late. Made in China 2025 has been conspicuously dropped from the CCP leadership’s lexicon, a move perhaps taken to deflect global attention from China’s continued march toward technology dominance. This only makes it more important that U.S. policymakers look closely at the substance of the marching orders given to China’s economic decision makers in the newest five-year plan. Doing so will position the United States out ahead of China’s new initiatives as the items on the CCP’s wishlist become reality.

Emily Jin is a research assistant and Coby Goldberg is a researcher, both at the Center for a New American Security.