In some ways, the U.S. economy in the 1970s was a lot like the U.S. economy today: there was rising inflation, most people were pessimistic about the future of the market, and total productivity kept going down. Back then, there was also a rising economic threat from the other side of the Pacific. Only in the 1970s, the danger came from Japan. Dozens of books and even a few movies were written about Japan because people were afraid it would overtake the U.S. as the world’s economic superpower.
Today, China is the one who is competing with Japan. Still, there is a lesson to be learned from past. That time when Japan was coming up with new ideas and growing its economy was not a terrible time for the U.S. In fact, some U.S. industries were so driven by what they thought was a threat from Japan that, by the 1980s and 1990s, they dominated the world market. China might play a similar role today, not as a monster to be afraid of but as a rival who, like Japan did in the past, can speed up the rate of innovation and even make the U.S. economy boom.
Part of the fear of China’s rise today comes from the fact that its model is so different from other countries’. China has a controlled political system, but its economy is very decentralized, with local governments competing to build their own “Silicon Valleys” all over the country. One example of this kind of structure is the city government of Hefei, a 5 million-person city in eastern China. In 2008, it took a chance and gave the company BOE Technology Group Co. billions of yuan, or hundreds of millions of dollars, to help it become the world’s largest maker of LCD screens, passing Samsung in the process. The city is also home to large quantum computing projects and has helped businesses like CIQTEK when no private investors thought it was a good business. Hefei has built the world-famous “quantum avenue,” where many of the best quantum companies in the world are based. Nio, an electric vehicle (EV) company that was about to go bankrupt, was recently saved by the Hefei government. They did this by organizing the whole supply chain, from battery makers to manufacturers, around the company. Within a year, Nio’s production went up by 81%, and the company’s market value went from $4 billion to $100 billion.
Today, China is the one who is competing with Japan. Still, there is a lesson to be learned from past. That time when Japan was coming up with new ideas and growing its economy was not a terrible time for the U.S. In fact, some U.S. industries were so driven by what they thought was a threat from Japan that, by the 1980s and 1990s, they dominated the world market. China might play a similar role today, not as a monster to be afraid of but as a rival who, like Japan did in the past, can speed up the rate of innovation and even make the U.S. economy boom.
Part of the fear of China’s rise today comes from the fact that its model is so different from other countries’. China has a controlled political system, but its economy is very decentralized, with local governments competing to build their own “Silicon Valleys” all over the country. One example of this kind of structure is the city government of Hefei, a 5 million-person city in eastern China. In 2008, it took a chance and gave the company BOE Technology Group Co. billions of yuan, or hundreds of millions of dollars, to help it become the world’s largest maker of LCD screens, passing Samsung in the process. The city is also home to large quantum computing projects and has helped businesses like CIQTEK when no private investors thought it was a good business. Hefei has built the world-famous “quantum avenue,” where many of the best quantum companies in the world are based. Nio, an electric vehicle (EV) company that was about to go bankrupt, was recently saved by the Hefei government. They did this by organizing the whole supply chain, from battery makers to manufacturers, around the company. Within a year, Nio’s production went up by 81%, and the company’s market value went from $4 billion to $100 billion.
Hefei isn’t the only place doing these kinds of things. Second-tier towns like Shenzhen, Wuhan, Suzhou, Guangzhou, Chengdu, and Tianjin each have their own areas of focus, such as manufacturing, autonomous vehicles, artificial intelligence (AI), or designing and making semiconductors. Each city has its own way of helping businesses get loans, hire good people, and build business hubs that work well together.
These efforts and ways of doing things help spread the ability and the money. China has more unicorns than any other country except the U.S., but they are not all in coastal towns like they are in the U.S. By the end of 2022, there would be 1,500 of these municipal level government funds, with a total of 2.7 trillion yuan (about $340 billion) to spend in companies. Cities and towns in the United States also give grants to businesses, but not on this scale, and it’s usually in response to a crisis, like when Houston gave $15 million to small companies during the COVID-19 pandemic to help them stay open.
Many people in the U.S. have been shocked by China’s rapid rise, which is a lot like how Japan was seen in the 1970s and 1980s. In the late 1970s, Japan’s semiconductor industry began to leapfrog the U.S., even though the microchip was invented in the U.S. This was a turning point.
The U.S. response then wasn’t too different from what it does now when it fights with China: it put 100% tariffs on Japanese goods, set up voluntary export controls, and sued Japanese companies for patent violations.
But what’s more important and will last longer is that the U.S. response wasn’t all bad. Both U.S. businesses and the U.S. government were inspired by Japan’s innovative innovation ecosystem, which linked its national labs, colleges, and industries. The rise of Japan pushed the U.S. to pass the Stevenson-Wydler Technology Innovation Act in 1980. This law made it easier for workers in national labs, universities, and businesses to work together. In the same year, the Bayh-Dole Act and the Small Business Patent Act gave professors an incentive to patent their ideas and gave colleges an incentive to license their breakthroughs. This made it easier for technology to move from the ivory tower to the real world. As a result of these changes, economic growth skyrocketed in the 1990s and 2000s. This was made possible by lab-grown innovations like the Internet, digital cameras, and smartphones.
The same thing is happening now with China, which has completely dominated the production of solar panels for more than a decade and is also the biggest player in the market for electric vehicles. Both of these industries were started in the United States. Here, too, there are many lessons from the past: In the 1980s, U.S. companies copied parts of Japanese industry to keep up with their rivals on the other side of the Pacific. As a result of these changes, the number of products that could be made increased, American companies focused on fewer goods and found ways to make them stand out, and microchips got faster, better, and cheaper. By the middle of the 1990s, U.S. companies were quickly rising to the top of markets like micro components, where they had a 72% market share. The U.S. and Japan were in a fierce battle and came up with many new ideas during this time. This is why chips are in everything from coffee makers to cars today.
This is the main reason why this time of competition between China and the U.S. is so important. It is important not just because it will lead to more innovation in both countries, but also because in the end, this kind of competition is good for consumers everywhere. Since 2010, the price of solar cells has dropped by 80%, making solar energy the cheapest way to get energy in the world. This can also be seen in the current competition between Chinese electric vehicle (EV) maker BYD and U.S.-based Tesla, which has led to cheaper and higher-quality cars. It can even be seen in big tech. Facebook’s chat features were influenced by WeChat’s payment option, and Amazon’s Prime Day is similar to China’s Singles Day. China’s new “juguo” system of government management is based on a “whole-of-nation” approach. It was modeled after both the Japanese system of combining public universities and private businesses and large-scale U.S. government projects like the Apollo Program and the Manhattan Project, which changed the world. Instead of turning away from China or trying to force China to turn away from the U.S., history and proof show that more competition leads to more innovation, which leads to more growth.
It’s not like China and the U.S. don’t already work together. In fact, more cross-national study on AI has been published by these two countries than by any other pair of countries (the U.S. and the U.K. are the second most productive pair). At this very important time, when the world is changing to a greener way of living, there are a lot of good examples of how to work together to win. For example, the German government is putting more resources into making batteries and building on Chinese technology. Major car companies like Ford and Toyota have been putting money into Chinese electric vehicle companies so they can use Chinese technology in their cars and sell it in the U.S., Japan, and Europe. Tesla chose Contemporary Amperex Technology Co. Ltd. (CATL), a Chinese company with plants in Germany, to make its batteries.
If a country decides to work on its technologies in isolation, its technological progress is likely to slow down. The lesson of the past is not to avoid foreign competition and give up the field in some areas, but to learn from your competitors, step up to the challenge, and come up with new ways to win.
Adapted from The New China Playbook by Keyu Jin, which was released by Viking, an imprint of Penguin Publishing Group, a division of Penguin Random House, LLC. Keyu Jin owns the rights until 2023.
