China’s Mercantilist Policies Slow Innovation in the High-Speed Rail Sector, New Report Finds; With 70% of the Global Market, State-Backed Chinese Firm CRRC May Cut Foreign Firm Patents by Half

WASHINGTON—China has become a dominant player in the high-speed rail sector by using mercantilist policies such as subsidies, mandated mergers, and forced technology transfers to give a competitive edge to its state-backed champion, CRRC, at the expense of more innovative firms in Japan and Europe. As a consequence, the pace of innovation in the global rail sector is slowing, according to a new report from the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy.

The report finds that by capturing market share and revenue from firms in North America, Europe, and Japan, state-backed Chinese firms are reducing their more innovative rivals’ ability to invest in research and development. ITIF estimates that, if not for Chinese firms’ outsized market share, non-Chinese rail firms would’ve produced twice as many rail patents issued by the U.S. Patent and Trademark Office.

“China’s state-directed bid for a leadership position in the high-speed rail sector has distorted the global market,” said Nigel Cory, ITIF’s associate director for trade policy and author of the report. “China could just as easily have used its vast financial resources to finance win-win trade and innovation; instead, it pursued zero-sum mercantilism, closing its market and subsidizing its rail firms to help them take advantage of open foreign markets.”

China is bolstering its high-speed rail companies to assert control of a strategically important, technologically advanced sector. In particular, China provides extensive subsidies that allow its firms to underbid competitors in foreign markets by 20 to 30 percent. Other international rail companies, including Alstom, Kawasaki, Siemens, and Hitachi, are far more innovative than CRRC, according to ITIF’s report, but they cannot compete with its state-supported growth, artifically low prices.

Each project lost to CRRC takes critical market share and revenue away from more innovative firms, reducing their ability to invest in R&D. That results in fewer new patents and less new technology. ITIF estimates that if CRRC held 15 percent of the global market instead of 70 percent, then non-Chinese high-speed rail firms would have doubled the number of rail patents issued by the US PTO.

The report proposes several measures for policymakers in the United States, Canada, Europe, Japan, and Korea to support innovation-driven high-speed rail firms in competition with CRRC:

• Blocking acquisitions by Chinese firms that benefit from stolen intellectual property and financial subsidies.
• Excluding Chinese rail firms from procurement contracts.
• Pushing the World Bank to stop rail-related funding in China and to exclude Chinese firm rail projects around the world.
• Providing more low-cost and easy-to-access export financing to help local rail firms compete with Chinese rail firms for foreign projects and sales.
• Providing financial incentives to host, and helping local firms send experts to international standards discussions.
• Allowing mergers, where appropriate, to improve local firms’ competitive position versus state-backed Chinese firms.
• Provide more funding and support for a long-term rail R&D framework.

“China’s mercantilist approach to the high-speed rail sector shows it seeks to to replace foreign firms and products at home and abroad,” adds Cory. “Unless Canada, the EU, Japan, South Korea, the United States, and others push back, this market-distorting competition will push a range of local rail firms out of business, and not just in the high-speed segment, but also among the many rail component suppliers. Ironically, that would leave them vulnerable to strategic acquisition by the same Chinese firms.”

Read the report.