World Trade Review (2021), 20, 169–185

doi:10.1017/S147474562000052X

ORIGINAL ARTICLE

China’s Race to the Top: Regional and Global

Implications of China’s Industrial Policy
Seung-Youn Oh
Bryn Mawr College, Bryn Mawr, USA
Email: [email protected]

(Received 6 July 2020; revised 6 July 2020; accepted 2 November 2020; first published online 11 February 2021)

Abstract
The paper examines the global and regional implications of China’s revitalized state capitalism model
through the sectoral lens of the Chinese automotive industry, which stands at the intersection of both
traditional and green industrial policy. At the multinational level, China skillfully facilitates local policy
implementation that creates excess capacity by propping up local and national champions through con-
venient compliance with the WTO. At the bilateral level, China closely links purchasing and coercive dip-
lomacy with protections for Chinese players both at home and abroad. Key endeavors like the Belt and
Road Initiative open up overseas markets to develop global champions and secure foreign footholds for
Chinese champions. Additionally, China’s increasing reliance on exclusionary diplomacy provides polit-
ical justifications to discriminate against foreign competitors within the Chinese market while moving for-
ward with industrial upgrading of domestic players. When linked together, these factors – all byproducts
of China’s approach to state-led capitalism – combine to explain China’s efforts to create a race to the top.

Keywords: China; industrial policy; economic statecraft; state capitalism; Belt and Road Initiative; industrial upgrading;
new energy vehicles

1. Introduction
China’s economic rise was one of the most momentous affairs of the twentieth century, changing
the landscape of both regional and world politics. Its extraordinary growth has, in many ways,
confirmed the power of free markets and challenged neo-classical perspectives on the foundations
and limits of a market economy. The 2008 financial crisis further confirmed the strength of state-
driven economic development and authoritarian models, which stood in stark contrast to the
struggling democratic liberal market economies. This sparked an academic debate about the effi-
cacy of newly strengthened industrial policies and a re-evaluation of the role of the state in the
market. In both developed and developing countries, taking a mercantilist approach and adopting
murky protectionist measures have become a norm rather than an exception. Desire to lead the
fundamental reordering of the global economy in the fourth industrial revolution provided an
added political justification to push for demand- and supply-side industrial policies with a
more pronounced visible hand in the market.
Beijing has implemented a diverse array of state-led initiatives to build industrial capacity and
become the world’s preeminent technology superpower. China’s leaders, especially President Xi
Jinping, have chosen to establish more centralized control over the economy instead of experi-
menting with further privatization and liberalization. They know that only market forces can gen-
erate the long-term growth that can sustain the Communist Party’s political survival; but, at the
same time, they want to ensure that the state controls the wealth that the market generates. What

© The Author(s), 2021. Published by Cambridge University Press

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 170 Seung‐Youn Oh

are the distinctive characteristics of China’s state-driven economic development model? What are
the global and regional implications of its revitalized state capitalism?
This paper explores such questions by examining China’s participation in multilateral and bilat-
eral settings as a way to expand its developmental and geopolitical agenda. At the multinational
level, international organizations such as the World Trade Organization (WTO) are limited in
the extent they can push China toward further liberalization. Originally a cautious and passive par-
ticipant in the WTO, China has moved rapidly along a learning curve to skillfully navigate the
system and create spaces for its industrial policy objectives. China often takes a passive stance
in agenda-setting stages, compared to other developing countries such as Brazil and India, yet
maximizes its leverages at the litigation stage within the Dispute Settlement Body. China deftly
shifts policy measures to comply with WTO rulings and adopts other policies with similar effects
that prioritize sectoral development objectives. This approach allows China to outsmart the WTO
system and continue nurturing its domestic companies as regional, national, and global champions
with government protection from fierce foreign competition.
At the bilateral level, Beijing also increasingly relies on economic statecraft, or the use of eco-
nomic instruments to advance foreign policy goals. China closely links purchasing and coercive
diplomacy with protections for Chinese players at home and abroad. The Belt and Road Initiative
(BRI), China’s infrastructure development and investment project that aims to connect Asia with
Europe and Africa along ancient trade routes, aims to secure footholds for Chinese national and
local champions in the overseas market. China also increasingly resorts to coercive measures to
pressure a targeted country to reverse certain actions. Negative sanctions not only lead to short-
term trade restrictions, but also create longer-term barriers for foreign firms and their products
when combined with discriminatory industrial policy measures against them. China’s increasing
use of economic statecraft contributes to the politicization of trade and increases the cost of eco-
nomic interdependence with China.
This article explores China’s efforts to create a race to the top through the lens of the automo-
tive industry, which stands at the intersection of both traditional and green industrial policy mea-
sures. The remainder of this article proceeds as follows. Section 2 provides an overview of Chinese
state capitalism and the use of industrial policies for economic developmental objectives. Section
3 introduces the characteristics of the Chinese automotive industry and modes of government
intervention. Then, Section 4 illustrates China’s WTO trade disputes in the automotive sector
to demonstrate the country’s increasing confidence in navigating the dispute resolution process
as well as to address the WTO’s institutional limitations in curbing governments’ interventionist
measures. The following passage, Section 5, provides a detailed overview of how Beijing uses the
BRI to expedite the internationalization of Chinese auto companies by expanding trade and
investment links for Chinese companies and products. Section 6 explores how China resorts to
economic statecraft and weaponizes foreign investment and trade, as seen in the cases of state-led
boycotts and unofficial economic retaliation against South Korea. The final section discusses the
implications of China’s industrial policy in the context of global power competition with the
United States and emphasizes that Beijing still has a keen interest in maintaining the existing glo-
bal trade regime rather than disputing China’s legitimacy as one of the world’s largest traders and
beneficiaries of the liberal economic order.

2. China’s State Capitalism and Industrial Policy Tools

Defining the relationship between state institutions and economic growth has been a perennial
quest in social science. Scholars in the field of economics and political science have been sharply
divided about the benefits of government intervention in the economy. In the early 1980s, devel-
opment policy shifted towards a more market-centered approach, limiting government interven-
tion to horizontal and cross-sectoral industrial policies that make market outcomes more efficient
by increasing competition or providing public goods. Policy makers and scholars, however,

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continuously argue for the benefits of vertical and sector-specific industrial policies whereby state
intervention deliberately favors particular industries or firms in order to spur structural trans-
formation that does not take place autonomously (Lin and Chang, 2009; Harrison and
Rodriguez-Clare, 2010). Recent developments in the world economy, including the fallout
from the 2007–2008 global financial crisis and the rise of state capitalism, have put industrial pol-
icy back on the agenda for both developed and developing countries alike.
China has combined capitalist institutions with a comparative predominance of direct state
participation in the economy, mainly but not exclusively through state-owned enterprises
(SOEs), an economic system widely referred to as ‘state capitalism’ (Bremmer, 2010; Liebman
and Milhaupt, 2015). Despite China’s decades-long reform process, the visible hand of the
Chinese state remains strong (Zheng and Huang, 2018). China is by no means the world’s
sole practitioner of state capitalism, sharing similar traits with other developed and developing
countries (Musacchio and Lazzarini, 2015). Yet it is arguably the most successful, and certainly
the largest, with several unique features (Naughton and Tsai, 2015; Wu, 2015). Instead of experi-
menting with further privatization and liberalization, Beijing has partially privatized a large frac-
tion of its SOEs, but the state sector gained strength at the expense of the private sector during the
Hu Jintao era (2004–2012). The 2008 global financial crisis provided a justification for further
power consolidation at the top with the trend of guojinmintui (advancing the state sector and
retreating the non-state sector) (Huang, 2008; Yang and Jiang, 2012). China’s leaders have chosen
to establish more centralized control over the economy (Lardy, 2019).
Private firms have been important drivers of China’s economic transformation and will remain
a promising source of its future growth (Lardy, 2014). However, the focus on equity ownership
overlooks key aspects of state capitalism in China because the state can capture companies with a
range of ownership types. Both SOEs and private companies have limited autonomy from the
state, and incorporate state policies as part of business objectives that extend beyond satisfying
the corporation’s shareholders and employees. The Party has various tools to facilitate state super-
vision over private enterprises that blur the boundary between SOEs and private firms. Such tools
include party membership for private entrepreneurs as well as financial support such as subsidies,
extra-legal control rights, and existence of party cells in board rooms (Milhaupt and Zheng, 2016;
Wu, 2016). Furthermore, foreign partners in joint ventures (JVs) are requested to allow the
Communist Party cells to take a formal role in strategic management decisions such as investment
plans or personnel changes (Feng, 2019).
China’s state capitalism raises concerns for the multilateral trade system in light of China’s
growing importance in the global economy and international trade. Foreign business circles
have consistently drawn attention to Chinese policy measures – subsidies, forced local content
and technology transfer requirements, disregard for intellectual property rights and discrimin-
ation against foreign companies in favor of domestic actors – most of which violate WTO regula-
tions. Foreign companies’ concerns are not limited to competition in the Chinese market and
their diminishing market share in China; they also fear increasing competition from inexpensive
Chinese products flooding the global market and their home markets, especially when China’s
subsidies can displace their exports in a common third-country market.
Additional apprehension regards the WTO’s institutional limitations in regulating China’s
industrial policy measures, especially the ineffectiveness of the WTO’s Agreement on Subsidies
and Countervailing Measures. The narrow definition of what constitutes a subsidy with the
focus on the financial contribution by ‘a government or public body’ allows SOEs to escape scru-
tiny. Moreover, many countries neglect to notify their subsidy programs to the WTO when doing
so runs on a voluntary basis (Bown and Hillman, 2019). Second, the protracted formal dispute
settlement process, which can take months or even years, creates incentives for countries to
worry less about the potential illegality of certain industrial policy measures when the economic
benefits are immediate. Countries can continue benefiting from disputed policies during this ini-
tial period of legal review and repeal them only once the challenge succeeds. The Dispute

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 172 Seung‐Youn Oh

Settlement Body (DSB) rulings are also prospective rather than retrospective, covering only losses
as of the date of the ruling, not the date of violation. Often, winning a trade dispute depends on
more than the final ruling; for example, in China, the real victory can come from buying time for
domestic industry adjustments, as well as signaling its policy preferences to multinational
corporations (MNCs) operating in the country (Oh, 2015).
MNCs implicitly or explicitly support protectionist measures in China due to either their fear
of retribution from Chinese government officials or their hope to gain even small pieces of the
ever-enlarging pie of the Chinese economy. Fear of retribution prevents MNCs from contesting
Chinese behavior or bringing evidence to support cases at the WTO. Chinese officials can
flex their muscles through measures such as blocking an MNC’s entrance into the Chinese
market, delaying permits, withholding raw materials, and detaining finished products at ports
(Oh, 2015).
With the recognition of existing WTO rules’ shortcomings, major advanced countries rely on
trilateral and bilateral channels to recognize China’s unfair trading practices. In December 2017 at
the WTO’s 11th Ministerial Conference, the United States, European Union, and Japan have
begun a trilateral process to confront the Chinese economic model and address ‘unfair market
distorting and protectionist practices’, especially on the issues of industrial subsidies, SOEs,
and the forced transfer of technology (United States Trade Representative, 2017). The trilateral
meeting has called for the reform of the WTO system. Bilaterally, the US has pushed China
with demands on fixing structural issues regarding how Beijing manages the country’s economy
and creating a level playing field for foreign investment regarding intellectual property
protections and cybertheft of US trade secrets.

3. The Chinese Automotive Industry

The Chinese auto industry stands at the intersection of both traditional and green industrial pol-
icy measures that pertain to the active intervention of the Chinese government at the national and
sub-national levels. It also serves as an illustrative example of the process and consequences of
Chinese efforts to balance liberalizing and protectionist measures as a designated pillar sector
since its Seventh Five-Year Plan in 1986. Labeled ‘industry of industries’, the automobile has
remained one of the most important strategic drivers of economic development as the epitome
of manufacturing, technological, commercial, and organizational innovation since the turn of
the twentieth century (Drucker, 1946, 149). Given the significance in job creation, economic con-
tributions, and industrial capacity building, the automotive industry has been the focus of indus-
trial policy and government involvement in economic growth in many countries. A strong
indigenous automotive industry also serves as a symbol of national pride that showcases indus-
trial prowess.
For the past three decades, Beijing has endeavored to follow in the footsteps of Japan and
South Korea, who created national champions by carefully crafting industrial policy and regula-
tory frameworks in their automotive sectors. In the traditional combustion auto sector, Beijing
required global automakers to form JVs with no more than two Chinese SOEs and limited
their ownership to a maximum equity share of 50%. For MNCs, such ownership regulation
restricts two of their most important business strategies: entry mode and entry timing. Beijing
also put JVs under strict local content requirements to build manufacturing capacity in the
upstream activity of car assembly through horizontal and vertical technology spillovers from for-
eign partners to domestic players. Developing suppliers and creating industrial clusters are key
foundations for sectoral growth, cost reduction, and industrial upgrading, given that a typical
automobile contains about 2,000 functional components, 30,000 parts, and 100 million lines
of software code. While the WTO has strongly attacked local content requirements for constitut-
ing non-tariff barriers of infant industry protection and control over foreign companies, policy
makers in developing countries employ such policies extensively to facilitate technology transfer

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 World Trade Review 173

from foreign partners and the growth of indigenous suppliers (Hestermeyer and Nielsen, 2014;
Sauvé, 2016; Ornelas and Puccio, 2020).
The extent to which such industrial policy measures were successful in nurturing the Chinese
auto industry has generated mixed assessments. Both Chinese SOEs and private automakers have
grown quantitatively in the world’s largest auto market. Despite such explosive quantitative
growth, Chinese SOEs who have been the main target of state support have not generated
solid indigenous brands that can compete with global brands and have relied on models from
their foreign JV partners. From 2010, Beijing shifted gears to prioritize investment in the devel-
opment of New-Energy Vehicles (NEVs) by designating NEVs as one of the seven ‘strategic
emerging industries’ in addition to its decade long focus on Electric Vehicles (EVs) (State
Council of China, 2010). The strategic focus coincides with China’s domestic need for greater
energy independence and environmental protection, as well as global ambition to take the lead
in renewable energy. In 2012, the Energy-Saving and New-Energy Automotive Industry
Development Plan (2012–2020) set forth an industrial development blueprint for NEVs calling
for the establishment of numerous regulations and subsidy programs to support domestic
R&D, manufacturing, and utilization.
China’s focus on developing its domestic capacity to produce NEVs was further emphasized
with ‘Made in China 2025’ – the underlying plans for China’s industrial upgrading and indigen-
ous technology development to dominate the global market in critical high-tech industries (State
Council of China, 2015). Made in China 2025 identifies NEVs as one of the ten target industries
to improve indigenous R&D through government subsidies and intellectual property acquisition
of the US and European rivals with advanced technology. It calls for indigenous EVs and NEVs
together to acquire more than 70% of the domestic market share by 2020 and for NEVs over 80%
by 2025. Backed by state sponsorship, local manufacturers are expected to achieve dominance at
home and success abroad in critical future technologies.
China adopted similar policies with developed European countries to boost the demand and
production of EVs and NEVs, including generous tax incentives for consumers to lower the cost
of vehicle purchases, investment for charging infrastructure, and restrictions on the sale and use
of gasoline cars. Certainly, there are emerging discussions among scholars and policy makers
about WTO compatibility of the industrial policy programs that foster public interest, such as
preventing climate change or in promoting renewable energy (Rubini, 2012; Espa and Marín
Durán, 2018). However, what makes the Chinese approach distinctive is its state-dominant eco-
nomic model along with its authoritarian form of governance that deploys an array of industrial
policies and maintains uneven playing fields.
Beijing’s policies to stimulate market performance of the Chinese domestic companies at the
expense of foreign competitors have been more intensified with NEVs. Foreign NEV producers
face pressure to form JVs with Chinese partners to sell in China due to a range of Chinese pol-
icies, including steep import tariffs of 25%, subsidies available for domestically produced NEVs,
and a new NEV credit system.1 Especially, the market access rules by the Ministry of Industry and
Information Technology (issued in 2009 and updated in 2017) require NEV manufacturers to
transfer their technologies to JVs to gain market access, and master the manufacturing technology
for a complete NEV and possess key R&D capacities to be eligible for certain NEV preference
programs (Howell et al., 2014; Cheung et al., 2016).
China’s market size and potential for further growth keep MNCs keen on expanding their
shares in the Chinese market, despite various formal and informal barriers. As the world’s largest

1
The NEV credit system requires all automakers selling vehicles in China to generate a certain portion of their production
and imports from NEVs by 2018 in order to generate ‘NEV credits’, or they would be subject to penalties. See Provisional
Measures for Administration of the NEV Fuel Use and Credit System, art 36 (MIIT, MOF, MOFCOM, General Administration
of Customs, and General Administration of Quality Supervision, Inspection and Quarantine, 2017 Order No. 44, issued 27
September 2017, effective 1 April 2018).

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 174 Seung‐Youn Oh

EV market, China accounted for over half of global EV sales in 2018 (Gersdorf et al., 2020). The
penetration rate for EVs is only 2% in major cities such as Beijing, Shanghai, Hangzhou, and
Shenzhen, and for NEVs the rate is less than 1.4% in the country as of mid-2019 (Ren, 2019).
As such, Beijing has huge leverage over MNCs in enforcing its plan to have domestic companies
control over 70% of the domestic market. The following sections showcase how China outsmarts
the multilateral trade regime to create space for industrial policy measures that nurture local and
national champions, while also expanding its overseas markets to develop its national champions
into global players.

4. Convenient Compliance: Creating Space for Chinese Champions

China joined the WTO in 2001 after thirteen years of marathon negotiations, making concessions
on both trade in goods and services that exceed those of other WTO member states (Qin, 2006;
Bown, 2009). Its accession was a significant step forward in opening the Chinese market and inte-
grating it into existing global economic governance regimes. The WTO also made a substantial
move towards being a ‘world’ organization by incorporating China, a big emerging economy,
into its organization. By doing so, the WTO raised the expectation to resolve trade concerns
with the non-market economy more effectively than through bilateral trade negotiations. The
conventional wisdom from neoliberal scholars appreciates the role the WTO plays in facilitating
trade liberalization among nations by providing, monitoring, and enforcing multilateral rules
(Axelrod and Keohane, 1985; Martin and Simmons, 1998). Once countries have joined the
WTO, they tend to change behaviors and abide by international legal agreements due to the repu-
tational costs of noncompliance (Simmons, 2000). Constructivist scholars highlight international
institutions’ ability to socialize member countries into adopting international norms (Johnston,
2001; Kent, 2002).
China has evolved from a cautious and passive WTO member into an active participant of the
litigations at the WTO’s DSB. Until its first case to go through the full panel and appeal process
starting in 2006, Beijing had participated 66 cases as a third-party observer by joining almost
every panel during its first five years in the WTO (World Trade Organization, n.d.). China’s com-
pliance with the DSB’s final rulings reflect Beijing’s realpolitik calculation to achieve its economic
development goals by selectively utilizing industrial policy tools. China tends to remove disputed
measures and settle disputes mainly for two reasons. First, China can easily replace the measures
with alternative trade and industrial instruments to the same end. Second, at the point of dispute
settlement, China has often already achieved its initial goals to put specific measures in place and
thus the originally disputed actions are no longer as useful. China temporarily utilizes non-
compliant policy tools during crucial stages of development but ultimately builds a reputation
as a responsible WTO member by complying with the DSB rulings – a practice that I characterize
as ‘convenient compliance’ (Oh, 2015).
The WTO trade disputes involving China’s industrial policy measures in the automotive
industry provide examples of how China skillfully adopts non-compliant industrial policy mea-
sures to achieve the same goal of sectoral development even after they have been declared illegal.
Upon WTO entry in 2001, Beijing successfully negotiated to maintain the JV requirements
between the Chinese SOEs and global automakers. Yet, Beijing had to remove the local content
requirement (the requirement to use domestically produced inputs), lower the tariffs on imported
cars from the 80–100% to a fixed 25% rate, and reduce tariffs on imported parts and components
from 15–50% to a fixed 10% by July 2006 (Noble et al., 2005).
To combat the dampening effects of liberalization measures on indigenous auto and auto parts
makers, the Chinese government adopted two sets of policies in 2004, one on local content and
another on technology transfer. First, to mitigate the adverse impact of the removal of the local
content requirements on local supplier development, Beijing adopted significant restrictions on
imported auto parts as a countermeasure. According to the Policy on Development of

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 World Trade Review 175

Automotive Industry in June 2004 and Measures for the Administration of Importation of
Automotive Parts Characterized as Complete Vehicles in February 2005, a car with more than
60% imported parts in either quantity or value would be treated as a fully imported car and
charged a 25% tariff instead of the normal 10% on parts (General Ministry of Customs, 2005).
The foreign partners were under continued pressure to work with local Chinese suppliers or
to convince their global suppliers to open factories directly in China, instead of importing
parts into China; this setup eventually had the same effect as the forced local content require-
ments from China’s pre-WTO entry era.
Joined by the EU and Canada, the US contested the measure at the WTO in March 2006 to
open a case on China–Auto Parts.2 The complainants claimed that such measures served as a sub-
sidy for automakers to use domestic rather than imported parts and acted as a discriminatory
charge in favor of auto parts originating in China (United States Trade Representative, 2008).
This dispute became the first WTO case for which China went through the full panel and appeal
process.3 Beijing halted the implementation of import-related provisions in August 2009 follow-
ing the rejection of China’s appeal by the Appellate Body. The rulings had the potential to benefit
auto parts exporters around the world by removing the measures against imports into China, add-
ing competitive pressure on auto parts producers in China that had been relatively sheltered from
imports. However, along with China’s two-decade long local content requirements for JVs prior to
the WTO entry and the four-year long litigation process at the WTO, global automakers in China
had already localized their supply chains close to 90%. Automakers invited first-tier suppliers to
China and cultivated local suppliers whether they entered in China’s pre-WTO entry era, like
Shanghai GM in 1997, or in its post-WTO entry era, like Beijing Hyundai in 2001 (Oh, 2013).
China conveniently revoked the above-mentioned discriminatory tariff measure and continued
pursuing the same goal of nurturing national champions with other policy instruments that dis-
criminated against foreign products. Two months after the WTO panel report for the China–
Auto Parts case, China launched a US$1.5 billion stimulus plan in March 2009 and offered an
export-contingent subsidies program for the domestic auto and auto parts companies to develop
proprietary brands and exports.4 The plan also included lower sales taxes on vehicles with small
engines, favoring existing Chinese domestic brands instead of JV models. In September 2012, the
United States opened a WTO case over the stimulus plan, China–Auto Parts Industries.5 After the
consultations held in November 2012, China agreed not to renew its subsidy program (United States
Trade Representative, 2019). Another case was opened in July 2012 by the US. In 2011, China
enacted the anti-dumping and countervailing duties after having stated that imported American
vehicles had been sold at below fair-market value and had benefited from U.S. subsidies, such as
the bailouts of General Motors and Chrysler (Ministry of Commerce, 2011). The US contested
such duties of more than US$3 billion on exports of American-produced cars and SUVs with
engines of 2.5 liters or more at the WTO in the ‘Anti-Dumping’ case (China–Autos US).6 After
going through a full panel process, the panel ruled in favor of the US in May 2013 and China
2
China – Measures Affecting Imports of Automobile Parts (China–Auto Parts), WT/DS340.
3
Beijing argued that the measures were necessary corrective actions to prevent importers from illicitly importing whole
cars by splitting shipments of auto parts into completely knocked down or semi-knocked down kits and circumventing
the higher taxes on finished vehicles. But the panel ruled that the 25% charge on these kits was not an internal charge
on imported auto parts; instead, it was a customs duty on the importation of parts charged at the border prior to assembly
despite having limited proof that auto manufacturers have illegally imported cars through kits. For the debate, please see
Wauters and Vandenbussche (2010).
4
The Obama administration said the subsidies to exporters in China totaled at least $1 billion from 2009 through 2011,
while the Chinese customs data show that the country exported $56 billion worth of automotive equipment during these
years. See Bradsher (2012).
5
China – Certain Measures Affecting the Automobile and Automobile-Parts Industries (China–Auto Parts Industries), WT/
DS450.
6
China – Anti-Dumping and Countervailing Duties on Certain Automobiles from the United States (China–Autos US), WT/
DS440.

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 176 Seung‐Youn Oh

Figure 1. China’s industrial policy measures in the auto sector

terminated the duties. As such, China’s effort to develop its domestic automotive sector has never
stopped, and various national policies have been continually reformulated into new instruments –
whether it has been the promotion of forced local content, discriminatory tariff policies, or stimulus
plans for China’s domestic companies (see Figure 1).
A second set of measures was adopted to facilitate technology transfer from foreign companies
to Chinese partners. The above-mentioned 2004 Automobile Policy required foreign automakers
to seek approval of new automobile-production plants in China to file technology-transfer agree-
ments, build R&D facilities, and develop new brands with local Chinese partners.7 For example,
in 2011, Volkswagen AG only obtained government permission to build a new factory in south
China after the company agreed to launch a new brand with a Chinese producer, First Auto
Works (Haley, 2012).
Such pressure for technology transfer has intensified in new strategic industries such as NEVs.
As explained above, foreign NEV makers are required to produce NEVs locally in the form of JVs
with Chinese partners and with no more than 50% equity in order to sell in the Chinese market.
They also need to become proficient in manufacturing technology to be eligible for the various
subsidy programs. In June 2018, the EU (later joined by the US, Japan, and Chinese Taipei) con-
tested such performance requirements in tandem with the forced technology transfer, ‘Certain
Measures on the Transfer of Technology’ (DS 549).8 They claimed that China’s JV requirement
and NEV production force foreign companies to transfer technology to their Chinese JV partners
in order to get administrative approval from the Chinese authorities, which violates equal treat-
ment for national and foreign companies (European Union, 2020). Foreign companies would also
lose their ability to enforce intellectual property rights when the JV contract with the Chinese
expires, leaving them vulnerable. As one trade association stated in USTR’s Section 301 hearing
testimony, ‘[Y]ou’re simply not going to be able to sell that product in China unless that local
partner has mastered the ability to leverage the technology and take it to produce it going forth’
(United States Trade Representative, 2018). Yet, foreign entrepreneurs are generally deterred from
supporting a WTO case against China (Miller and Miller, 2007). With its large market size, attractive
growth potential, and strong state capacity, China skillfully crafts protective industrial policies to

7
Policy on Development of Automotive Industry in June 2004.
China – Certain Measures on the Transfer of Technology – Request to join consultations – Communication from Japan,
8

WT/DS549.

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 World Trade Review 177

make spaces for its local and national champions while continuing developmental objectives with
different policy toolkits and staying one step ahead of WTO rule enforcement.
As latecomers to the WTO, it is harder for developing countries to rewrite the foundational
WTO rules that work as institutional constraints, and yet they find ways to increase operational
room within international organizations. For example, India and Brazil used their activist and
entrepreneurial leadership through proactive agenda-setting in the Doha Round (Hopewell,
2016). On the other hand, China uses reactive veto capacity and takes a passive stance in agenda-
setting, while maximizing leverage at the litigation and rule-interpretation process through con-
venient compliance. Beijing has moved rapidly along the learning curve to make a transition from
‘rule-taker’ to ‘rule-shaker’, debunking several institutional limitations of the WTO (Gao, 2011).

5. Belt and Road Initiative: Launchpad for Internationalizing Chinese Champions

Beijing has become a ‘rule-maker’ through its new global initiative to build a vast network of trade
routes and investment links between China and participating countries, awarding national and
local champions opportunities to become global champions. The state manipulation of economic
instruments for strategic purposes, termed economic statecraft, has long been a staple of great-
power politics (Baldwin, 1985). As the second largest economy and the factory of the world,
China has increasingly leveraged its economic power over other countries using both negative
and positive sanctions, intensifying the nexus between economy and security (Reilly, 2013).
Since 1999, China has sought the ‘Going Global’ strategy, urging Chinese commercial actors to
invest abroad. Both state-backed SOEs and private companies drove the trend of building infra-
structure in the developing world and buying existing companies in the developed world. China’s
major effort to build friendship and buy influence through purchasing diplomacy has culminated
in one of the most ambitious infrastructure and trade projects ever conceived. In 2013, President
Xi Jinping announced the launch of both the Silk Road Economic Belt and the 21st Century
Maritime Silk Road that form the Belt and Road Initiative, with total investment aims of US
$1.3 trillion by 2027 with coverage of 120 countries. It is often compared to the 1948 Marshall
plan of US$13 billion – equivalent to US$100 billion today (Shen, 2016).
In addition to enhancing trade, foreign investment, and economic expansion for developing
countries through much-needed infrastructure building, the BRI is designed to meet economic
and strategic goals for China. It allows Beijing to efficiently utilize excess savings and overcapacity
in construction and to consolidate economic and diplomatic relations with participating coun-
tries. It also diversifies China’s import of energy and other resources through economic corridors
to circumvent routes that are controlled by the US and its allies. Moreover, it provides footholds
in the overseas market to spur internationalization initiatives for the Chinese local and national
champions and to support building of international networks of production and distribution that
leverage the different strengths of each location (Hout, 2020).
The automotive industry has been one of the sectors that have received central and local gov-
ernment support through the BRI in conjunction with transportation, construction, and infra-
structure sectors. In the traditional combustion engine car industry, the lack of domestic
demand for indigenous brands in fierce competition with global brands of JVs has been a barrier
for local companies’ growth. The BRI is expected to provide huge overseas markets and potential
for local production facilities in BRI-participating countries. Guaranteed demand for Chinese
indigenous brands become a launchpad for fast ascent in the Chinese technology market;
under the government’s aegis, Chinese players can begin to aggressively seek and capture low-
price markets. After securing solid ground, they can then bring in talented experts from their riv-
als and pursue Mergers and Acquisitions (M&As), paving the way for entry into the high-end
market. In addition to the traditional car industry, President Xi’s vision of the ‘Green’ BRI, high-
lighting green-oriented infrastructure and energy projects, supports the growth of EVs and clear
technology products in global markets.

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 178 Seung‐Youn Oh

Table 1. China’s Exports of Complete Vehicles to BRI Countries in 2018 (10 thousand vehicles, billon US$)

Country Volume % Increase from 2013 Value % Increase from 2013

1 Iran 19.33 274.2% 17.99 247.0%

2 Chile 7.53 – 6.90 –
3 Egypt 4.38 23.1% 3.04 48.0%
4 Ecuador 3.75 – 3.29 –
5 Viet Nam 3.70 102.8% 4.69 40.6%
6 Philippines 2.83 258.9% 6.78 183.7%
7 Algeria 2.77 – 2.47 –
8 Saudi Arabia 2.08 −12.3% 4.69 1.5%
9 Russia 1.93 −78.6% 4.43 −54.5%
Source: Ministry of Commerce (2019).

First, Beijing sought to internationalize Chinese auto companies by opening up new export mar-
kets for indigenous Chinese auto brands in BRI-participating countries. The BRI has provided wider
markets for the Chinese domestic players to meet the economies of scale through expanding overseas
demand (see Table 1). From 2013 to 2018, the average growth rate of China’s export and value of
complete vehicles to the BRI countries have been 11.6% and 12.1% respectively (Ministry of
Commerce, 2019). In 2018, BRI countries accounted for 68.6% of total vehicle exports of 692,000
cars and 67.6% of total vehicle export value of US$ 102.2 billion. Chinese cars rank in the forefront
of market share in countries like in Iran, Chile, and Algeria.
Second, the Chinese companies have actively developed plans for overseas partnerships and JV
plants. With the launch of BRI initiatives in 2013, major automakers jumped into establishing
new international corporations that manage overseas partnership and imports and exports. For
example, the Beijing municipal government-owned Beijing Automotive Industry Company
(BAIC), established new divisions in June 2013 called the BAIC International Corporation and
the New Import/Export Division. As Table 2 suggests, most major Chinese auto manufacturers
and parts companies have formed JVs and overseas production facilities in BRI countries.
Third, both Chinese automakers and parts companies further accelerated to secure their access
to critical raw materials for EV production, such as cobalt and lithium. As Table 3 suggests, the
Chinese automaker Great Wall invested in Australian lithium resource companies in 2017, and
Yunnan Aluminum signed a JV agreement with Israel’s aluminum-air technology company
Phinergy to make aluminum batteries in 2018. The world’s largest and fastest-growing EV battery
maker from China, CATL, also signed a contract with the world’s top cobalt producer, Glencore
(a Switzerland-based mining company), which has partnerships in the Democratic Republic of
Congo. These active moves by the Chinese companies intensify inter-country competition to
secure natural resources and energy diplomacy (Economy and Levi, 2014).
Nevertheless, there are increasing concerns about the costs that accompany the Chinese model
of state capitalism with the BRI. First, internally, Xi’s original intention was to promote public–
private partnerships to increase private investment and the transfer of technological expertise.
MNCs, SOEs, and private enterprises are expected to leverage their respective strengths, deepen
their collaboration, and boost efficiency in project implementation with a higher rate of return
and high-quality development. Such collaboration would relieve some of the local governments’
debt and provide competitive pressure for SOEs to improve Chinese financial and industrial
health in the process. The dominance of state-led and financially unsustainable economic devel-
opment in China’s approach yet does little to encourage the participation of MNCs or private
firms. Furthermore, not all commercial actors respond to the government’s incentives in ways

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 World Trade Review 179

Table 2. China’s exports and local production of autos in BRI countries

Export
Chinese automakers countries Overseas manufacturing and JVs

Shanghai Auto Industry 60 73 overseas auto parts plants

Company Manufacturing hubs in Thailand, Indonesia, India
JV in Thailand and Egypt

Dongfeng 80 Knockdown plant in Iran and Southeast Asia

JV in Indonesia

First Auto Works 78 16 manufacturing cooperative projects

Chang’an 40+ 19 production plants worldwide

8 knockdowns plants including Vietnam, Malaysia,
Paraguay, Nigeria, Egypt, and others

Beijing Auto Industry 46 4 overseas production plants & 22 knockdown plants

Company (BAIC) Major presence in South Africa, Mexico, Iran
Plant in South Africa: Biggest investment in the history of
BAIC and South Africa
JV in Malaysia for electric bus

Geely 80+ JV in Malaysia

6 knockdown plants around the world

Great Wall 60+ Production plant in Russia, India and Thailand

Knockdown plants in Malaysia, Ecuador, Tunisia, Bulgaria
Invested in Australian lithium resource companies

Chery 80+ 10 overseas knockdown plants

JV in Brazil, Russia, and Malaysia
Major manufacturing hub in Iran
BYD 60+ 30 production plants worldwide
EV bus production facilities in Europe, US, Brazil, Ecuador
JV plant in Bulgaria for electric bus production

Brilliance 68 6 overseas knockdown plants

JV in Iran

Source: Compiled by the author from company websites and public statements/reports, auto industry reports, and trusted news sources.

that are conducive for the state’s interest in expanding strategic goals (Norris, 2016). In reality, the
Chinese tactic of promoting public–private partnerships has turned to public–public partnerships,
exposing the limitations of diversifying the participating actors in the project.
Second, the BRI has stirred up concerns that the program lacks transparency from project plan-
ning to budgeting and procurement and public reporting of debt levels; that it facilitates China’s
export of its authoritarian model; that the commercial loan terms cause ‘debt trap diplomacy’; and
that the projects have inadequate environmental and social safeguards (Gerstel, 2018; Hurley et al.,
2018; World Bank, 2019). Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro,
Pakistan, and Tajikistan are on the list of potential debt defaulters; incumbent politicians in
Malaysia, Sri Lanka, and Maldives lost office for corruption scandals involving infrastructure
loans linked to the Chinese government and firms (Mundy and Hille, 2019).
The BRI represents China’s vision to increase its influence by using financial carrots and eco-
nomic promises that would bring mutual gains. More research has revealed that the results of the
program are mixed at best, and China is rapidly updating lending practices (Dollar, 2019; Russel
and Berger, 2019). Yet, China’s rhetorical carrots and materialized results thus far mark signifi-
cant gaps. In addition, doubts exist about whether China’s economic power has afforded Beijing
political influence and resulted in foreign policy alignment by other countries. An added tension

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 180 Seung‐Youn Oh

Table 3. Chinese investment in EV-related raw materials

Chinese Foreign Raw

company partner Year material Use Project

Hainan Sri Lanka: 2019 Rubber Autos 2 rubber trade zones, technology transfer
Rubber Plantation China’s formal role in Sri Lanka’s national
Industries Rubber Industry plan
Ministry Elevated Sri Lanka’s rubber yields from
800 kg/ha to minimum of 2,000 kg/ha
(projected)

Yunnan Israel: Phinergy 2018 Aluminum EV’s Research, development, production and
Aluminum alternative sale of aluminum-air energy systems
power source (and related products)

Hanrui None 2018 Cobalt Lithium-ion A joint-venture in Kolwezi, Democratic

Cobalt hydroxide battery Republic of Congo with another Chinese
Investment company
Annual production of 20,000 tonnes of
crude copper and 5,000 tonnes of cobalt
hydroxide (projected)

Great Wall Australia: 2017 Lithium EV battery 75,000 tonnes/year of spodumene

Pilbara concentrate for the initial five-year
period
20,000 tonnes/year of concentrate for a
six-year period

CATL Switzerland: 2016 Cobalt EV battery Glencore’s majority stake in Katanga

Glencore mining and full ownership in Mutanda
mining in the DRC
20,000 tonnes of cobalt products
triangular deal between Glencore, CATL
and VW

Tsingshan Indonesia: 2015 Nickel Lithium-ion Morowali Industrial Park (multiple power
Steel Bintang sulphate battery plants that process mined nickel)
Delapan Expansion of national railways and
electricity generation

Tianqi Chile: SQM 2013 Lithium EV battery 23.77% of SQM stake for Tianqi
Lithium Replacement of board members, veto
rights, and other financial incentives

Source: Compiled by the author from various sources.

is the competitive pressure from the United States and its allies in pushing the Indo-Pacific Vision
as an alternative to Chinese investment in the developing world.

6. Economic Statecraft: Revitalized Tool for Industrial Developmental Purpose

While Beijing exercises economic leverage to induce positive behaviors through economic incen-
tives, it also increasingly uses asymmetric economic interdependence as ‘economic blackmailing’
to force its counterpart to make a certain decision or act in a way that benefits Beijing’s interests
(Hirschman, 1945; Keohane and Nye, 1977; Knorr and Trager, 1977). Over the past decade,
China has increasingly used various coercive measures as economic retaliation. For example,
the country placed an import ban on Norwegian salmon in 2010 after the Nobel Peace Prize
was awarded to the Chinese dissident Liu Xiaobo. It imposed an export ban on rare earth miner-
als to Japan in 2010 and an import ban on Filipino fruit in 2012 over the territorial dispute in the
East and South China Sea. As the largest trading partner for over 100 countries around the world,
China’s frequent use of trade embargoes over diplomatic issues raises uncertainty around

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 World Trade Review 181

economic interdependence and politicizes trade issues. Research has revealed that such temporary
measures do not necessarily create a significant change in monthly trade data (Li and Liu, 2019).
Rather, they raise the cost of enforcement for the Chinese authorities on import/export bans and
minimize the welfare of Chinese citizens by limiting the choices available in the Chinese market.
China’s immediate neighbor, South Korea, was also subject to economic retaliation over
Seoul’s decision to deploy the US missile defense system from 2016 to 2018. After Seoul’s
announcement in July 2016, China not only expressed outspoken resentment but immediately
launched all-out economic retaliation, including the usual tactics of state-led boycotts and con-
sumer activism wrapped with nationalistic rhetoric (Weiss, 2014). The official mouthpieces of
China’s ruling Communist Party, People’s Daily and Global Times, started a massive media out-
pouring against Seoul’s decision, sparking boycotts against Korean consumer products, including
cars, pop-culture, and cosmetics.
What concerns trading partners and foreign businesses, however, goes beyond such short-term
trade embargoes and state-led boycotts. Industrial policy measures that discriminate against par-
ticular foreign companies could pose mid-term to long-term challenges (Aggarwal and Reddie,
2020). South Korean companies working in the sectors in which Beijing fiercely supports local
companies were met with major hurdles in their business operations in China. Hyundai
Motor Company, which has a JV with BAIC, suffered from customer’ boycotts, with its sales
in China dropping by 36% from 2016 to 2017 and profits suffering losses of 11.9% in 2016
(Lee, 2018). In addition, the rift with Hyundai’s JV partner has deepened over the JV’s reliance
on Korean suppliers, some of which have direct or indirect financial ties with Hyundai Group. In
September 2017, Beijing publicly criticized the issue and asked to switch suppliers to local
Chinese companies (Wang, 2017).
Subtle exclusion of foreign firms’ access to the Chinese market is another often-used retaliatory
technique in connection with industrial policy measures to move forward with the industrial
upgrading of domestic players. As leading global battery makers, three Korean battery companies
– LG Chemical, Samsung SDI, and SK Innovation – have expanded their market shares in lithium
nickel cobalt manganese (NCM) batteries from 2015 in the world’s largest booming EV market,
China. Yet, the Chinese central government took retaliatory measures against them by suspend-
ing subsidies for electric buses installed with Korean-sourced NCM batteries in 2016 (Crompton,
2016). The Korean government issued a formal complaint that China’s new subsidy policy for
electric batteries was a discriminatory measure against Korean companies, who produce mostly
NCM batteries, and a protectionist measure favoring Chinese local manufacturers, who produce
lithium ferro phosphate (LFP) batteries.
Likewise, China’s Ministry of Industry and Information Technology withdrew subsidies for
EVs loaded with batteries from those Korean companies from late 2016 till December 2019
(People.Cn, 2016). Especially, the ‘seventh list of eco-friendly cars eligible for subsidies’ in
2018 excluded Korean battery-powered EVs among 340 selected vehicles, even though the
China Association of Automobile Manufacturers included three Korean companies in its whitelist
of high-performing companies with advanced technology and high product quality (China
Association of Automotive Manufacturing, 2018). Subsidies are critical for EV makers in the
Chinese market because state subsidies can cover as much as half of the price of the cars.
Accordingly, such unexpected exclusion forced the Hyundai Motor company to switch battery
suppliers for the Sonata plug-in hybrid from the original LG Chemical to the Chinese company
CATL to be eligible for subsidies. Hyundai had to adjust the design of the car, which delayed its
market debut for about a year and lost its competitiveness to a number of competing models. In
the meantime, Chinese competitors were being propelled by heavy subsidies and generous R&D
grants, which created about 486 EV makers in one year (Barrett, 2019).
China increasingly reaches for financial and economic instruments to accomplish geopolitical
objectives, adopting a multifaceted approach to state capitalism (see Figure 2). This has sparked a
wave of fear among middle power countries and foreign companies who are witnessing the

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 182 Seung‐Youn Oh

Figure 2. China’s multifaceted approach to state capitalism

heightened nexus between security and economy. China’s reliance on non-tariff barriers, such as
subtle exclusion of foreign firms’ access in the Chinese market or unofficial state-led boycotts,
deny the existence of any underpinning domestic regulation. This allows China to bypass
WTO rulings, which limit the use of trade restrictions as a political tool and make trading part-
ners vulnerable. Foreign companies find it more challenging to recover from subtle exclusionary
sanctions because it is hard to reverse damages on consumer perception without an official chan-
nel. With increasing politicization of economic interdependence, states and firms are increasingly
recognizing the need for robust policy in the direction of diversified supply chains and the
national security implications for potential decoupling from China along with reshoring of stra-
tegic industries. Pursuing ‘China plus one’ strategies by searching for alternative markets and pro-
duction location in addition to China is not just a business strategy, but a matter of geopolitical
importance.

7. Conclusion
Much has changed in China since 1978, when the country embarked on the Opening and Reform
policy that enabled it to occupy the center of the global trade regime. At the global political and
economic stage, China has evolved from a passive rule-taker to active rule-shaker and rule-shaper.
Through convenient compliance at the WTO, China skillfully facilitates local policy implemen-
tation that creates excess capacity by propping up local and national champions. Then, key initia-
tives like the BRI open up overseas markets to provide a firm foothold for the local and national
champions to develop into global champions. In addition, China’s increasing reliance on exclu-
sionary diplomacy provides political justifications to discriminate against foreign competitors in
the Chinese market for national security purposes while moving forward with the industrial
upgrading of domestic players.
When linked together, these factors – all byproducts of China’s approach to state-led capital-
ism – combine to raise the costs of economic interdependence and politicize trade with state-led
boycotts and unofficial forms of retaliation. Along with authoritarian institutions and assertive
nationalism, the Chinese government is likely to utilize further economic means to advance its
political and strategic goals. Many other countries and companies will be vulnerable to China’s
economic statecraft, as China is the largest trading partner for over 100 countries and is at the
center node of the global supply chain. The political risks will also increase as Chinese companies
catch up with rivals and achieve technological self-sufficiency under the Chinese government’s
heavy subsidization and favorable industrial policies.
China’s continued reliance on industrial policy raises the concern that China’s gain comes at
the expense of other countries. During Barack Obama’s presidency, China–US relations reflected
the belief that a strong and thriving China was in the United States’ long-term national interest
(Barrett, 2019). This has been the centerpiece of the United States’ policy towards China since
diplomatic normalization in 1979. Robust economic connections kept the bilateral relationship

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 World Trade Review 183

on track in times of political or military friction. American policymakers, companies, and con-
sumers were willing to overlook the lopsided economic relationship with China. However, this
optimistic approach has given way to a more skeptical outlook, and China has lost many
pro-Beijing constituents in Washington. As America’s manufacturing sector weakens and
China’s economy rapidly catches up, more voices are demanding market access, academic access,
and informational flow on a reciprocal basis.
China’s state-led capitalism partly contributed to the global turn toward protectionism, but it is the
Chinese economy that bleeds significantly due to the clouded prospects of further trade liberalization.
Four decades have passed since China’s Opening and Reform, but two things remain indisputable:
first, openly promoting reform is the only path toward sustainable development and continuous pros-
perity; second, China has achieved its large and growing share of global trade because of its partici-
pation in the global economy, not despite it. As much as China seems to challenge the liberal trading
system to its own advantage, it has become a significant stakeholder in maintaining the multilateral
trade system and advancing its interests within the existing global trade regime.
Acknowledgements. The author would like to thank Vinod Aggarwal, Andrew Reddie, and Philip Rogers for their invalu-
able comments, and also would like to thank Eva Liu and Stephanie Lee for their research assistance.

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Cite this article: Oh S-Y (2021). China’s Race to the Top: Regional and Global Implications of China’s Industrial Policy.
World Trade Review 20, 169–185. https://doi.org/10.1017/S147474562000052X

https://doi.org/10.1017/S147474562000052X Published online by Cambridge University Press