The U.S. economy of the 1970s was, in certain ways, quite similar to the U.S. economy today: rising inflation, a population broadly pessimistic about the future of the market, and persistent declines in overall productivity. There was also, back then, a growing economic threat from across the Pacific. Only, in the 1970s, the threat came from Japan, which was the subject of dozens of books, and even a handful of movies, as fears of it overtaking the U.S. as the world’s economic superpower loomed large.
Today, the competition isn’t coming from Japan, but from China. Still, there is a lesson in history, for that period of Japanese innovation and economic growth did not turn out to be any great tragedy for the U.S. Indeed, certain sectors in the U.S. were so spurred on by the perceived Japanese threat that they ended up, by the 1980s and 1990s, dominating the global market. China might play a similar role today, not as a juggernaut to be feared, but as a competitor; one that can—as Japan once did—accelerate the pace of innovation and even bring boom times to the U.S. economy.
Today, part of the fear of China’s rise has to do with the uniqueness of its model: a politically centralized system of power, coupled with a rigorously decentralized economy, wherein local governments compete to build up their own mini ‘Silicon Valleys’ all over the country. One example of this structure comes from the municipal government of Hefei, a city in eastern China of 5 million, which took a chance as early as 2008 in staking the company BOE Technology Group Co. with billions of yuan—or hundreds of millions of dollars—helping the LCD maker overtake Samsung in becoming the world’s largest manufacturer of LCD screens. The city also plays host to mega projects in quantum computing, and backed companies in the sector like CIQTEK when no private investors deemed it commercially viable. Today, Hefei has built the globally renowned “quantum avenue,” which is home to many of the world’s leading quantum companies. The Hefei government also recently saved Nio, an EV company that was on the verge of bankruptcy, by coordinating an entire supply chain—from battery makers to manufacturers—around it. Within a year of that supply chain effort, Nio’s production grew by 81%, and its market value went from $4 billion to $100 billion.
Hefei is not the only city making such moves. Second-tier cities such as Shenzhen, Wuhan, Suzhou, Guangzhou, Chengdu, Tianjin each have their own focal areas, whether it is in autonomous vehicles, AI, semiconductor design or manufacturing. Each city has a unique approach to help companies arrange for loans, attract talent, and build up complimentary business hubs.
These efforts and approaches help distribute the talent, and the wealth. China’s unicorns, second only to the U.S. in sheer numbers, are spread throughout China, not clustered in coastal cities as they are in the U.S. By the end of 2022, there were 1,500 of these municipal level government funds, totalling 2.7 trillion yuan (about $340 billion) for investing in companies. While U.S. cities and municipal governments award grants to businesses too, it is nothing on this scale, and it is usually in response to a crisis, as when Houston awarded $15 million in grants to help prop-up small businesses during the depths of the COVID-19 pandemic.
Many in the U.S. have looked on China’s astonishing rise with consternation, which again echoes how Japan was viewed in the 1970s and ’80s. The seminal moment came when the Japanese semiconductor industry began to leap ahead of the U.S. in the late 1970s—despite the U.S. being the birthplace of the microchip.
The U.S. reaction then was also not too dissimilar to the skirmishes with China today: it raised 100% tariffs on Japanese products, put in place voluntary export controls, and sued Japanese manufacturers for patent infringement.
But more importantly, and lastingly, the reaction from the U.S. wasn’t purely negative. Both U.S. companies and the U.S. government took inspiration from Japan’s novel innovation ecosystem that integrated its national labs and universities with its industries. Japan’s ascent spurred the U.S. to pass the Stevenson-Wydler Technology Innovation Act in 1980, to facilitate collaboration between researchers in national labs and academia with industry. The same year, the Bayh-Dole Act and the Small Business Patent Act incentivized professors to patent and universities to license breakthroughs, which encouraged an active transfer of technology from the ivory tower into private industry. As a result of these changes, productivity growth soared throughout the 1990s and 2000s thanks to lab-grown innovations like the world wide web, the digital camera, and the smartphone.
The contemporary parallel of leapfrogging a homegrown U.S. industry is now happening with China, which has for more than a decade now completely dominated solar panel manufacturing, and is also currently the biggest player in the electric vehicle market—two industries that were pioneered in the U.S.. Here, too, lessons from the past abound: In the 1980s, U.S. firms folded in aspects of Japanese manufacturing to aggressively innovate with their competitors across the Pacific. As a result of these changes, manufacturing capacity rose; American companies focused on a narrower set of products and differentiated; microchips got faster, better, and cheaper. By the mid 1990’s, the U.S. firms were surging to dominate markets such as micro components, with a 72% market share. Much of the world today, where chips are in everything from our coffee makers to our cars, is owed to this period of fierce competition and innovation between Japan and the U.S.
This is, at its essence, why this moment of Chinese competition with the U.S. is so crucial—not simply because it would lead to more innovation by each of these nations, but because, in the end, this sort of competition benefits consumers the world over. We see this firsthand with solar, where the cost of solar panels has declined by 80% since 2010; it is now the cheapest source of energy in the world. This can also be seen in the ongoing competition between the Chinese EV maker BYD and U.S.-based Tesla, where more affordable and better-quality cars are the result of their competition. It can even be seen in Big Tech: Facebook took inspiration from WeChat’s payment option in its chat functions, and Amazon’s Prime Day echoes China’s Singles day. China’s new “juguo” system of governmental management, which takes a whole of nation approach, is inspired by both the Japanese system of integration of its public universities and private businesses, as well as the sort of sweeping government projects in the U.S.—such as the Apollo Program or the Manhattan Project—that have had such world shifting results. Rather than turn away from China, or force China to turn away from the U.S., evidence and history has shown that greater competition leads to greater innovation, which will inevitably lead to more growth.
It is not as though China and the U.S. have no collaboration already. In fact, the two nations have generated the largest amount of cross-national published research in AI than any other two nations (the second most productive pair is the U.S. and the U.K.) There are plenty of good models for collaborative competition happening at this very essential moment, when the world is embarking on a green transition. The German government, for example, is ramping up its battery manufacturing sector, and building it atop Chinese technology. Major car manufacturers such as Ford and Toyota have been investing in Chinese electric vehicle companies so that they can incorporate Chinese tech in their cars, and bring that tech to the American, Japanese, and European markets. Tesla opted for a Chinese battery maker Contemporary Amperex Technology Co. Ltd. (CATL), which has factories in Germany.
Any nation that chooses to develop its technologies in isolation is likely to see its technological advancement slow down. The lesson of the past is not to run from international competition and cede the field in certain sectors, but to learn from your competitor, rise to the occasion, and innovate to win.
Source: Adapted from The New China Playbook by Keyu Jin, published by Viking