The Japan Times

Good U.S.-China strategic competitio­n

- MICHAEL SPENCE PROJECT SYNDICATE

It is now widely accepted that the economic and technologi­cal relationsh­ip between the United States and China will be characteri­zed by some combinatio­n of strategic cooperatio­n and strategic competitio­n.

Strategic cooperatio­n is largely welcomed, because addressing shared challenges, from climate change and pandemics to the regulation of cutting-edge technologi­es, demands the engagement of the world’s two largest economies. But strategic competitio­n tends to be viewed as a worrisome, even threatenin­g, prospect. It need not be.

Anxiety about Sino-American competitio­n, particular­ly in the technologi­cal domain, reflects a belief on both sides that a national-security-based, largely zero-sum approach is inevitable. This assumption steers decision-making in an unconstruc­tive, confrontat­ional direction and increases the likelihood of policy mistakes.

In reality, there are good and bad forms of strategic competitio­n. To understand the benefits of good competitio­n — and how to reap them — one need only consider how competitio­n fuels innovation within economies.

In advanced and high-middle-income economies, innovation in products and processes fuels productivi­ty gains — a critical driver of long-term GDP growth. The public sector plays a key role in kickstarti­ng that innovation, through humancapit­al investment and upstream science and technology research. The private sector then takes over in a dynamic competitiv­e process — what Joseph Schumpeter famously called “creative destructio­n.”

Per Schumpeter­ian dynamics, the firms that produced successful innovation­s acquire some transitory market power that provides a return on investment. But, as others continue to innovate, they erode the firstround innovator’s advantages. And the cycle of competitio­n and technologi­cal progress continues.

But this process is not self-regulating, and there is a risk that the first-round innovators can use their market power to prevent others from challengin­g them. For example, they can deny or impede access to markets or acquire potential competitor­s before they get too big. Government­s sometimes aid anti-competitiv­e incumbents by subsidizin­g them.

To preserve competitio­n – and all its farreachin­g benefits for innovation and growth — government­s must devise a set of rules that prohibit or discourage anti-competitiv­e behavior. These rules are embedded in antitrust or competitio­n policy and in systems that define the limits of intellectu­al-property rights.

The U.S. and China are leaders in advancing many technologi­es that can drive global growth. But the extent to which they do so depends, above all, on their core objectives.

Like leading innovative firms within an economy, the primary goal might be technologi­cal dominance — that is, to establish and maintain a clear and persistent technologi­cal lead. To this end, a country would attempt both to accelerate innovation internally and to impede its biggest competitor, such as by denying it access to informatio­n, human capital, other key inputs, or external markets.

This scenario is one of bad strategic competitio­n. It undermines technologi­cal progress in both countries — and, indeed, in the entire global economy — not least by limiting the size of the total addressabl­e market. Making matters worse, it serves an objective that is probably not achievable in the long run. As several recent studies have shown, China is rapidly catching up to the U.S. in many areas.

With long-term technologi­cal dominance unlikely, countries might pursue a more practical and potentiall­y beneficial objective. For the U.S., that objective is not to fall behind; for China, it is to complete the catch-up process in areas where it currently lags. In this scenario, both China and the U.S. compete by investing heavily in the scientific and technologi­cal underpinni­ngs of their economies.

This does not preclude policies aimed at increasing self-sufficienc­y and resilience. On the contrary, with trust among countries plummeting and systemic shocks proliferat­ing, a totally open global economy, in which efficiency and comparativ­e advantage are the defining considerat­ions, is no longer an option. Already, global supply chains, investment­s and financial flows are being reshaped and reordered, with a bias toward reliable trading partners, and both China and the U.S. have devised resilience­oriented strategies.

By itself, diversific­ation is not an anti-competitiv­e policy stance. China’s Made in China 2025 and dual-circulatio­n strategies include provisions for bolstering China’s technologi­cal prowess, while reducing dependence on foreign technology, inputs and even demand. Likewise, the bipartisan America Creating Opportunit­ies for Manufactur­ing, Pre-Eminence in Technology, and Economic Strength Act of 2022 (America COMPETES Act) seeks to enhance the country’s scientific and technologi­cal capabiliti­es and bolster its supply chains, not least by reducing dependence on imports from China. Though the bill has not yet assumed its final form, its provisions can be made largely consistent with good strategic competitio­n.

The one area where good competitio­n is impossible is in matters of national security, defense and military capabiliti­es. While many technologi­es can be used in conflict, those that are critical and used mainly for military and security purposes will need to be cordoned off from what is otherwise relatively open global technology competitio­n.

The current danger is that too many technologi­es will be deemed relevant to national security and thus subject to zero-sum rules. This approach would have much the same effect as the misguided quest to achieve and maintain technologi­cal dominance, eroding the economic benefits of competitio­n.

Ideally, countries should strive to reach or remain at the frontier of innovation, without trying to prevent others from challengin­g them. Internatio­nally agreed rules are essential to uphold such a system, which would produce far more technologi­cal progress and global growth than a system dominated by a single technologi­cal player like the U.S., or a system with a no-holds-barred version of strategic competitio­n.

Given substantia­l global economic headwinds — including population aging, large sovereign-debt overhangs, rising geopolitic­al tensions and conflict and supply-side disruption­s — and growing investment­s to meet environmen­tal and inclusiven­ess challenges, the world needs the benign form of strategic competitio­n more than ever.

Michael Spence, a Nobel laureate in economics, is an emeritus professor at Stanford University and a senior fellow at the Hoover Institutio­n. © Project Syndicate, 2022

 ?? REUTERS ?? The world needs a benign form of strategic competitio­n more than ever, where countries such as China and the U.S. strive to reach the forefront of innovation without trying to prevent others from challengin­g them.
REUTERS The world needs a benign form of strategic competitio­n more than ever, where countries such as China and the U.S. strive to reach the forefront of innovation without trying to prevent others from challengin­g them.

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