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In Systemic Competition with China

Achim Wambach

This past February, Germany’s economics minister Peter Altmaier presented the National Industry Strategy for 2030. Shortly after that, Altmaier, together with France’s finance minister, Bruno Le Maire, released a Franco-German manifesto for European industrial policy. In July, he also worked together with Poland’s economics minister Jadwiga Emilewicz to put forward suggestions for reforming European competition policy. The elephant in the room, however, is China.

China’s success with state capitalism poses, along with security concerns, huge economic challenges for western market economies. China’s own economy has boomed over the past 20 years. Since the new millennium, China’s 7 per cent share in gross world product has increased by a good 19 per cent, and over the last decade, its economic output has nearly tripled. The fear of falling behind this economic giant is real.

Private industry has certainly contributed much to China’s recent success. In particular, Chinese digital companies were very quick in taking over an international leading role in the digital economy and for implementing artificial intelligence. German firms have also partially relocated their research and development departments for machine learning to China, where highly trained computer professionals and better access to data are abundant. Now, digital companies such as Tencent and the Alibaba Group are among the world’s most valuable firms, continuing to forge ahead in Europe. If Germany desires to keep up, its politics has to react faster than it has been. On the agenda here is broadband expansion, investing in appropriate training – including new professorships of artificial intelligence and improved advanced training possibilities – as well as expanding the European internal market. Competition law must also continue to adapt in order to better deal with firms dominating the market, which an upcoming draft legislation for the 10th Amendment to the Act against Restraints of Competition, as well as a commission report to be released this fall titled “Competition Law 4.0,” will help facilitate, at least in Germany. 

While private industry has certainly helped the rise of China, in reality, it’s only one part of the economy. China is a state capital economy, which means that state enterprises and state-controlled firms play a dominant role, with the former accounting for 35 per cent of China’s GDP, as well as being among the largest companies in the country in general. The Fortune Global 500 from 2014 featured 92 Chinese firms, 81 of which were controlled by the state. Mergers in the last few years have made these firms even stronger. Whereas there were still 189 firms supported by the central government in 2003, after several mega-mergers, only 97 are 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), which became the China Railway Rolling Stock Corporation (CRRC) – by far the world’s largest enterprise in the industry.

Expectations that the sheer size of these giant state enterprises would create economies of scale and increase profitability have so far not been met. Instead, debt levels of these firms have risen to dangerous heights. And for Europe and the US, there is evidence that these mergers actually lead to fewer innovations, in part because research departments are consolidated and eventually downsized. The textbook argument for competition as a leading market principle shouldn’t be ignored here: competition increases the likelihood of innovation and leads to increased prosperity. An answer to China can’t simply mean fostering European champions at the cost of loss of competition in Europe. This would only serve to weaken dynamic innovation. 

But neither is it entirely clear yet how the trade-off between private corporate dynamics and government management of firms will develop in China. One thing is for certain: if Chinese firms are increasingly merged to shut out “unnecessary competition,” this strongly suggests controlled competition on the Chinese part. In order to stay abreast of these quick developments, more knowledge of the intensity of competition in each of China’s sectors would need to be acquired. 

Should these developments towards comprehensive state control in China’s economy intensify, German corporations should already be in a position to respond via their own activity in China. Measures for tackling 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 have any justification for their existence.” If China decides in favour of a non-competitive market form, then there are definitely good reasons to reactivate these export cartel measures, which would be targeted at the competition in China.

Measures of competitive and foreign policy regarding competition in Europe with Chinese firms should also take into account the particulars of a state capital economy. European anti-dumping and anti-subsidy measures could be strengthened in order to keep overly aggressive price-setting from Chinese state enterprises in check. In merger control, the acquisition of European companies by Chinese companies, as long as they are state-owned, ought to always be evaluated with the understanding that these are not independent purchase procedures by individual corporations. If that leads to problems of competitiveness, the competition authorities should be in a position to intervene. And if national security is perceived to be under threat, a risk assessment is in order. Otherwise, the purchase would be well left alone. Germany has done very well with its open markets. Foreign capital and foreign expertise are generally beneficial for the firms as well as for the German economy.

Ideally, though, the rules of the economic and business environment, insofar as they reach beyond the typical WTO agreements, are laid out in a separate agreement, such as the investment treaty that Europe has been negotiating with China for over six years now. China and Europe working together, creating fair competition between the nations’ firms, is the much better alternative to unilateral protectionism.

This article first appeared on 5 August 2019 in “Frankfurter Allgemeine Zeitung” (FAZ).

Citation

Achim Wambach: In Systemic Competition with China, EconPol opinion 24, August 2019