China’s Unfair Economic Policies Have Harmed Innovation in Developed Economies, Scholarly Review Finds

January 6, 2020

WASHINGTON—Policy debates about the rise of China’s economy have long focused on the effect it has had on jobs in developed nations. But a new review of scholarly economic literature by the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy, finds that China’s rise has also harmed technological innovation, particularly in North America and Europe.

The report argues this trend has not been a simple consequence of China joining the global trading system and becoming deeply integrated with more developed economies. Indeed, that process normally boosts, rather than retards, global innovation. Rather, China’s particular mix of economic and trade policies, which rely on extremely distortionary and unfair measures such as lavish subsidies for domestic companies, forced technology transfers, and intellectual property theft, have made it harder for companies in developed economies to continue to innovate.

“We have moved into a world where some nations are not engaging in trade on market terms, they’re operating under a strategy of government protectionism and mercantilism—and China is at the forefront of that trend,” said ITIF President Robert D. Atkinson, who authored the review. “Given the evidence of the harm this causes, it should now be clear that conventional economic and trade theory fails as a guide for policymaking. Instead of assuming market integration will always increase economic efficiency and be beneficial to society, we must recognize that the global trading system can be corrupted to our detriment.”

In the first of a year-long series of reports supported by the Smith Richarson Foundation, ITIF reviewed dozens of studies that scholars have conducted in recent years and found the preponderance of evidence suggests the mercantilist nature of Chinese trade epansion has reduced research and development (R&D) and innovation globally by helping less innovative Chinese companies compete on unfair terms with more innovative companies in developed economies.

The review describes two main ways trade competition can reduce innovation—first, by reducing the size of the market for innovative firms, and second by reducing revenues and profits necessary to invest in R&D for the future. Mercantilist trade barriers and distortions such as those China has implemented exacerbate both dynamics by propping up weak domestic competitors, closing off access to new markets, creating overcapacity, and artificially forcing down prices.

The review concludes that a large majority of scholarly research and evidence suggests unfair Chinese competition has adversely affected both process and product innovation in developed economies, particularly in Europe and North America, which has harmed productivity by enabling less-productive Chinese firms to gain more market share than they otherwise would have against more productive foreign firms.

“It is time for economists and policymakers to clearly distinguish between market-based trade that maximizes innovation and societal welfare, and mercantilist-based trade,” said Atkinson. “Especially in innovation-driven industries, mercantilism is likely to be welfare- and innovation-reducing, not just for the affected nations, but globally.”

Read the report.