Chelsea_SunChelsea_Sun ・ Feb. 6, 2024
China's Technological Crossroads: Navigating the Challenges Amidst U.S.-China Tensions
"In the long run, with the right high-tech investment model, China will lead the world in technology," Yuan noted.

BEIJING, February 6 (TMTPOST)—Amid the mounting U.S.-China tensions, China finds itself at a critical juncture in the field of technology, grappling with both internal and external challenges.

Recently, the U.S. Congress announced the passage of the "National Defense Authorization Act for Fiscal Year 2024," citing "national security" as grounds to prohibit the purchase of batteries from four Chinese companies, including Contemporary Amperex Technology Co. Ltd. (CATL) and BYD, starting October 2027. Prior to this, the U.S. Department of Commerce, along with Japan and the Netherlands, imposed a ban on the export of photolithography machines to China, initiated an investigation into the mature semiconductor supply chain, widely seen as a move targeting China in particular.

On January 31, Matthew S. Axelrod, Assistant Secretary for Export Enforcement at the U.S. Department of Commerce, said that nearly 800 Chinese entities have been added to the "Entity List," with over 300 included to the list during the Biden administration.

In addition to external pressures, China is also confronted with internal challenges. In cutting-edge sectors like semiconductors, AI, and biomedicine, China has no counterparts to major tech giants like Microsoft or NVIDIA.

Meanwhile, China has been coping with a shortage of original technologies. In comparison to leading manufacturing powers globally, China's manufacturing sector remains extensive but lacks strength. Additionally, domestic companies allocate less to research and development than their U.S. peers, and investment institutions witness a comprehensive decline, causing financing difficulties for cutting-edge tech firms.

China's GDP rose from US$1.094 trillion in 1999 to US$ 17.8 trillion in 2023, marking a staggering increase of over 13.9 times. As China becomes the world's second-largest economy, questions arise. Does China's weak foundation in core technology, coupled with tightening U.S. export controls, push it into a bottleneck of mature technology dividends? Is China's original technological capability, or the "zero to one" innovation, significantly lagging behind developed nations, potentially leading to a prolonged relative economic stagnation?

Recently, a research team led by Zheng Yongnian, former dean and professor at the Institute for International Affairs, Qianhai, introduced the concept of the "middle technology trap" in a series of articles under the theme "Overcoming the 'Middle Technology Trap' and Achieving Chinese Modernization."

According to Zheng, developing countries, including China, continuously import, imitate, and mature in technology but lack investment in original technology. This poses a significant challenge to industrial upgrading and the transition to high-quality development in countries like China.

"The recent U.S. approach of 'blocking' indicates its refusal to allow China to further climb up the mountain.' The systematic 'decoupling' is even more severe, showing the U.S.' intention to drive China off 'this mountain.' China should not isolate itself and leave 'this mountain' but should tell the U.S. that although the U.S. currently dominates 'this mountain,' it belongs to both the U.S. and China, with contributions from both," Zheng advocates.

He calls for China to adopt more open policies and comprehensive reforms to achieve technological upgrades and overcome the "middle technology trap."

Yuan Randong, Assistant Dean and Associate Researcher at the Institute for International Affairs, Qianhai, emphasized that to achieve high-quality development, an economy must circumvent the "middle technology trap." He suggests that China should cultivate original technological innovation capabilities and concurrently focus on sustainable technological upgrades to foster high-quality development.

"In the long run, with the right high-tech investment model, China will lead the world in technology," Yuan noted.

China's Chip Dependency and Urgent Need for Investments in High-Tech Sectors

Since the start of economic reform and opening up in 1978, China has embraced global integration, leveraging advantages in labor costs and policy incentives to become a manufacturing powerhouse, especially after joining the World Trade Organization (WTO) in 2001.

In 2021, China's manufacturing sector contributed approximately 30% of the global value-added manufacturing, approaching the total of the United States, Japan, Germany, South Korea, and India.

However, despite being the world's second largest economy, China remains a big but not a strong technological manufacturing country.

According to the Manufacturing Power Development Index released by the Chinese Academy of Engineering, China's technological intensity in manufacturing still lags behind developed nations like the United States, Germany, and Japan. Risks of being constrained to mid-to-low-end technologies by these countries are evident.

The China Institute of Information and Communications, in its "Outlook on China's Industrial Economic Development (2020)," pointed out that although China maintained its position as the world's top industrial nation since 2010, it is dependent on foreign technology in critical core areas. Import reliance for core basic components, key basic materials, basic technologies, and industries exceeds 50%. The import dependency for integrated circuits (chips) reaches 80%, with large high-quality castings and forgings at 90%, and high-end hydraulic and sealing components at nearly 100%.

Meanwhile, several OECD economies reported growth rates of over 10% in 2021 and China's reported R&D expenditure grew by 10% in 2021. In purchasing power adjusted terms, China's total R&D expenditure stood in 2021 at 83% of total R&D conducted in the U.S., OECD data showed.

Evidently, as technology innovation becomes the core of global strategic competition, China faces challenges, including the bottleneck period of technological dividends and the "middle technology trap."

To address these challenges, a comprehensive transformation of China's technological development model is imperative.

Overcoming the "Middle Technology Trap": China's Path to High-Quality Development

Yuan challenges the notion that the level of pure basic research has a direct causal relationship with the "bottleneck" issues faced by China in certain technological areas. Despite external pressures, he emphasizes that attributing China's challenges solely to inadequate pure basic research or U.S. restrictions oversimplifies the complex landscape of technological development.

He contends that the outputs of pure basic research belong to humanity as a whole, accessible to anyone capable of comprehending published papers. The real bottleneck arises in the inability to independently manufacture specific advanced products, such as high-end chips, photolithography machines, and precision bearings.

Yuan highlights the intricate details and parameters embedded in these manufacturing processes, often guarded as business secrets rather than patents, making reverse engineering challenging.

According to Yuan, China's scientific progress has been commendable since its founding in 1949, but the collaboration among pure basic research, applied technology, and financial support represents a weakness in the nation's scientific innovation. To enhance the level of pure basic research, he suggests identifying fundamental weaknesses and formulating strategic improvements in this crucial aspect of scientific development.

Yuan asserts that over 90% of what is labeled as "basic research" in China is, in fact, applied research. He points out that compared to other technological powerhouses, China's investment in research and development, especially in pure basic research, remains insufficient. The disparity is evident in the allocation of funds for pure basic research, where the U.S., Britain, France, and Japan dedicate 12%-23% of their total R&D budget, while China allocates around 6%.

Challenges confronting China lie not only in increasing investment but also in distinguishing between basic and applied research. Yuan emphasizes the need for a clearer delineation, as the current ambiguity hampers effective scientific management.

Yuan suggests that China has yet to make significant strides in genuine pure basic research, representing a substantial opportunity for growth. As China's comprehensive strength rises, strategic investment in pure basic research becomes crucial for long-term national and global interests.

Becoming a global leader in technology requires more than mere imitation or emulation of others. Genuine creativity and bottom-up technological innovation are essential. China needs to recognize its shortcomings, invest extensively in foundational science, and devote more time to developing fundamental technological innovations, Yuan remarked.

A Multi-pronged Approach: Building Talent Systems, Transforming Research, and Attracting Capital

Addressing the imperative of breaking free from the "middle technology trap," Yuan outlines three essential factors for a country: a robust foundation in basic scientific research from universities and research institutions, the ability to translate basic research to applied technologies, and an open financial system providing substantial support.

In the realm of talent and free thinking, Yuan acknowledges that the greatest uncertainty in China's basic research comes from the Western countries' policy of "decoupling." He emphasizes that basic research relies on global collaboration and free exchange of ideas among researchers from different civilizations and cultures.

Yuan contends that the fundamental problem in technological innovation is people. He introduces the concept of "scientific research population," differentiating between scientific research and technical populations. The current educational system, focused on rote learning, falls short in fostering essential skills such as independent thinking, logical reasoning, creativity, and problem-solving.

China must reshape its educational system, prioritize the development of a scientific research population, and enhance its pure basic research capabilities decisively.

Regarding companies, Yuan criticizes China's enterprises for their closed operational models. Unlike U.S. companies that extend their supply chains globally, Chinese companies often operate in isolation, safeguarding market shares as a primary profit guarantee. He emphasizes that this closed approach lacks competitiveness and hinders innovation.

Overcoming the “middle technology trap” demands a holistic approach involving educational reform, fostering a scientific population, transforming research systems, and encouraging open capital. Yuan stresses the need for China to adjust its policies and systems to meet these conditions and secure its position as a global technological leader.

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