China Not an Immediate Threat to U.S. Tech Leadership, Expert Tells Review Commission

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WASHINGTON, DC (June 15, 2011)—Contrary to common misperceptions, China’s innovation policies do not pose a threat to U.S. leadership in science and technology, East-West Center economist Dieter Ernst said today in testimony before the congressionally mandated U.S.-China Economic and Security Review Commission. “The U.S. retains a strong lead in overall innovative capacity, and China still has a long way to go to close the innovation gap,” Ernst said.

Instead, he said, China’s progress in innovation should be seen as a wake-up call for America: “Rather than fearing China and blaming it for our problems, we need to focus constructively on how this relationship can be improved.”

Read the full text of Ernst’s testimony here.

Download a pdf of Ernst’s presentation slides.

Ernst urged the U.S. government and private sector to work together in implementing proactive trade diplomacy that takes into account the diverse forces and the conflicting agendas that drive China’s own innovation policy, and in developing a national strategy to upgrade America’s innovation system in order to cope with the competitive challenges posed by China. “Trade diplomacy and national innovation strategy are interrelated, and hence we need to pursue them simultaneously,” he testified. “Corrective action needs to start now, but there is still time to adjust policies and corporate strategies to the new challenges of an increasingly multi-polar global knowledge economy.”

Ernst was among a handful of experts invited to testify at today’s hearing before the commission, which was created by Congress in 2000 to monitor the national security implications of the bilateral trade and economic relationship between the United States and China, and to provide recommendations for legislative and administrative action where appropriate. The topic of the hearing was China’s Five Year Plan, Indigenous Innovation and Technology Transfers, and Outsourcing.”

China’s innovation policy has produced massive investments in research & development infrastructure and higher education, Ernst said. Since 2000, China has increased R&D spending roughly 10 percent each year, with the result that China’s share in global R&D spending has increased from 9.1 percent in 2008 to 12.3 percent in 2010, while the U.S. share has declined from 35.4 percent to 34.4 percent. China’s share is projected to grow even further in 2011, Ernst said, overtaking Japan as the world’s second largest R&D investor.

Since 1998, the number of colleges in China has doubled, and the number of students has more than quintupled to around 6 million, he said. More importantly, China's domestic doctorate awards in science and engineering have increased more than tenfold since the early 1990s, nearing the number of such doctorates awarded in the United States.

China’s patent boom is of particular interest, Ernst said. In terms of total patenting activity, China has overtaken Korea and Europe, and it is catching up with the U.S. and Japan. And in 2009, he said, Chinese nationals accounted for nearly 90 percent of the country’s domestic patent applications, indicating that the government’s ‘indigenous innovation” policies have been successful, at least in quantitative terms.

Even so, Ernst said, the gap in innovation capacity persists, and China’s leadership is very conscious that the U.S. retains a strong lead in R&D spending, patent applications and the per-capita number of scientists and engineers. A telling example, he said, is that no Chinese company is among the top 20 global R&D spenders in the information technology industry. In addition, China owns just two percent of worldwide patents, with 95 percent of its patents being domestic only.

Ernst said that root causes of China’s continuing innovation gap include severe quality problems in education, scientific plagiarism and barriers to private R&D investment. A major weakness of China’s policy, he said, is its elaborate product and technology lists – constructed to assess compliance with government standardization requirements ­– which can quickly become outdated  Even more significant for China’s indigenous innovation push, he added, is that such control lists focus on existing technologiesrather than on the future innovations they are designed to promote.

China’s policies have no doubt increased technology-related trade conflicts with the U.S., adding further to disputes over exchange rates and foreign direct investment, Ernst said, and America has the right to insist on safeguards against forced technology transfers. But more proactive trade diplomacy would also require substantial private investment and improved capacity for monitoring by U.S. government agencies.

Given the current restrictions on U.S. public budgets, the private sector needs to contribute to the necessary funding, Ernst said. In addition, industry needs to be more forthcoming with information on employment effects, both at home and overseas, of its manufacturing and R&D activities in China, as well as on cyber security violations and other proven damages of Chinese policies. To identify areas where policy adjustments might be possible, the U.S. needs to conduct continuous monitoring and in-depth research on how Chinese innovation policies are evolving over time, he said.

“U.S. trade negotiations with China have a significantly greater chance of success if there is a sharing of benefits that is acceptable to both sides,” Ernst said. “It is certainly in America’s interest to foster U.S.-China cooperation on science, technology, and innovation. But these partnerships need to be on an equal footing, with reciprocity of rights and obligations on contentious issues, such as finding the right balance between the protection of intellectual property rights and China’s interest in technology diffusion.

Progress towards such adjusted rules of reciprocity should be possible, he said, “once the U.S. and China accept the fact that, while their economic systems are different, their economies and innovation systems are interdependent.”