This summer, the German cabinet will propose its new National Industry Strategy 2030.
Federal Minister of Economic Affairs Altmaier has placed great emphasis on the industrial strategy and elicited a great deal of controversy. While the proposed instruments and one-sided attention to industry and large firms has drawn some criticism, underlying justification for the industrial strategy has received less attention: How should Europe, with its market-based orientation, position itself against state capitalism in China, marked by a large proportion of state-owned enterprises and a high density of government control of the private economy? In trying to wrestle with this question, it makes sense to divide the discussion into three strands.

Achim Wambach on the Systemic Competition between Europe and China
ZEW President Prof. Achim Wambach analyzes the competition between Europe and the Chinese state capitalism

The question whether or not the use of Huawei technology in the 5G network or the purchase of shares of the network transmission operator 50Hertz by a Chinese firm represents a security risk for Germany cannot be assessed from a purely economic perspective alone. However, it is striking that in the public debate – and not only in the USA – economic and security policy arguments are constantly being interwoven. The German government has responded by adjusting the Foreign Trade Ordinance so that for shareholdings by foreign purchasers of 10 per cent or greater, it can verify the extent that such interests compromise national security. It would be good if economic experts were involved in making this risk assessment, since the issues involved also touch upon economic aspects. Is Chinese investment in an Autobahn section acceptable on security policy grounds? How about a harbour? Without an analysis of the value creation chain, these questions cannot be fully addressed.

China as a trailblazer in artificial intelligence and digital companies

In a remarkably brief time, Chinese companies have taken on a trailblazing role in digital companies and in the application of artificial intelligence. In addition, German firms have partially displaced their research and development departments in the area of machine learning to China, because there are so many highly trained computer professionals working there, and data access is better. By now, digital companies such as Tencent and the Alibaba Group have become among the world’s richest firms and are now forging ahead in Europe. Congratulations China! This economic dynamism, primarily attributable to the private economic activity of these digital companies and the good educational level of young Chinese professionals is equalled nowhere else. German policy-makers must respond to this change more rapidly than they have until now, in order to make sure that Germany is not asleep at the wheel during digital development. The agenda here includes broadband expansion, investment in training, including new professorships of artificial intelligence and improved advanced training possibilities and the expansion of the European internal market. Competition law must also continue to adapt. The ongoing discussion about the further development of the EU and German competition law is on the right track. Thus, the Commission “Competition Law 4.0”, is occupied, among others, with the question of how collaborations between companies in data exchange or in building platforms can be reconciled with greater legal certainty in the EU.

China’s State Capitalism

China has chosen the economic form of the socialist market economy for itself, and state enterprises and state-controlled firms play a dominant role. These state enterprises grow ever more powerful through mergers. Whereas there were still 189 firms supported by the central government in 2003, after several mega-mergers, there are only 97 left today. The best-known example is the merger of the two Chinese railway rolling stock manufacturers China North (CNR) and China South Locomotive and Rolling Stock Corporation (CSR) to become the China Railway Rolling Stock Corporation (CRRC), by a wide margin the world’s largest enterprise in the industry. This merged corporation was cited by proponents of the prohibited merger of the railway businesses of Siemens and Alstom as the central global competitor.

Now, there are many voices – among them the Federal Minister of Economic Affairs Peter Altmaier and the Chairman of the Board of Siemens Joe Kaeser – who claim that there is only one way to respond to such dominance, with one’s own giant enterprise, the European champions. However, the facts speak against this assumption. The increases in productivity in China were not generated in the state enterprise, but rather in the economy’s private sector. The hope for the giant state enterprise was to create economies of scale through their large size and increase profitability, but this has not been fulfilled to date. Instead, the debt levels of these firms rose to dangerous heights. And for Europe and the US, there is persuasive evidence that mergers lead to fewer innovations, in part because research departments are consolidated and thus downsized.

The textbook argument for competition as a leading market principle should not be ignored: competition increases the likelihood of creating innovations and leads to increased prosperity. Crippling Europe’s market and innovation dynamics at the expense of competition by creating champions would be the wrong response to China from a macroeconomic perspective.

It will turn out over time how the trade-off between private corporate dynamics and government management of firms will develop in China. It is irritating when Chinese companies merge in order to eliminate “needless competition”. Should this development intensify, German corporations should be able to respond to this in their activity in China. One instrument for doing this used to exist. Until the end of the 1990s, export cartels were permitted. These were dismantled on the grounds “that in view of the efforts to dismantle global government and private restrictions on competition, export cartels no longer had any justification for their existence.” If China decides in favour of a non-competitive market form, there are good reasons to reactivate this instrument.

The purchase of European firms by Chinese firms ought to always be evaluated with the understanding that these are not independent purchase procedures by individual corporations, but instead, are being conducted by a (government) enterprise. Given this premise, when there are problems of competitiveness, the competition authorities should be able to intervene. If there are security issues, a risk assessment should be made. Otherwise, one should leave the purchase alone. Germany has done very well with its open markets. Foreign capital and foreign expertise are generally beneficial for the firms and also for the German economy.

Currently, there are further instruments under discussion that might contribute to resolving specific problems related to China’s approach to the global economy but are not a direct economic policy response to state capitalism, and thus would be superfluous in the face of joint treaties. Thus, for example, border tax adjustments could take care of compensating for any competitive advantage for Chinese companies resulting from laxer environmental standards. European anti-dumping instruments could be given more teeth in order to punish too-aggressive price-setting by Chinese enterprises. The investment treaty that Europe has been negotiating with China for six years by now, along with a trade treaty as a further step would be welcome and could take these aspects into consideration. However, even without treaties, Europe is not powerless to stand up to competition with state capitalism.

This essay was first published in an abbreviated version on 26.06.2019 in the “Rheinische Post”.

Date

28.06.2019

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