Editor's Note China’s challenge to the current international system has generated concerns for the US leadership, causing a shift in US policy toward China driven by the view that China’s actions indicated that the US engagement policy had failed. Changes in American approaches to China have become more obvious since President Trump took office. He has taken a tough stance on China and triggered a trade war between the two countries. Ryo Sahashi attempts to show those changes in US policies toward China by examining key events with relation to various issues as well as Japanese responses to the ongoing competition between the US and China.     Quotes from the paper  Introduction The U.S. Vice President Mike Pence delivered his eye-catching speech on October 4th, 2018 on China. In the remark, Pence clearly accuses China of using political, military, and economic tools to interfere in the domestic politics and advance its influence in American society. He also criticizes Beijing for suppressing the rights of religious freedom for Christians, Muslims and Buddhists. Giving credit to American “open door” policy for the success of rapid development of China, Pence discusses the essence of Trump administration’s National Security Strategy and emerging policies against a “communist” China. While there is still a chance for both governments to agree on ways to assuage imbalance of trade surplus through diplomatic efforts, the hard-liner position on China has been almost a unified and inter-departmental view in the Trump administration. Trump’s foreign policy has inclination to promoting ‘America First’ in trade, and has been reluctant to globalism, order-building and international institutions, and cold-hearted towards old allies and partners which American leadership has been underpinned since the Cold War. Therefore, it was surprising to the international audience that his administration has advocated the strategy of competition against China, which requires all of policy resources, what he has denied until then. The big question is the role of the U.S. allies and partners in the strategy. Since Chinese challenges on the liberal and democratic order are multifaceted, and use of force is not always cost-effective to achieve the political goals in great power politics, it is rational to accumulate political and diplomatic powers to check and shape ambitious activities by China, such as modernizing dual-use technologies, exercising sharp power in Western democracies, and envisioning an alternative order. However, the Trump administration has gradually decreased American reliability and even credibility due to its uncertain and untrustworthy commitments on international agreements. This casts doubts for some on the ability for the U.S. to lead a coalition to compete against China. Moreover, no country is prepared to contain China: their China policy is naturally nuanced and balanced, due to the reality of economic interdependence and indispensability of economic exchange with China. In each country, we can find out interest groups, or constituency, to support business with China, while we can also find out pro-competition camps who try to offset engagement. A good example is the recent Japan-China relations. In October 2018, Prime Minister Shinzo Abe visited Beijing and shook hands strongly with President Xi, proclaiming three principles in order to avoid being dragged into the competition. Japan has viewed that its alliance policy with the U.S. is still essential for long-term security, but it aims to shape the strategic environment by international norms and rules. Japan is not alone for such a nuanced and independent stance on China, and many Asian and European countries have different policies against China. Their strategic goals are to shape China in the rule-based order. Some argue it is because of the Trump administration that the U.S. finally turned its foreign and security policy toward competitive approaches against China. However, we have to ask whether the Trump administration has an ability to lead the world for the strategic goals properly, and whether American allies and friends can accept the economic cost to reshuffle business activities with China due to security concerns. This paper attempts to contrast American and Japanese approaches on China. Firstly, it analyzes emerging American hard-liner approaches on China. Then, it argues the debates and responses in Japan on the emerging U.S. -China competition.   Trade War Technology is becoming the main field of competitive policies. In December [2018], CFO of Huawei Wanzhou Meng was arrested in Canada and the U.S. Justice Department claimed criminal charges for bank fraud, wire fraud, conspiracies to commit bank among others against Huawei, its two affiliates and Ms. Meng. In 5G and ITC area, reportedly the Trump administration would soon issue presidential decisions on tighter control of telecommunication device made by Chinese companies to American market. Also, in other areas of emerging and founding technologies, the U.S. Commerce department is in the process of issuing the list of control.   Security To reduce increasing Chinese influence and debt diplomacy and make government development organizations like Overseas Private Investment Corp (OPIC) stronger, the Senate passed the legislation to create a new 60 billion USD agency. In addition, in Papua New Guina Vice President Pence also announced the Indo-Pacific Transparency Initiative. His speech explained, “In conjunction with more than $400 million in American funding, this program will help empower the region’s citizens, combat corruption, and strengthen sovereignty” (Pence 2018a).   Sharp Power Congressional Commission Report revealed that some Washington think-tanks were funded by the Chinese Communist Party through the United Front Work Department (UFWD) to ensure a better projection of China in the U.S. The report stated violation against the rights and freedom of speech that were protected by the laws of the U.S. The report stated that Johns Hopkins School of Advanced International Studies had been receiving funding from Tung Chee-hwa, the Vice Chairman of the Chinese People's Political Consultative Conference that has high influence on UFWD. The U.S. Justice Department ordered on September 18th [2018] that Xinhua News Agency (CCTV) and China Global Television Network (CGTN) to register as foreign agents. The initiative was taken to reduce the foreign influence in the domestic issues of the U.S., to reduce the media manipulation, and to toughen the stance of the U.S. on the policies of China. On the same day, Trump tweeted that China was trying to meddle in the U.S. elections by turning the farmers, industrialists and businessmen against the Trump administration.   Religious Freedom On September 12th [2018], Nauert discussed a possibility of U.S. sanctions in response to the Chinese government's crackdown on ethnic Uighurs, Kazakhs and other minority groups. The sanctions could be imposed under the Global Magnitsky Act that would allow the government of the U.S. to freeze the U.S. assets of the Human rights violators, ban them from entering the U.S. and prohibit any U.S. firms to do business with them. Chinese government did not show any accommodating posture and insisted the “sinicization” of Xinjiang should continue.   Taiwan In December 2016, Trump received a call from the President of Taiwan Tsai Ing-wen. Since taking office, Washington and Beijing started to fix the relationship through diplomatic back channels. On February 9th, just a few days before the upcoming Abe-Trump summit, the White House released the turnout on One China policy. It said, “President Trump agreed, at the request of President Xi, to honor our ‘one China’ policy.” Trump administration has tried to stretch out its Taiwan-related policy to the edge of its One China policy, and the Congress has shown its strong interests through legislation, while most of the policies on Taiwan was under the administrative power. A good example of bipartisan support and President’s forward-leaning position can be seen in the Taiwan Travel Act (signed in March 2018), which permits the meetings between the U.S. and Taiwanese high officials.   Further Research Agenda [I]t is observed that Trump administration’s China policy has been transformed into the hard-liner approach since the winter of 2017 through spring of 2018, and security hawks and economic nationalists have united their positions on various issues. However, the research questions have been remained: firstly, whether the administration position on China has been really shifted, including president, bureaucracy, and interest groups. Secondly, it is still unclear whether there is a consensus view on the end state with such hard-liner policy. Some provocatively argue the de-coupling of Chinese economy from global supply chains, and stress the regulation on technological development, acquisition through investment, and free trade with China, while these arrangements could do serious negative impacts on substantial economy and stock markets. If the administration aims at such decoupling, the tension between the U.S. and China shall not be relaxed for a decade or more. On the other hand, if the administration simply tries to enhance its bargaining power to change Chinese unfair economic practices and ambitious challenges against the American leadership, there is a room for the Chinese government to assuage the U.S. concerns through concessions and economic statecraft. Finally, relating to these points, is the engagement idea vanishing among the U.S. policy makers? Since the 1970s, many China hands have kept the hopes on Chinese democratization and also socialization in the international community through contribution to global governance. Last five years, it is said, by some security-concerned experts, such hopes have been into extinct. Do ideas to avoid Thucydides trap, through statecraft, have the possibility to arise? In addition, President Trump might be attracted by the idea to make “Big Bargain” with Chinese leaders, making a historical turning point of the world order, to claim it as his own achievement.   Japan’s Response to the U.S.-China Competition Until the early spring of 2018, China had a long political season, and Xi Jinping entered his second term. In September, Abe showed up at the Chinese embassy’s ceremony of national day, voicing his intention to visit China and hope to invite Xi Jinping to Japan then. Beijing also made signals to keep the momentum for China-Japan relations. After having a warm summit meeting between Abe and Xi at Da Nang, APEC in November, on the occasion of Memorial Day ceremony for ‘Nanjing Massacre’ on December 13th, Xi did not make speech by himself, but the remarks were made by Yu Zhengsheng, chairman of Chinese People's Political Consultative Conference, emphasizing the points that Japan was a neighbor to construct the relationship along with the principles of Periphery Diplomacy toward their common future friendship. Prime Minister Li Keqiang visited Japan on the occasion of the China-Korea-Japan trilateral summit hosted by Japan in May, 2018. It was for the first time in eight years that Chinese prime minister visited Japan. At this occasion, in addition to the warm welcome for Li at Tokyo and Sapporo, the two leaders celebrated the conclusion of maritime-air communication mechanism between the two authorities and signed the China-Japan social welfare treaty, which both country’s industry long hoped to accomplish. Not only top-leaders’ meetings have taken place, but foreign ministers also met each other very frequently during this period of time. After assuming the Foreign Minister in August 2017, Taro Kono and his counterpart Minister Wang Yi had held eight foreign minister meetings. According to the anonymous person in the Japanese ministry, the Chinese side had sought occasions energetically to hold foreign minister meetings.   Prospect and Further Research Agenda As of February, 2019, China and Japan are still waiting how Trump would behave after the mid-term election of 2018, on his China policy and North Korean policy, respectively. Xi Jinping may pay state visit to Japan in 2019, but the items Beijing and Tokyo could agree on would depend on the situations of the US-China relations at that time: if this relationship between Beijing and Washington goes back to the normal negotiation phase, putting an end to strong criticism against China, China might not be motivated to approach towards Japan strongly. On the other hands, if Beijing and Washington fail to reach at any concessions, China should be tempted to enhance its relations with Japan, while Japan’s position might be more difficult. Japan, as a crucial ally for the U.S. strategy, should be asked from Washington to make a united front on China belligerent behaviors domestically and abroad. Japan would be put in a serious dilemma between the U.S.-Japan alliance and the China-Japan relations. The Japanese government paid much attention to manage the triangular relationships, by explaining the restoration of the relationship with China aims to fix the worsen relationship since 2012 and also to persuade China into a more fair and responsible behavior in the international community. However, any interpretation that this move means tilting towards China should be rejected. It should be also noted, on the other hands, that Japan has not shared such comprehensive sense of competition against China, which was provoked by Vice President Mike Pence. Both Japan and the U.S. concern over Chinese unfair practice, providing subsidies to state-owned companies and failing to secure intellectual property rights, while the Trump administration’s economic nationalism is also against WTO rules and targets at its own allies. To make further research, we have to make deep dive on Japan’s response on American tighter controls against Chinese business and investment, and then on Japan’s diplomatic efforts with other countries toward rule based order-building. Japan’s vision of Asian order was typical one to maintain American-led post war order in the time of shifting balance of power. For the last ten years, Japanese diplomacy has aimed to underpin American hegemony by stretching out its diplomatic and defense resources and by securitarizing its Indo-Pacific diplomacy through enhancing security partnership with a lot of nations (Sahashi 2018). However, Japan’s vision lies not in confrontational order-making process. As Akihiko Tanaka insists, while a new Cold War is theoretically possible as long as the Chinese communist party maintains its ruling system as such, it “should not be metamorphosed into a hot war and Japan should make efforts not only for strengthening the alliance for deterrence but also for enlarging a sphere for ‘peaceful co-existence’ with China.” He also argues, “Japan should not give up shaping China models of development and political reforms in the future” (Tanaka 2018). Even though Japan has not come up with good alternatives, and is still rejecting to accept a Sino-centric order vision, the recent behaviors suggest Japan’s dilemma is deepened in the time of incredible Trump foreign policy.     Author’s Biography Ryo Sahashi is an Associate Professor of International Politics, Institute for Advanced Studies on Asia at University of Tokyo. Sahashi specializes in international politics and is currently focusing on East Asian security as well as Japanese security policy. His recent book is In a Search for Coexistence: the United States and Two Chinas during the Cold War (Tokyo: Keiso, 2015). In English, he recently edited Looking for Leadership: The Dilemma of Political Leadership in Japan (Tokyo and New York: Japan Center for International Exchange, 2015), and wrote on the impact of rising China on Asian order, Japan’s security policy and Japan-Taiwan relations. Now he is writing his next book on US-China competition and leading two group studies on the alliance and order after the end of the Cold War. He received his B.A. from International Christian University and his Ph.D. from the Graduate Schools for Law and Politics at the University of Tokyo. He also studied at Department of Political Science, University of Illinois at Urbana-Champaign.  

.a_wrap {font-size:14px; font-family:Nanum Gothic, Sans-serif, Arial; line-height:20px;} li {margin:8px 0;} Editor's Note China is the world’s biggest producer and consumer of coals as well as the largest greenhouse gas emitter. Surprisingly, China is also the global leader in clean energy development. Unfortunately, however, this embrace of green energy has not extended to China’s overseas energy infrastructure development projects. Instead, China continues to push forward with building inefficient subcritical coal plants in the less-developed regions rather than helping those nations move toward a low-carbon economy. Melanie Hart uses the Indonesian case to illustrate why China must reconsider its current approach before it becomes a less attractive development partner in the long term.     Quotes from the paper  Introduction Chinese companies and development banks are playing an increasingly impactful role in global infrastructure development. Domestically, China is reaching the point where economic growth rates are slowing and Chinese firms can often find better infrastructure investment opportunities abroad than they can at home. Through the Belt and Road Initiative, Beijing is providing a mix of diplomatic and financial aid to help Chinese firms find those opportunities in nations ranging from Southeast Asia to Africa to Europe. The types of technologies and projects China brings to those nations will have an outsized impact on the global economy for decades to come. Chinese firms are particularly active in energy infrastructure. China is the world’s biggest energy consumer, and it is undergoing a massive domestic transition toward cleaner energy sources (Hart, Bassett, and Johnson 2017). Chinese firms are global leaders across multiple renewable energy sectors—particularly wind and solar—as well as in next-generation clean coal technologies. If China leverages its domestic energy innovations to help other nations avoid installing low-efficiency, pollution-intensive coal, that will enable recipient nations to avoid the high economic, social, environmental, and climate costs associated with those projects. At a global level, if China pushes the next wave of energy infrastructure expansion toward more sustainable technologies, that will help the planet avoid some of the most disastrous impacts from global climate change. Unfortunately, this is not the approach China is taking today. Instead of helping developing nations acquire, install, and operate innovative cleaner energy technologies, China is driving a massive build-out of high-emission subcritical coal plants. Instead of pulling other developing nations up to help them achieve China’s own domestic standards, China is treating many nations as a dumping ground, offloading outdated coal generation technologies that are too inefficient and pollution-intensive to use at home. Chinese officials and development experts often argue that China is providing the cheapest alternatives because that is what lower-income nations want. That approach is short-sighted. It fails to account for the mid- and longer-term costs associated with sub-standard projects. Indonesia’s experience should serve as a warning for Beijing. After purchasing a first wave of sub-critical coal plants from China, Indonesia is now looking to other nations to support future energy infrastructure expansion. If China does not change its approach, negative impacts from the first wave of Belt and Road energy investments could outweigh the positive impacts. That could be particularly consequential in Southeast Asia, which is one of the fastest-growing energy consuming regions in the world and a key focus for China’s Belt and Road Initiative. This paper will describe China’s current approach to energy development in Southeast Asia and the downside risks associated with that approach.   China’s Approach to Coal-Fired Power Development Domestically, China is transitioning its coal-fired power fleet from older, high-polluting subcritical coal-fired power units to newer and cleaner supercritical and ultra-supercritical units (Hart, Bassett, and Johnson 2017). Chinese regulators are using a mix of efficiency standards, emission regulations, and mandatory subcritical plant retirements to drive this shift. The regulatory measures are impressive. By 2020, all existing Chinese coal-fired power units must meet an efficiency standard of 310 gce per kilowatt-hour. To put that in comparison with the U.S. coal fleet: no existing U.S. coal-fired power unit is performing at those efficiency levels today (Hart, Bassett, and Johnson 2017). China’s domestic coal transition is making the nation a world leader in supercritical and ultra-supercritical coal-fired power technologies. If China leverages its growing international role to bring those technologies to other nations, that could help other nations avoid building out more pollution- and carbon-intensive coal plants. China is particularly active in developing nations that are unable to meet the high project standards required to obtain financing from the World Bank and other western-led development banks (IMF 2018). Many of those lower-income nations are currently experiencing the rapid growth rates associated with early-stage economic development and, in order to fuel that growth, rapid energy infrastructure expansion. The generation technologies these nations choose will have an outsized impact on their local environmental conditions and the global climate for decades to come. China is well-placed to push that expansion in a sustainable direction. Unfortunately, Beijing is thus far taking a different approach. When Chinese banks and firms go abroad, they tend to follow a bifurcated strategy: they bring cutting-edge energy technologies to developed markets and cheap, outdated technologies to developing markets. In the energy sector, that strategy risks saddling developing regions with severe local environmental pollution and skyrocketing carbon emissions. As Beijing tightens China’s domestic coal-fired power standards, Chinese firms can no longer build subcritical plants at home so many of them are sending those technologies abroad. In some cases Chinese firms are actually dismantling outdated coal-fired power plants and exporting them to developing nations. At a global level, if China continues to export outdated energy technologies that will make it harder to slow and reduce global climate change.   Southeast Asia’s Energy Expansion Southeast Asia is one of the fastest-growing energy consumption regions in the world and is launching a major energy infrastructure boom. The region’s per capita energy use is still relatively low, at 0.13 tons of oil equivalent as of 2013. That consumption rate is expected to more than double by 2035 as economic development expands energy access and consumption ability across the region (ASEAN Center for Energy 2015). Population is also projected to grow rapidly and that will further drive electricity consumption growth. Between 2015 and 2040, the region’s overall energy demand is projected to grow 80 percent and power consumption is projected to triple. By 2025, the region is expected to add around $1.5 trillion in new energy infrastructure to supply its growing demand. Energy technology choices made during this massive infrastructure expansion will have an outsized impact on the region’s energy efficiency, sustainability, and climate emissions for decades to come. As of 2013, the ASEAN region generates 821 TWh of electricity, of which natural gas accounts for 44 percent, coal 31.5 percent, and oil 4.16 percent (ASEAN Center for Energy 2015). Although natural gas dominates in installed capacity, the region is rapidly shifting toward coal, and coal already outpaces natural gas in new-builds. By 2035, coal is projected to account for around 55 percent of the region’s electricity generation (accounting for 30 percent of total global coal growth through 2035). By 2040, the region will likely consume as much coal as India today. As a result, the region’s energy-related carbon dioxide emissions are projected to double by 2035. Renewable energy is also growing – as of 2013, installed renewable energy generation capacity totaled 45.7 GW and accounted for around 21 percent of total electricity generation. All ASEAN nations have renewable energy targets and policies, but coal still enjoys substantial policy support, partly because the region is rich in coal resources and partly because coal production interests heavily influence energy policy in many ASEAN nations.   China’s Role in Southeast Asia’s Sub-Critical Coal Expansion Below, Table 1 tallies the number of coal-fired power units Chinese companies are supporting across all three Southeast Asian income tiers and over time. It is not surprising to see subcritical plants in the 1996-2005 time-frame because cleaner plants were less available. However, the post-2015 project pipeline is a concern, because those plants are under construction in an era when the Southeast Asian region is undergoing a major energy boom, cleaner options are more available, and Beijing is banning sub-critical technologies domestically. Chinese firms are beginning to bring some cleaner projects to the region. As of 2016, Chinese companies had participated in 4 cleaner-coal projects, with another 17 in the pipeline. However, China is much more active on the subcritical side, with 154 units completed and another 75 in pipeline as of 2016.                        Source: Center for American Progress analysis using data from S&P Global Platts. Note: The “post-2015” category includes plants operating in 2016 and early 2017 but is mostly composed of plants under construction or planned for 2017-2021. This chart does not include plants that were retired or canceled before 2016.   Chinese officials and development experts routinely claim Chinese firms are simply providing what the recipient nations can afford and once those nations can afford cleaner technologies, Chinese companies will be delighted to provide them. However, the reality is that other major development funders are already building cleaner projects in nations where China is still actively promoting subcritical coal. For example, Japan currently has sixteen ultra-supercritical coal-fired power projects underway in the region while China has only three.     Lessons from Indonesia Indonesian officials and energy experts admit that the Chinese firms who provided subcritical coal-fired power units for the 10,000 MW program were delivering what Indonesia was asking for, which was a low-cost solution. Indonesian officials report that Japanese and South Korean firms tend to walk away and refuse to build plants at ultra-low price points, but Chinese firms are more likely to try to make things work, which sometimes brings bad consequences. Today, Indonesia recognizes that subcritical coal technology is a bad investment, particularly when subcritical plants are manufactured using out-of-date and/or second-hand components. Under current Indonesian President Joko Widodo, Jakarta has announced a new planned 35,000 MW expansion in generation capacity, which is supposed to include cleaner coal technology as well as renewables. In theory, the 35,000 MW expansion would be great opportunity to bring in China’s more cutting-edge technology solutions. In reality, however, recent field interviews suggest that Indonesian officials are largely avoiding Chinese technology in this round due to the government’s experience with previous Chinese-financed and Chinese-manufactured subcritical coal-fired power expansions. Instead, local officials report that they are looking primarily to Japan and South Korea for cleaner alternatives. The Indonesian case suggests that when China provides low-cost, high-emission systems to developing markets, medium-to-longer term performance or sustainability problems may not only affect those nations’ climate and emission trajectories but also impact their openness to choosing Chinese technologies as they move up the economic development ladder. Chinese officials are assuming that, by providing low-cost solutions today, they will have an opportunity to provide cleaner, higher-performing solutions down the road. In reality, negative experiences with first-round Chinese development projects could turn recipient nations away from future Chinese projects. If so, that trend has the potential to undermine China’s position as a low-emission technology provider across the region, despite the fact that China has already developed impressive technology innovations at home and has much to offer, not only in the coal sector but also in renewable energy technology.   Going Forward: Can China Avoid Building a Dirty Belt and Road? There are two potential pathways for Chinese involvement in Southeast Asia’s energy infrastructure expansion going forward. China could continue with the status quo approach, pushing low-standard technologies in less-developed regions and reserving China’s most innovative energy technologies for higher-income nations that can afford to pay higher up-front project costs. The backlash that China’s subcritical coal projects are already generating across Indonesia suggests that, if China pursues this approach, it will become a less attractive development partner over time. Once recipient nations gain the ability to pay for higher-standard projects, they may follow Indonesia’s example and turn to other nations instead of seeking to upgrade with a new generation of Chinese products. That would be particularly unfortunate in the coal sector because, as China transitions its domestic energy sector toward cleaner coal generation, it increasingly has cutting-edge technology and operational knowledge that could benefit Southeast Asian nations. Alternatively, China could change its approach and seek to leverage the Belt and Road Initiative and other state-supported programs to help developing nations leapfrog up to the same standards China is implementing domestically. That would require a mix of capacity building—to help recipient nations understand the full array of innovative technologies available and how to deploy them in their own markets—as well as innovative financing to help those nations meet the higher up-front costs associated with cleaner projects. This approach would shift the role China is playing as an international infrastructure developer, providing increasing rather than decreasing opportunities for Chinese investment over time. This approach would also provide broad regional and global benefits, particularly on the climate front.     Author’s Biography Melanie Hart serves as senior fellow and China policy director at the Center for American Progress (CAP), a leading American think tank based in Washington, DC. She is responsible for formulating CAP policy proposals on China and US-China relations and leading CAP efforts to promote those proposals with political leaders in the United States and Asia. She founded and leads multiple US-China track II dialogue programs at the Center and frequently advises senior U.S. political leaders on China policy issues. Hart also serves as a Senior Advisor on China to The Scowcroft Group, a premier international business advisory firm.  

.a_wrap {font-size:14px; font-family:Nanum Gothic, Sans-serif, Arial; line-height:20px;} li {margin:8px 0;} Editor's Note In this paper, Mingshen Zhang analyzes China’s digitalization as spurred by advances in smart digital technologies and discusses the opportunities that this will bring to the regional economy and integration in the Asia-Pacific. China’s digital transformation is taking place across sectors, but not evenly; while China is highly digitized in e-commerce, it falls far behind in the digitalization of the manufacturing and R&D industries. Zhang, however, asserts that China’s digitalization will be further accelerated by domestic factors, such as demographic changes and structural industrial shifts, and predicts that it will generate opportunities for regional economies to cooperate with China on the development of digital infrastructure and government policy frameworks for the Internet and the digital economy.     Quotes from the paper  Introduction At present, digital transformation centered on the use of smart information technology to change the economic and social activities is expected to generate substantial digital economy and digital dividend. As a general purpose technology, smart digital technology has strong properties of platforms, openness, integration, and ecosystem, which will impose broad impacts on the innovation, entrepreneurial activities, investment, trade, and industrial development. Currently, the Asia-Pacific region arrives at a critical point to overcome the structural problems, shape the economic momentum and pursue the quality oriented economic growth. Therefore, all the Asia-Pacific economies have reached a broad consensus in the exploitation of the digital economy and dividend. They seek to give full play to the leading role of digital transformation in improving labor productivity, creating business opportunities and promoting free trade in order to better achieve sustainable development and inclusive and secure growth in the Asia-Pacific. China, one of the most important economies in the Asia-Pacific, is also undergoing an unprecedented digital transformation. Due to the scale and systematic integration effects of digitalization, it can be expected that China’s huge market potential, rich application scenarios, and urgent upgrading needs may bring not only historical opportunities for digital economic cooperation in the Asia-Pacific region but also essential incentives for this region to form a more intimate innovation community. This paper consists of three parts. The first section attempts to summarize the characteristics of the new round of digitalization induced by smart digital technologies. Moreover, it further develops a digitalization matrix as a framework to capture the feature of digital transformation. In the second section, the paper moves towards the analysis of status-quo and trends of China’s digitalization by using the digitalization matrix. Finally, it identifies possible opportunities for boosting the digital economy to pursue quality-oriented economic growth and regional integration in the Asia-Pacific region by China’s digitalization.   A New Round of Digitalization: Characteristics and Elements Information and Communication Technology (ICT) plays a crucial role in digitalization as the ICT is often used and developed as a part of the process of ongoing adoption of digital technologies to change the economy and society. Since the 1950s, four generations of computers have evolved. Each generation reflected  hardware changes in size and capability enhancements in computer operating systems. Primarily due to the dramatic improvements in computer components and manufacturing, computers today can do more than the largest computers of the mid-1960s at about a thousandth of the cost. Furthermore, the technological progress of ICT in the last several decades is much faster than we expected. The breakthrough in the ICT in the last decade results in the emergence of smart digital technologies such as Artificial Intelligence, the Internet of Things (IoC), Cloud Computing, Cyber-Physical Systems and Big Data, which has launched a new round of digitalization. For example, computer scientists began tinkering with AI in the 1950s, but it is only in the last decade that AI has been realized when new applications were able to be unlocked thanks to hardware developments, including faster processors and more abundant storage, larger data sets, and more capable algorithms. The smarter digital technology blurs the boundary among the physical, digital and biological world, which is one of the most prominent features in the current digitalization as Schwab (2017) called it as the Fourth Industrial Revolution. In this way, digital technology diffuses into every corner of our social and economic life, enhancing the potential of individuals, enterprises, industries, and government within the whole economy.   Understanding the Status Quo and Trend of China’s Digitalization Overall, although China’s digital transformation has been steadily unfolding, the main progress happens on the consumption/application side rather than the production/physical side. For example, due to the emergence of digital giants like BAT (namely Baidu, Alibaba, and Tencent) and the prosperity in e-commerce, it is widely recognized that China represents one of the leading and critical forces in digitalization globally. The vast market demand has stimulated the booming development of China’s digital economy, but it also causes the digital transformation to concentrate on the consumer end and the application end. Zhang (2018) compared the digitalization between China and South Korea, finding that China only gained a prominent advantage over South Korea in terms of digitalization of trade and consumption but lagged far behind South Korea in digitalization in the process of manufacturing. More specifically, China accounts for a more significant portion of export in ICT goods than that of South Korea. Also, almost 23% of total Chinese retail sales are relative to e-commerce in 2017, just seven percentage points higher than that of South Korea. However, the robot density in China is 68, just around one-tenth of it is in South Korea. Concerning the ICT manufacturing and services expenditure on R&D as a percentage of GDP, the level of South Korea is four times higher than that of China.             Figure 4  Colored digitalization matrix using data from China and South Korea                  Source: Zhang (2018). Note: The element in red represents China has more advantage in that area, and the blue ones indicate the opposite situation. The darker the color implies the more sizeable relative gap of digitalization exists between China and South Korea.   The Implication of China’s Digital Transformation for the Asia-Pacific [D]igital economy may provide incentives and opportunities to strengthen economic cooperation. It is no doubt that profiting from innovation is the ultimate incentive for any entities regardless of what the type of innovation is and what the tool we utilize. In the era of the digital economy, the value-capture problem for innovators in the digital economy involves some different challenges from those in the industrial economy, with the dynamics of platforms and ecosystems being important (Teece 2018). Thus, we should create an open, inclusive, diverse, and fully interactive ecosystem based on the platform in order to take advantage of the network effect, scale effect, and the economy of scope. Furthermore, smart digital technology enables us to realize the instant interaction and self-adaption to eliminate the uncertainty, which lowers the threshold of regional cooperation for SMEs and underdeveloped economies. The incentive and opportunities brought by the digitalization will have prominent influences on regional integration through digital trade and logistic facilitation. Considering the limited scale of market and lack of access to the international market for some economies in the Asia-Pacific, it is somewhat difficult for them to exploit the opportunities of economic cooperation. The unique advantage that China possesses may suggest that China’s digitalization can be an opportunity for the Asia-Pacific to cope with the impact of the digital economy mentioned above. As the second largest economy and the growing mid-class, China owns one of the most huge and promising markets with increasing potential all over the world. Also, China regards the digitalization as one of the top priorities to achieve the quality-oriented economic development. Especially in recent years, the new round of digitalization stepped into a new stage, aiming to speed up digitalization towards production/physical side. The significant improvement in digitalization in the dimensions including factor, industry and governance demonstrate China can help the other economies to overcome the sustained challenges in digital transformation and leverage the opportunities regarding economic cooperation. For example, China has established various funding mechanisms like AIIB, Silk Road Funds, and other long-term cheap loans, all of which can support the construction and interconnection of digital infrastructure. The Chinese digital giants like BATJ (namely Baidu, Alibaba, Tencent, and JD) can also play a more significant role in facilitating cross-border e-commerce in many ASEAN countries. Even in the clouding service, Alibaba is competent to build an ecosystem including more than 8,000 companies and meet their demands in time with its leading technologies. Among over a thousand smart city pilots have been launched across the world, China is home to half of these cities, amounting to a staggering 500 pilots. It provides significant opportunities for the Asia-Pacific economies with leading capabilities in this aspect to profit from their leading technologies and abundant experiences through a mechanism such as PPP contract. Considering China’s digitalization can be regarded as an opportunity for the Asia-Pacific, I strongly recommend the economies in the Asia-Pacific should enhance cooperation on digital economy by leveraging China’s digitalization. I refer to the APEC Internet and Digital Economy Roadmap which is released in 2017 and select the promising areas including (1) Development of digital infrastructure; (2) Development of holistic government policy frameworks for the Internet and Digital Economy; (3) Promoting coherence and cooperation of regulatory approaches affecting the Internet and digital economy; (4) Promoting innovation and adoption of enabling technologies and services; (5) Enhancing inclusiveness of Internet and digital economy; and (6) Facilitation of e-commerce and advancing cooperation on digital trade.     Author’s Biography Mingshen Zhang received his doctoral degree from Renmin University of China in 2014 and has served as the assistant research fellow in Institute of Economic Research, National Development and Reform Commission since 2015. His research interests concentrate on innovation and entrepreneurship such as technology transfer and commercialization. His work has been published in multiple journals, including Research Policy and Macroeconomic Research. He is also the author of the book, entitled Open Innovation of China’s Firms and Performance Implication within the Context of Structural Reform (2017).  

.a_wrap {font-size:14px; font-family:Nanum Gothic, Sans-serif, Arial; line-height:20px;} li {margin:8px 0;} Editor's Note The high technology industry has become a new growth engine for many countries. China, the second largest economy in the world, has also been playing catch up to close the technology gap. However, it still lags behind its neighboring countries, such as South Korea and Taiwan, which achieved economic miracles well before China. Douglas Fuller examines the reasons behind this, asking why China has far fewer tech giants compared to South Korea and Taiwan despite its unprecedented economic success. Fuller concludes that it was China’s ineffective pursuit of industrial policy and excessive state regulation of the market that have impeded the development of the tech industry.      Quotes from the paper  Introduction This report attempts to explain the limited emergence of Chinese technology titans. The first section examines the structural reasons there has not been great success in pro-active (as opposed to passive, tariff-driven infant industry protection) industrial policy in building technology-intensive firms in China. The second section turns to look at how sectoral characteristics shape the opportunities for technological upgrading among Chinese firms given the state’s policies outlined in the first section. The third section addresses the important issue of market regulation and how that has impacted upgrading in various industries. The fourth section examines the critical role that foreign venture capital has played in China’s technology sector, and the implications of the current surge of domestic venture capital. The final section will address continuities and departures with China’s past industrial development in Xi’s industrial policies.   The Sorrows of Industrial Policy In the case of China, there are four serious constraints to the effective pursuit of industrial policy: (1) the structure of the state apparatus, (2) the bias of credit allocation toward SOEs/state-favored firms and the resulting managerial deficiencies of these firms (3) the information asymmetries due to sheer geographic size and population of China and (4) the balance of exports vis-à-vis procurement. These obstacles are in addition to the incentives for local officials that prioritize investment and land grabs over implementing upgrading of local firms and multinationals within their jurisdictions discussed by Fuller (2016, Chapter 2).   Sectoral Characteristics and Success There has been variation in technological catch-up across sectors in China’s economy. For more medium-tech technology, machinery-based sectors, China has experienced a fair amount of upgrading among domestic firms (Brandt and Thun 2010, 2016). For many high-technology sectors, China’s record of catch-up among domestic firms has been weak, and hybrid firms located in China but financed from outside of China have driven technologically upgrading. And in most be noted that for even the mature, medium-technology industries, Brandt and Thun (2010, 2016) find little evidence for effective industrial policy beyond the tariff barriers that encourage multinational corporations (MNCs) in these industries to set up factories in China. There would be no problem with such a hybrid model of high technology development except for two issues.  First, industrial policy has wasted a tremendous amount of resources on the domestic firms in high-technology areas. Second, the hybrid model itself is under threat as will be discussed later in this report.     Regulation of Competition Brandt and Thun (2016) in revisiting the machine sectors they analyzed over time have concluded that some sectors were much less successful than others even though they shared the benefit of MNC suppliers investing in China. They concluded that the state regulation of market competition to keep out rather than encourage competition was holding back those sectors that achieved less upgrading. The auto industry is a case in point.  The state kept primarily private firms from entering into this market for decades, and consequently, the local state champions, despite benefitting from being the partners of the joint-ventures (JVs) required for MNCs entry, failed to upgrade effectively. In contrast, construction equipment, where there was a veritable free-for-all of foreign, state-owned, private, and other firms in the gray corporate area between state-owned and truly private, witnessed impressive upgrading. To underline Brandt and Thun’s point, the most promising domestic carmaker today is a late arriving (due to state barriers to entry), private firm, Geely.   Domesticating Venture Capital Virtually every big name in technological or business model innovation in China that emerged out of the start-up scene over the last two decades received the majority of its funding from overseas venture capital (VC). From the triumvirate of Baidu, Alibaba and Tencent (BAT) to more recent success stories, such as Xiaomi, foreign venture capital has played a critical role in China’s start-up scene. In short, VC was the main conduit for creating the hybrid firms driving China’s technology development. Why has foreign venture capital played such an outsized role? Prior to 2007, one could point to the fact that China did not have the legal framework for general-limited partnership structures commonly used for venture capital in the U.S., U.K. and elsewhere. However, even after this problem was resolved through revisions in China’s Partnership Law, foreign venture capital has still played an outsized role in China’s financing of technological entrepreneurship. One way to understand why this has been the case is the bridging function foreign venture capital plays in linking Chinese entrepreneurs to institutions abroad better able to support technological entrepreneurship.  Whereas the domestic stock markets remain unattractive due to its speculative nature (due largely to the dearth of large institutional investors) and the state’s slow and biased process of deciding which firms can list, foreign venture capital has deep experience in listing start-ups on stock markets abroad   Continuities and Departures in Industrial Policy under Xi The MiC 2025 builds upon previous announced policies of the past ten years, and not surprisingly exhibits some of the flaws of past industrial policymaking. First and foremost, too many state-owned firms are the vehicles of choice for pursuing these industrial policies. Second, and worse still, the funds provided for these industrial policies are often used to spur the state takeover of private (often nominally foreign) companies and assets. Third, state procurement appears once again to be one of the preferred means of supporting these industries. Given that such procurement is not typically distributed to the most capable firms, much of the spending on these various industries may prove to be both ineffective and wasteful. Understandably, the scale of the proposed plans has alarmed foreign companies and countries alike. Even if China’s flawed industrial policymaking process does not lead to success, it may still lead to adding large amounts of capacity in various sectors. In other words, there is the possibility that relatively ineffective industrial policy could create a lose-lose situation in which inefficient Chinese capacity crashes the global market in a certain good (e.g. DRAM) without actually spurring sustainable development in China. However, I expect going forward that these industrial policies will face both financial and human capital constraints that limit the effective added capacity in some of these sectors. Of course, these industrial policy limitations are unlikely to alleviate the American government’s concerns about loss of intellectual property via forced transfer or theft as outlined in USTR’s 2018 Section 301 report.     Author’s Biography Douglas B. Fuller is a professor at City University of Hong Kong. The focus of his research is innovation, technology policy and international business. He has previously taught at Zhejiang University, King’s College London, Chinese University of Hong Kong and American University in Washington D.C. He has led research projects sponsored by the Alfred P. Sloan Foundation and the Savantas Policy Institute of Hong Kong. Fuller is the author of Paper Tigers, Hidden Dragons: Firms and the Political Economy of China’s Technological Development, and a co-organizer of Network B (Globalization and Socio-economic Development) of the Society for the Advancement of Socio-Economics.   

.a_wrap {font-size:14px; font-family:Nanum Gothic, Sans-serif, Arial; line-height:20px;} li {margin:8px 0;} Editor's Note Unlike other papers analyzing China’s economic policy in line with its broader national strategy, Junwei Liang narrows his focus down to China’s trade policy and trends. He offers a comprehensive overview of China’s trade balances, product varieties, trade partners, regional characteristics, and trade in commodities and services, arguing that China should make more of an effort to use its domestic market and the rising social challenges of a decreasing labor force. Despite global concerns about China’s return to a more statist and developmentalist approach, the author offers assurance that China will continue to pursue opening up and deepen its reforms.      Quotes from the paper  Introduction Since the reform and opening-up in 1978, China has witnessed an explosive growth in trade, especially in export of commodity. After the accession to the WTO, the linkage of “Made in China” to the international market has boosted competitiveness of China’s products, while more and more conflicts and contradictions between China and trade partners have been emerging vastly and vigorously. The trade policy of the Trump administration against China is quite non-political-friendly, more importantly, a very awful and frightful signal to the global free trade regime. This will pose great challenges on Chinese authorities and companies, even individuals. China will, in the foreseeable future, be continuing implementing reform and opening-up and some critical transformations will be made in a larger and deeper sense, although it might be a long way to go.   China’s Trade Development    Figure 1  Trade Value and Share of China: 1950-2017 Source: UNCTAD, Billion USD, %.      Figure 2  Trade Balance of China: 1978-2017 Source: UNCTAD, Billion USD.      Figure 3  Product Varieties of China’s Export: 1995-2017 Source: UNCTAD, Billion USD.   Figure 4    Product Varieties of China’s Import: 1995-2017 Source: UNCTAD, Billion USD.   Figure 17   Partners of China’s Export: Number and Average Value Source: UNCTAD, Billion USD.      Figure 18   Partners of China’s Import: Number and Average Value Source: UNCTAD, Billion USD.       Conflicts, Contradictions and Challenges of China’s trade   Figure 26  Frequencies and Percentages of Global Antidumping Initiations and Measures Source: UNCTAD, Billion USD.      Figure 27  The Share of AD Initiations and Measures against China Filed by the World and the U.S. Source: WTO (%)   Figure 28  337 investigation the U.S. has initiated on China and the rest of the World Source: WTO (%)   China’s Coming Transformations in Trade Reform and opening-up is a great process that has helped China and the rest of the world achieve development and progress together. Opening-up is the path China must take to achieve prosperity and development. President Xi Jinping pointed out that “What has happened proves that opening-up was key to China’s economic growth over the past 40 years and in the same vein, high-quality development of China’s economy in the future can only be achieved with greater openness.” At present, the world is undergoing great development, transformation and adjustment. The road to world economic recovery is hard and tortuous; economic globalization experiences twists and turns; and unilateralism and protectionism are on the rise. These are the challenges that all of the countries are facing. Under the new conditions, China will adhere to its fundamental national policy of opening-up, actively promoting international cooperation under the Belt and Road Initiative, and striving to create a future that is open, innovative, inclusive and mutually beneficial. China will unswervingly promote opening-up on a higher level, significantly relax access to markets, create a more attractive environment to investment, implement high-standard policies of trade and investment liberalization and facilitation, build free trade ports with Chinese characteristics, and make a new ground to pursue opening-up on all fronts.       Author’s Biography Junwei Liang was granted a PhD degree from Nanjing University in 2009 and is now an associate Professor at Shandong University. His research is focusing on International Political Economics, including welfare analysis of trade policies and NTMs on China’s innovation on firm level. His findings have been published on both Chinese and English journals, such as World Economy, Journal of Quantitative and Technical Economics, etc. He is now the peer reviewer of several leading journals in China.  

.a_wrap {font-size:14px; font-family:Nanum Gothic, Sans-serif, Arial; line-height:20px;} Editor's Note Feiteng Zhong attempts to understand the rise of China by applying key concepts from international relations theory, such as the “balance of power” and “hegemony.” Zhong, however, points out that some concepts can be interpreted differently according to local contexts and thus it is necessary to look at a phenomenon from various perspectives to reach comprehensive understanding. As part of this effort, the author introduces a new concept, called “developmental security” as an alternative way to view China’s rise in the Chinese context. This concept is originated from China’s development-oriented grand strategy in which growth in GDP per capita forms the basis for national strategic goals, the interests of security and development are unified, and a peaceful environment around the region is fostered to promote domestic development.     Quotes from the paper  In the field of international relations, there are two main issues attracted great concerns related to the rising of China. First, will China return to traditional China, that is, to build a regional order in the surrounding areas similar to the Tributary System (Friedberg 2011; Pan and Lo 2017) Second, will China replace the U.S. and become a hegemonic power equivalent to the U.S. (Mearsheimer 2010; Kurth 2012)? For most Chinese scholars, both of them are not the best options (Zhong 2015; Qi 2015). According to the White Paper of China’s Policies on Asia-Pacific Security Cooperation issued by the China’s State Council Information Office on January 11th, 2017, the security framework in the Asia-Pacific region which was promoted by China “does not mean starting all over again, but improving and upgrading the existing mechanisms,” and “should be adopted as a common caused by all the countries in the region” (China’s State Council Information Office 2017). However, the challenge is what reasonable and feasible scenarios would be if those two options are not the case. This article concludes that China will neither become another U.S. nor return to the past, considering the fact that China is still the largest economy with far lower income levels than the U.S. by 2050. GDP per capita is closely related to a country's technical capability, the global vision of its domestic audiences, and its interdependence of the global economy. With the improvement of China’s GDP per capita, especially the gap between the eastern coastal areas of China and high income countries was greatly reduced, China is going to embrace globalization, but in a Chinese way. It is clear that China will face increasingly complex international security challenges to safeguard its growing interests abroad, but its main challenges remain at the domestic level, particularly in addressing the gap between the rich and the poor, regional imbalances and the sustainability of development.     China’s Development Path towards 2050 According to data released by the USDA in December 2017, China's per capita GDP was close to $7,400 in 2017, compared to that U.S. GDP per capita was $53,000, that of Japan was $48,000 and that of South Korea was $26,000. Even by 2030, China's GDP per capita is expected to be less than $15,000, which is equivalent to only 22.4 percent of that of the U.S. (USDA 2017). In October 2017, during the 19th National Congress of the CPC, Japan’s Institute of Energy Economics, released a forecast report on the future of energy development in 2050, which provides the economic development prospects of major economies in the world, especially the East Asia economies (The Institute of Energy Economics 2017). According to this forecast, as shown in Table 1, China's GDP per capita is expected to reach 14,000 US dollars by 2030, 22,000 US dollars by 2040 and 30,000 US dollars by 2050. However, in terms of economic size, China will account for 17.7 percent of the world's economy by 2030, according to the USDA. By then, the U.S. will account for 19.8 percent, while Japan and South Korea will account for only 6 percent and 1.6 percent respectively. According to projections from the Institute of Energy Economics in Japan, a size of China's economy will reach 89.8 percent of the U.S. economy in 2030 and 111.1 percent of the U.S. economy in 2040, making it the largest economy in the world. By then, the third-largest economy will be India, not Japan. Therefore, the world is entering a major stage of economic restructuring.   Table 1 Growth Prospects of China and Other Global Major Economies until 2050   GDP per capita GDP   2030 2040 2050 2030 2040 2050 China 14.4 22.1 30.1 20311 30759 40328 India 4.0 6.4 9.5 6133 10236 15857 Japan 57.6 67.4 77.2 6948 7705 8329 Korea 35.6 43.6 52.2 1877 2284 2633 United States 63.5 74.6 84.1 22629 27677 32902 China/U.S. 22.7% 30.0% 35.8% 89.8% 111.1% 122.6%                      Source: The Institute of Energy Economics (2017).       Understanding the Traditional Paradigm of Power Transition between China and the U.S. [T]he relationship between hegemony and international order has long been a subject of discussion in the field of international relations. Robert Gilpin, the late professor at Princeton University who wrote about this in the early 1980s, argues that war is the main driver of systemic change. Robert Keohane, on the other hand, believes that the decline of hegemony does not necessarily lead to the collapse of the international order, because other countries benefit from it, and several countries can join together to maintain the international system. At present, the debate is still continuing. John Ikenberry, a liberal scholar at Princeton University, argues that China also benefits from the American order and will not overturn it (Ikenberry 2018). Other realists, such as John Mearsheimer, argue that China's rise is likely to lead to a war between China and the U.S. (Mearsheimer and Walt 2016). […] China and the West have different views on Great Power. The core lies in that the western concept of great power is based on military power, while the popular concept of great power in China mainly refers to the size of population and land, without economic and military implications. With the rise of China's economy, new meanings with economic power were added to the concept of China’s great power. However, the Chinese government still considers itself as the biggest developing country in the world, a concept broadly used since the mid-1980s (Zhong 2019).   Developmental Security: A New Perspective Understanding China’s Rise If we recognize the importance of per capita GDP in understanding international security issues, we will have a new perspective to examine the state of peace between China and its neighbors since the reform and opening up. At present, many scholars in Asia are talking about getting rid of the "middle-income trap." From a global perspective, it is more important to summarize how Asian countries get rid of the "low income trap." According to Robert Barro, a macroeconomist at Harvard University, the average annual growth rate in the west over the 200 years since the industrial revolution has been two percent. If developing countries are to catch up, especially if they are to get rid of two income traps, it will take a 25-year average of 2.9 percent growth in each income stage (Barro 2016, 14). Barro also believes that getting out of the "low income trap" is far more difficult than getting out of the "middle income trap." In 1998, China graduated from low-income countries and became a lower middle-income country. In 2010, China became a high middle-income country. From 1990 to 2011, China reduced the number of poor people by 439 million, making a huge contribution to global poverty reduction. Some scholars have pointed out that China's poverty reduction policy experience is of great significance to many low-income developing countries (Pan and Chen 2016, 135-143). At the same time, China's national security policy and its ideas of foreign relations should be given equal attention. China's national security philosophy is quite different from that of the U.S. The basic international political concept of the American elite is based on the history of European international politics. The most prominent one is the concept of balance of power. The Chinese government has highlighted the correlation between domestic security and international security and its ability to highlight the state of sustainable security in the definition of national security. In this regard, it is similar to the concept of "comprehensive security" proposed by Japan in the early 1980s. China's grand strategy is a strategy of internal and external balance (Zhong 2018). More fundamentally, since the reform and opening up, China has implemented a grand strategy based on development, which can also be called "developmental security." It has three basic characteristics: first, it takes the development of per capita GDP as the basis for constructing national strategic goals; second, security interests and development interests are unified, and there is a coordinated relationship between military expenditure and domestic socio-economic development. Third, we should foster a peaceful environment around the region that is conducive to development (Zhong 2017). It is hard to imagine how peace in East Asia could have lasted so long since the late 1970s, if a rising China had not adopted such a strategy.   A Complex and Networked Asia Pacific Order Conceptually, Robert Keohane and Josephy Nye demonstrated in the late 1970s that the overall power distribution does not correspond to the issue-area power distribution. A country with a small economy can also become one of the world's top countries in individual issue areas. When Keohane and Nye proposed the concept of complex interdependence, the empirical facts on which it was based came mainly from the relations between the U.S. and Canada, Australia and the European countries, when the average per capita GDP of Western developed countries was close to $10,000. By this measure, as China's per capita GDP increases further, many countries in China's neighbors can reach this level. According to the current calculation, if the initial results of the BRI are achieved, the GDP per capita of countries involved in the BRI can also be doubled in the next 15 years, which will deepen the complexity of China's neighbor relations. If complex interdependence can be applied to developed countries in the 1970s, the concept can also generalize China's future relations with regional countries. […] [I]n the conception of the Asia-Pacific regional order in 2030 and 2050, one should not look for clues only from the Western theories of international relations. In various Western theories of international relations, scholars generally believe that the core mark of a great power is military capability (Zhong 2017b). Although China attaches equal importance to military capabilities, the development of military capabilities should match the needs of the domestic economy and society under the development security strategy. Moreover, since the founding of a new China, China's military expenditure has never reached the corresponding level of the U.S. in terms of the proportion of its economy size. While neighboring countries often accuse China of the increase in military spending at an average annual rate of 10 percent, they have never simultaneously considered that China's economy has grown at a similar rate over the past four decades. Some scholars have pointed out that, if measured by military spending as percentage of total governmental expenditure, China's military growth rate is even lower than domestic expenditure. In this regard, international observers need to have a better understanding of China's domestic affairs and the affairs of the Asian region, which means frequent visits to China and its neighbors, frequent comparisons of regional differences, and efforts to seize the interests and development trends of all parties from various complex regional and trans-regional phenomena.     Author’s Biography   Feiteng Zhong is Professor and Head of Department of Great Power Relations Studies, National Institute of International Strategy, Chinese Academy of Social Sciences. He received his Ph.D. (2009) in international relations from the Waseda University as well as the Peking University. He is also the author of "Developmental Security: China Rise and Regional Order Reconstruction" (China Social Sciences Press 2017). His main research interests include International Political Economy, The Political Economy of the Belt and Road Initiative, China's Foreign Policy, East Asia and the United States.  

.a_wrap {font-size:14px; font-family:Nanum Gothic, Sans-serif, Arial; line-height:20px;} Editor's Note US economic policy toward China has centered on the integration of the country into the US-led global rule-based system since its opening up in 1978. However, this approach has been shaken since the Trump administration abandoned many of the pillars of liberal institutionalism. The clash between such shifts and China’s increasingly statist developmental approach under Xi jinping has led to tensions between the US and China. In the lead paper in this collection, Stephan Haggard and Barry Naughton examine policy changes of the two countries and the implications as well as the resulting conflicts which have risen. The authors also offer a careful analysis and map out three possible scenarios of the prospects for US-China relations in the short- and intermedium term.     Quotes from the paper  Introduction Since the opening to China in the 1970s, US foreign economic policy toward the country was an integral part of the US’s broader defense of a liberal, rule-based global economic system. The core to this strategy was the integration of China through the negotiation of binding rules, with China’s entry into the WTO as the crowning moment of the approach. Despite disagreements at the margin, this strategy not only united the US’s two political parties; it also enjoyed support among US allies. Since 2016, however, this approach has virtually collapsed under the weight of developments on both sides of the Pacific. In the US, the Trump administration unambiguously rejected basic premises of the liberal institutionalist approach. In China under the leadership of Xi Jinping, there has been a return to a more statist, developmentalist posture toward economic policy, with new industrial policies, greater emphasis on state-owned enterprises, and a strengthened Communist Party role. This paper begins with a brief consideration of possible growth trends going forward and their implications. We will then examine the US-China conflict in more detail and consider a number of possible scenarios for both the short- and intermediate run.   China’s Growth History: Policy and Prospects Since the onset of “reform and opening” in 1978, China has undergone dramatic economic and political changes, but with a noticeable policy turning point in 2006-2007. China’s export ratio (exports/GDP) increased steadily up this point, with an especially rapid increase in 2002-2005 following its entry into the WTO. Since 2006-2007, China’s export ratio has declined just as inexorably, although it may now (2019) be stabilizing. This shift in the role of trade was related to broader changes in China’s development trajectory, which were in turn related to the country’s secular slowdown. From 1978 through 2010, annual GDP growth averaged 10%. After 2010, the growth rate began to decline, falling below 8% in mid-2014, and now approaching 6% (from above). Even if China does not experience a sharp “hard landing” associated with the unraveling of excess indebtedness (discussed later), growth will likely continue to slow. This slowdown arises from challenges in raising productivity as China nears the technological frontier—at least in some areas—as well as labor market dynamics. Most long-run forecasts predict a significant “kink” in growth around 2028. At that point, China’s labor force will begin to decline much more significantly than today, just as the burden of an aging population begins to kick in.   A Closer Look: The Political Economy of Chinese Growth in the Medium-Run Through 2006, promotion of export-led growth was a key motive of policy-makers; interest groups formed that were created by export-led growth; and these interest groups tended to support policies favorable to the country’s post-reform development strategy. Since 2007, this picture has changed dramatically as growth strategy has shifted. The structure of interest groups seems to have shifted. As China has changed from an important recipient of incoming foreign direct investment (FDI) to an important source of outgoing foreign direct investment (OFDI), new opportunities for lobbying and new interest groups have sprung up, for example among China’s state-owned banks and corporations which have themselves gone global. Yet policy shifted dramatically at the end of 2016 from welcoming aggressive corporations expanding abroad to reigning them in sharply (for example Hainan Airlines, Wanda Corporation, and Anbang Insurance). The government now seeks to channel resources into state-controlled initiatives, both in the Belt and Road Initiative (BRI) and in international extensions of government-led technology initiatives. These steps were leading to heightened international conflict even before China’s foreign economic environment was disrupted by the Trump shock. Finally, we should make mention of politics. It has long been held not only as a statistical regularity but as a virtual law that when countries reached a certain threshold—around $6,000 in 1990 dollars or about $10,000 today—they were highly likely to democratize; the exceptions were largely oil states. China to date has not only proved an exception to this rule, but seems to be moving in the opposite direction under Xi Jinping. China is becoming more rather than less authoritarian.   U.S. Strategy: Integrating China into a Rules-Based Order The traditional U.S. approach to China involved emphasizing China’s role as a “responsible stakeholder” in a global system of which it had been an enormous beneficiary. The approach was by no means static; as China’s comparative advantage shifted, the U.S. sought concessions in areas that reflected changing U.S. comparative advantage, particularly as regards the investment and regulatory climate for American firms. Efforts to encourage China to sign up to international institutions with binding rules or to negotiate transparent bilateral commitments, however, were a key component. These were coupled with dispute settlement mechanisms for enforcement. In addition, foreign actors—including but not limited to the U.S.―presumed that an evolving legal and administrative system in China itself would provide the basis for foreign parties and their allies to check executive discretion and backsliding, thus keeping the reform process moving forward. […] To be sure, the U.S. and China were clearly co-dependent. In the U.S., a coalition of powerful American firms had strong vested interests in the relationship because of their investments in China. These investments produced low-cost sourcing networks for a vast range of goods and also provided goods and services for the Chinese domestic market. The U.S. also benefitted from inflows of official Chinese capital to keep government borrowing costs low. Yet China was ultimately portrayed as the more vulnerable partner, needing access to the U.S. market and investment not only for economic reasons, but to deliver robust growth for domestic political reasons.   Challenges to the Liberal Approach: The U.S. Home Front A number of developments are clearly challenging this rule-based approach, starting with the radical departure from elite consensus reflected in the election of Donald Trump. There is ongoing debate about whether Trump’s approach is personal and idiosyncratic. If so, then trade policy will simply “snap back” to the post-Trump consensus under a new president, whether Democrat or Republican. Although such a reversion to the historical mean is possible, there is a growing consensus that a genuine partisan realignment has occurred around trade issues, with the Republican base now more skeptical of globalization than its Democratic counterparts. Pressure to “do something” on trade vis-à-vis China is likely to persist regardless of who is in the White House or in control of Congress, in part because of rising concerns about Chinese grand strategy.     Challenges to the US Approach: China Reimagined First, while China continues to be a relatively open economy for its size—measured by trade as a share of GDP―there is growing evidence that its hybrid model is by no means trending in a more liberal direction. Although industrial policy never completely went away, the commitment of resources to industrial policy accelerated steadily since the shift noted above that occurred around 2006. In addition to the ongoing focus on exports, new attention was paid to achieving competitiveness in a range of cutting-edge industries. The roll-out of a series of policy tools mobilized to support these programs was emblematic of the new state-led push to foster indigenous innovation and upgrade manufacturing. Moreover, these developments were taking place in sectors that not only had relevance for China’s economic position but for its military modernization as well (see Cheung 2019). […] Second, the liberal presumption that the existing institutions constitute the only meaningful game in town is also being challenged. While the United States and Western Europe re-evaluate the efficacy of a rule-based approach, China is building its own international institutional alternatives. These include its tacit alliance with ASEAN on the Regional Comprehensive Economic Partnership (RCEP), a more-or-less explicit alternative to the TPP. Progress in RCEP has been slow in part because of the greater heterogeneity of the parties, most notably in India’s foot-dragging. However, RCEP has potential strategic influence because it is an intra-Asian not trans-Pacific entity. Moreover, its consensus-driven approach to trade policy has a profound political logic: “low-lying fruit” and “early harvests” yield gains to the parties while difficult issues are pushed off. Although technically in violation of Article XXIV of the WTO, which calls for FTAs to liberalize “substantially all trade,” the RCEP may be rewriting rules around a looser, more iterative approach to trade policymaking that yields somewhat less but locks parties into an alternative to TPP-style negotiations.   Future Prospects and Medium-Run Scenarios What can we say about the prospects for U.S.-China relations going forward, looking not only at the short-run but the intermediate term? Three possible scenarios present themselves. The first possibility is that the “reverse course” visible in the two countries will prove to be an aberration. In this scenario, Trump’s legacy is not enduring. In 2020, the U.S. turns back toward the well-worn divisions over trade policy, but with adequate bipartisan support for liberal rules of the road. This would not mean the end of pressure on China, but it would occur within established bilateral dialogues and through use of WTO and other bilateral mechanisms. […] A second possibility, one we think more likely, is that skepticism about China in the U.S. will continue to rise and that Xi’s legacy of a more statist political economy will endure in China. Yet even with the new directions staked out by Trump and Xi, the two countries might manage to negotiate a modus vivendi, however brittle, that would persist across administrations. Both sides would make compromises. Xi would need to make some concessions, most notably with respect to IPR issues, and Trump would not only have to roll back sanctions but promise—perhaps privately—to forego their use going forward. This path would not necessarily reflect a fundamental departure in worldviews; rather it would be driven by pragmatic concerns and rising uncertainties on both sides about the sustainability of trade conflict as costs mount. […] The third possibility is for a period of sustained conflict in the U.S.-China relationship and even the possibility of what is now called “decoupling.” Unfortunately, there are already elements of this possibility in the National Security Strategy and other documents dealing with U.S. defense posture. The implications of chronic system conflict for the world economy are potentially grave and we can at least imagine the conflict generating a worldwide downturn. Yet we can also imagine this conflict taking very different forms, such as a gradual disengagement of the Chinese and American economies as both seek to diversify and build coalitions of support through their favored policy approaches     Author’s Biography   Stephan Haggard is Professor at the School of Global Policy and Strategy, University of California, San Diego. Haggard has written extensively on the East Asian developmental state; on comparative transitions to democracy and welfare states worldwide (with Robert Kauffman), and on North Korea. His most recent book is Developmental States (2018), in the Cambridge Elements series. Haggard has a Ph.D. in political science from U.C. Berkeley (1983). Barry Naughton is Professor at the School of Global Policy and Strategy, University of California, San Diego. Barry Naughton has written extensively on the Chinese economy, with an emphasis on market transition, technology and trade, and political economy. His most recent book is the revised and updated edition of his textbook, The Chinese Economy: Adaptation and Growth (2018 from MIT Press). Naughton has a Ph.D. in economics from Yale University (1986).  

.a_wrap {font-size:14px; font-family:Nanum Gothic, Sans-serif, Arial; line-height:20px;} li {margin:8px 0;} Editor's Note In this paper, Tai Ming Cheung examines the vision and paths put forward by China under Xi Jinping to build a militarily powerful and technologically advanced country, which is also called a "techno-security state." Xi’s military reinforcement strategy is composed of the three following components―reform, modernization, and innovation; Xi has put particular emphasis on innovation and expanded its application to military arena far more compared to his predecessors. Cheung expects the Chinese techno-security state to make smooth progress under Xi’s leadership based on sufficient financial capacity and good access to foreign technology, despite hurdles such as bureaucratic fragmentation, corruption, and political interference.     Quotes from the paper  Introduction At the 19th Chinese Communist Party Congress in October 2017 that solidified Chinese Communist Party General Secretary and Commander-in Chief Xi Jinping’s hold on power for the foreseeable future, he offered a confident, even strident, vision of China’s growing long-term influence and might in the international system. Xi talked about “socialism with Chinese characteristics entering a new era” in which he described China as “moving closer to the global center stage,” that China’s brand of socialism offered a new option for countries who want to speed up their development while preserving their independence, and a China that was becoming a great power (Xi 2017). To realize these grand ambitions, Xi stressed that China needs to become a militarily powerful and technologically advanced country, and he offered a timeline. First, the country should reach the first tier of the world’s most innovative countries by 2035, and at the same time, the military would realize its objectives of becoming a fully modern force. By 2050, China would challenge for global leadership with a world-class military a centerpiece of the country’s “comprehensive national strength.” This paper examines whether these goals are realistic and achievable within the timeline put forward by Xi? How will China undertake this grand transformation? What is Xi’s vision for marrying military power with innovation? What are the geostrategic and geo-economic implications for the United States and Asia if China is successful?   The Emergence of the Chinese Techno-Security State under Xi Jinping China under Xi Jinping is a security-maximizing state that is building its power and prestige on an increasingly capable and expansive economic and technological foundation. The country fits the profile of what can be defined as a techno-security state in which the development efforts of the state are prioritized to meeting expansive national security requirements, of which the cultivation of strategic technological and industrial capabilities are prime goals. […] Xi’s vision of the Chinese techno-security state is heavily influenced by the ideological and organizational principles laid down during the Maoist era in the 1950s to 1970s and updated by his predecessors Jiang Zemin and Hu Jintao in the 1990s and 2000s. These principles are emphatically statist in nature: Technological development is strategic and fundamental for determining China’s place in the global strategic and economic balance –it is a vital ingredient in grand strategic thinking. The state must invest in critical technological sectors because of high risks and long and costly research and development cycles. The state must nurture indigenous innovation capacity, although this should allow for absorption of foreign technologies to help catch up. Technology diffusion through spin-off or spin-on should be a central long-term goal Military and security considerations should be paramount. Emphasis should be on ‘big science’ mega-projects. The grand strategy of Xi’s techno-security state has several core components: Building a strong national security state, especially prioritizing the development of military, internal security, and information control capabilities across a wide array of domains, of which cyber is of central importance. Building an advanced defense science, technological and industrial base. Forging a dual-use civil-military economy.   The Rise of the Chinese National Security State under Xi  In the making of the national security state, Xi has put forward a concept that he describes as a ‘national security path with Chinese characteristics’ that is a mixture of assertive principles coupled with deep concerns of vulnerabilities (Xinhua News Agency April 16, 2014). A number of key notions are behind the shaping of this concept: National security is comprehensive: Xi sees the domestic and external components of national security as overlapping and tightly connected, which is very different from the compartmentalized approach that his predecessors pursued. This is an important reason why Xi decided to establish a new organization, the National Security Commission, to manage this integrated approach (Lampton 2016; Wuthnow 2017). National security is expansive: Closely connected with the perspective that national security is comprehensive is the notion that it is expansive and covers many different domains. In a new national security law that is being finalized, national security is identified as covering 11 categories: political, territorial, military, economic, cultural, social, ecological, science and technology, information, nuclear, and natural resources. Ensuring national security has to be done pro-actively, pre-emptively, and strategically: It is important to identify and address national security challenges and opportunities early, strategically, and decisively rather than being reactive and tactical. This requires extensive and high-level leadership engagement, close coordination across the national security apparatus, and the development of a capable and substantial intelligence system to keep abreast of internal and international developments. Strongly asserting China’s interests: Xi is stressing the need to engage in struggle (斗争) in the pursuit of national interests, especially in the military and diplomatic arenas. In describing China’s approach in dealing with the United States, Admiral Sun pointed out that “facts have shown that without struggle it will be impossible for the United States to respect our core interests, without struggle it will be impossible to realize cooperation and win-win on the basis of equality, and without struggle it will be impossible to have an excellent situation today.” In other words, China needs to take a resilient stance and push hard against the United States in order to win its respect, although the Chinese leadership is also careful not to go too far and spark armed conflict, as it remains much weaker.   The Cult of Innovation and the Transformation of Chinese Military Power Xi Jinping’s grand goal of transforming the Chinese defense establishment from being big to being strong rests on a three-pronged strategy of reform, innovation, and modernization. Reform refers to undertaking a concerted roots and branch restructuring of the existing defense establishment to improve its readiness and ability to fight and win future wars as well as to ensure its political reliability to the Communist Party. Innovation concerns the development of new, especially novel, ways and means of strengthening China’s military power and influence through hard (such as material, technological, and industrial) and soft (such as normative, strategy and tactics, processes) factors. Modernization is the result of the implementation of the reforms and innovation on the development of defense capabilities. While these three components of Xi’s military strengthening strategy are being pursued on parallel but separate tracks, there is considerable overlapping and coordination of their activities. Moreover, although these endeavors are occurring concurrently, there are different timeframes set for them. Accomplishing the bulk of structural reforms is targeted for the beginning of the 2020s, while Xi declared at the 19th Party Congress that defense modernization would basically be completed by 2035 and China would become a world class defense innovation power on a par with the United States by 2050. Reform and modernization have been at the top of the defense establishment’s policy agenda going back to the 1970s, but innovation has only come to the fore since the beginning of the twenty-first century. Both Jiang Zemin and Hu Jintao emphasized the importance of innovation, especially related to research and development, during their tenures. Xi though has elevated innovation to a core priority and broadened its application to far more military areas than his predecessors did.   Global Implications: Intensifying U.S.-China Technological Competition The Chinese techno-security state is flourishing and looks set to grow faster, bigger, and better under Xi Jinping’s long-term leadership. While weaknesses such as bureaucratic fragmentation, corruption, political interference, and entrenched corporate interests will complicate progress, there are numerous strengths that will allow the techno-security state to mitigate or overcome these obstacles. They include ample funding and good access to foreign technology and know-how. The rise of the Chinese techno-security state has triggered deepening concern in the United States that its military technological superiority with China is under mounting threat. This has led to intensifying Sino-US defense technological competition that is likely to become more acute. The U.S. Defense Department has been pursuing a number of initiatives since the early 2010s in an effort to maintain its technological advantages, such as the Third Offset Strategy and the Defense Innovation Initiative that was pursued by the Obama Administration (see Cheung and Mahnken 2018). While the Trump Administration no longer uses the Third Offset label, it has made clear that it embraces the view that the United States and China are now great power rivals. This is spelled out in the US national defense strategy issued in January 2018 that points out, “as China continues its economic and military ascendance, asserting power through an all-of-nation long-term strategy, it will continue to pursue a military modernization program that seeks Indo-Pacific regional hegemony in the near-term and displacement of the United States to achieve global pre-eminence in the future” (U.S. Defense Department 2018). This competition in the defense domain has also spilled over into the broader U.S.-China technology relationship, especially in areas such as high and strategic technology, communications technology, U.S. and allied curbs on Chinese investment in sensitive technological areas, and restrictions on research and development exchanges. The two countries appear to be spiraling into a technological cold war that has far-reaching negative consequences for not only their techno-security establishments but also for the development of their national innovation capabilities and for the global technological order.       Author’s Biography Tai Ming Cheung is the director of IGCC and a professor at the School of Global Policy and Strategy at UC San Diego, where he teaches courses on Asian security and Chinese security and technology. He is a long-time analyst of Chinese and East Asian defense and national security affairs and was based in Asia from the mid-1980s to 2002 covering political, economic, and strategic developments in greater China. He was also a journalist and political and business risk consultant in Northeast Asia. Cheung received his Ph.D. from the War Studies Department at King’s College, London University. Recent publications include The Gathering Pacific Storm: Emerging US-China Strategic Competition in Defense Technological and Industrial Development (ed., with Thomas Mahnken, Cambria, 2018) and China and Cybersecurity (ed., with Jon Lindsay and Derek Reveron, Oxford, 2015).