The Economics Show: China wanted western tech. Now, the tables have turned.

0:00Hi, everyone.

0:01Soumaya Keynes: Rob and I are taking a break from the Unhedged podcast this week, but we wanted to introduce you to another podcast in the FT stable. The Economics Show with Soumaya Keynes is a weekly FT podcast covering the biggest issues in global economics, including trade, monetary policy and the AI revolution. In this episode, Soumaya speaks to John Minnick, an expert on Chinese industrial policy at LSE. They discuss how China used tech transfers to absorb Western know-how and become the world's foremost manufacturer. And they ask whether the US and Europe should now do the same to China. If you like what you hear, click the link in the description or search The Economic Show wherever you get your podcasts to find more episodes.

0:45Soumaya Keynes: Enjoy the show. China has moved up the value chain. Its companies aren't supplying basic components anymore. they are global brands in their own right. And Western officials are looking on anxiously, as Chinese batteries, cars and drones become increasingly sophisticated. Now, Western policymakers are asking the same question their Chinese counterparts were asking years ago. We'd like to beat them. Should we be joining them?

1:19This is The Economics Show with Samaya Keynes. I'm the author of a new book, How to Win a Trade War, with Chad Bowne. And in this episode, I wanted to make a sort of spin-off show, going deeper into one of the topics that we covered, and also speaking to one of the researchers whose expertise we drew on. So today, I am delighted to be speaking to John Minnick, assistant professor at the London School of Economics, whose super interesting research looks at the history of technology transfer to China and how other countries might learn from that model today. John, hello. Great to be here. Thank you for having me.

2:00Okay. So on a scale of one to 10, how strongly would you recommend to Western governments that they respond to concerns about Chinese competition by persuading them to hand over their tech. So one is no, don't bother. Ten is absolutely this should be a massive priority for them. I would say the core idea, I would give an eight or a nine. You know, one of the things I've learned from my research on China and technology transfer policies in China is that technology transfer policy alone is seldom the only or decisive factor that's going to get you from zero to one, but an eight or a nine because I think that this should absolutely be an integral part of any policy package that European or the American government in the future pursue if they want to get technology transfer from China.

2:48I'd say where I'm a little bit more skeptical in the case of advanced industrial economies, especially liberal democratic governments, is when it comes to execution because getting it right, so to speak, requires There's a real tolerance for waste and efficiency, a lot of failure, but also a capacity to sort of iteratively improve along the way. And with that, a kind of flexibility that honestly, at this point, I don't know, but I'm not particularly confident in Western government's capacity to do. Okay, well, starting on a nice upbeat note there. So it feels like this question of, you know, how to do tech transfer, how to deal with investment is really where the debate is right now when it comes to relations with China.

3:34I think in the US, there's relative hostility towards inbound Chinese investment, although increasingly there are voices making this point that, you know, if we want to compete, then we're actually going to have to try to draw on some of the Chinese companies' technology. I think in the EU, the debate is much less settled. So there is just this question, which is open, of how far they should embrace partnerships with the Chinese. And in recent policy debates, you've seen the Industrial Accelerator Act, the IAA, which, quote, lays down conditions for large foreign investments, which will apply to investments above 100 million euros by investors from countries that account for a 40 percent share of global production.

4:22And that rhyme with Schmeiner, you might as well say. So I think what the Europeans are trying to do is make sure that more of the value associated with a foreign investment spills over to Europe, that they get some of those ideas when the Chinese invest, which is kind of funny in a way, because in a sense, where we started with the Trump-China trade wars was a concern about forced technology transfer, right? The Chinese had been applying this policy of trying to extract foreign tech for years. The Americans felt that they had been doing that in an underhand way. And then there were tariffs. So it's kind of funny that the source of all this tension at the beginning is now, you know, we've gone full circle.

5:08We're now saying, oh, actually, we need to know how to do it better. How did you come to be researching this question? Yeah, so my own interest in technology transfer policy really did begin with the, I guess what we would now call the first U.S.-China trade war that began in 2018. And I think like a lot of people who follow U.S.-China relations and who study China, I found myself at that time wondering how on earth we got here. And what I realized was that despite Trump's rhetorical emphasis on the trade balance, if you actually looked at the documents that outlined the U.S. government's rationale for imposing trade sanctions on China in 2018, the Section 301 investigation report that was published in March of 2018, what you see is that that entire document, I think the word trade imbalance comes up maybe once in a footnote.

5:57But the entire document is about so-called forced technology transfer and intellectual property theft. Now, I say so-called not because there wasn't on some level a coercive element to this. There absolutely was. But the reality and one thing that I explore in my research is that many of the tech transfer arrangements that Western multinationals entered into with Chinese counterparts during this period, in particular following China's accession of the WTO, were basically consensual. Foreign companies were desperate to gain access to the Chinese market and were very glad to hand over technology in return.

6:30Of course, they handed over second or third generation technology, but compared to what was available in China, that was a massive leap forward. And this did contribute very directly to the growth in Chinese capabilities. What we ended up seeing was as China ramped up these policies in the mid-2000s and then especially after the global financial crisis, and in particular as Chinese firms began to outcompete Western multinationals first in the Chinese market but then began to expand abroad, Western multinationals then began to push their home governments, in particular the U.S., for some kind of remedial action.

7:04And so in some ways, we have the trade imbalance story, but then running alongside that is the story of Western multinationals' experiences with technology transfer in China, their growing disillusionment with their failure to fully penetrate the Chinese market that in many ways sets the stage for the trade and technology conflicts that define the world that we now live in. Okay, well, we're going to get into all of that in greater depth. But first of all, I want to go back and give a bit more context because it's not like China is the only country in the world to benefit from technology transfers.

7:36I mean, the Chinese themselves often refer to this example of the U.S. benefiting from technology transfer, some would say theft, from the Brits. What's your favorite historical example of that kind of thing? Oh, there are so many. Theoretical debates on technology transfer go back to the 1830s, but really it was the U.S. in the decades after its founding that was a real pioneer under Alexander Hamilton in the kinds of practices that we would now call technology transfer policy. When we look at a lot of the early manufacturing industries in the U.S., textiles, steam power, other forms of low-value-added manufacturing, ironworking, and so on and so forth, all of these industries in the U.S.

8:17were seeded by technology transfers of various kinds. Again, some licit, some illicit coming from the UK. You could say much the same for Germany under Bismarck in the 1870s and 1880s. But the real wave of technology transfer policy being, I would say, an integral part of development begins with Japan, South Korea, and Taiwan, primarily in the decades after World War II. In all of these cases, technology transfers from the U.S. in particular were absolutely critical to seeding the development of what became the industries that these countries were very famous for in subsequent decades. Now, what's interesting about the cases of Japan, South Korea, and Taiwan, and I think this is the big contrast with China, and this sets the stage for what makes China's case so interesting and so important, is that in the case of Japan, South Korea, and Taiwan, they were, of course, close Cold War allies of the U.S.

9:13And what that meant was that the U.S. had a very strong strategic interest in accelerating their industrialization, or in the case of Japan, their re-industrialization. And so the U.S. government actively transferred various kinds of military technologies to these countries and supported the transfer of commercial technologies to these countries. But importantly, it did so without requiring them to open up their market to foreign investment from the U.S. So these countries, by virtue of their role as U.S. allies, were able to, in a sense, get the benefits of foreign technology without paying the cost in terms of foreign competition.

9:46And, of course, this option wasn't available to China. And I think a big part of what motivates technology transfer policies in China was precisely because it wasn't an ally of the U.S. It really had no option in the 80s and especially the 90s for obtaining technology except by opening up its market to capital and competition. And so technology transfer policies in a way are a response to the basic dilemma that this generates, which is how do we harness that technology we need for our development without ceding the market to more productive foreign multinational enterprises? Okay, so there was that dilemma.

10:22And then effectively, what the Chinese leadership said to foreign multinationals was, okay, you can come into our market, we'll give you market access, but you have to share your tech. So can you give me a flavor of the types of policies that they used? How did they implement that? So before China joined the WTO or the World Trade Organization in 2001, it used a variety of policy tools. But I would say during this period, by far the most important, and this, of course, continues to be the case in the post-WTO period, was joint venture requirements on foreign firms seeking to invest in China. And I think it's important to underscore just how important joint venture requirements and therefore technology transfer were to the decision to open up to foreign capital in the first place.

11:03And really the story of reform and opening beginning in 1978 is inextricable from the strategic goal of bringing in foreign capital so you can acquire technology. The problem that China faced in the 1980s and 1990s, I mean, first in the 1980s, there was in fact very little foreign direct investment into China. And it was concentrated in a handful of industries and primarily in the special economic zones in cities like Shenzhen. And at that time, most of it was concentrated in low-value-eyed manufacturing sectors like textile. So it didn't bring a lot of technology content into China. It was really after Deng Xiaoping's southern tour.

11:38This is a famous trip that Deng Xiaoping makes to Shenzhen and other special economic zones in the south of China in 1992. And that really reignites the momentum behind reform and opening in the 1990s. And it's at that time that we see the emergence of this quasi-official strategy that the Chinese refer to as trading the market for technology. That's when this becomes a centerpiece of the sort of broader developmental agenda. And so at the beginning of the 1990s, Chinese officials were really excited about the possibilities as they're opening up their market more broadly to foreign direct investment, that they'll be able to capture some of this technology that's being brought in via these joint venture policies.

12:18But as it turned out, in the 1990s, these policies had relatively limited efficacy. And a big part of that was, one, the Chinese state was basically a mess. You'd had a decade of devolution of administrative and fiscal authority to local governments, and that created a situation where the central government found it very difficult to actually enforce its technology transfer priorities vis-a-vis local governments. So the 1980s, 1990s was a kind of early experimental phase thinking about how to do this trading the market for technology practice. But as of the 1990s, these policies were still very much in their infancy, and we hadn't really seen them fully come to form.

13:01Okay, and then China entered the World Trade Organization. So how did that change? What changes in the post-WTO period is that, at least formally, China committed, as part of its succession agreement to the WTO, no longer to require technology transfer as a condition of market access. But what in fact we see is not an ending of the trading the market for technology strategy of the 1990s, but actually an evolution of that strategy. And the evolution is defined by the fact that by the mid-2000s, you have the emergence of what we now call the indigenous innovation industrial policy paradigm. This policy really puts this concept of indigenous innovation, domestically derived innovation, at the heart of China's broader innovation strategy.

13:45The goal was how can we move beyond some of the perceived failures of the trading the market for technology strategy of the 1990s where you had SOEs that use these policies as a form of rent seeking, et cetera, et cetera. How can we transition from that to something where firms are actually introducing, digesting, absorbing, and re-innovating, quote-unquote, on top of this foreign technology and foreign know-how? And so a lot of what we see in the 2000s and going into the 2010s is this effort to combine foreign technology transfers with much greater emphasis on domestic companies, whether state-owned or private, investing much more heavily in their own internal R &D to raise their absorptive capacity.

14:29I should say that we're talking about your forthcoming paper, Re-Innovation Nation, which will be published in the Journal of Politics soon, maybe this year or next. So in that paper, you talk about this huge variation in the use of these technology transfer requirements or these policies across sectors. And I want to start with the ones that look like they were successful. So high-speed rail, right? That seems to be the famous example. China's managed to build 50 ,000 kilometers of high-speed lines in 17 years. It now has twice as much capacity as the rest of the world combined. And its trains are being made with fewer and fewer imported components.

15:13So what were the dynamics here that allowed that to seem like such a success? In the case of high-speed rail in the post-WTO period, China benefited from a couple of factors. One is that in high-speed rail, China was effectively downstream, so to speak, of global production processes in the sense that most of what was imported into China was ultimately actually consumed there. China was a market for these firms. It was also a market over which you had a centralized regulatory authority, the Ministry of Railways, that had really monopsony power. It was the sole buyer. And that put it in a really strong position as, again, a focal point for bargaining with these foreign enterprises.

15:51Another important aspect of the high-speed rail story is that you have a few firms that dominate the market globally, compete intensely for marginal global market share, But it is what we might call a relatively large N oligopoly in the sense that you've got four major firms globally. And that's just enough to start to get these inter-firm competition dynamics where firms don't want to be the sucker that doesn't make the deal with the Chinese side. So actually, when I was doing my research, I had a conversation with somebody who was a former employee at the American Chamber of Commerce in China who told me a story about the high-speed rail negotiations, which I should say may be quasi-apocryphal.

16:27But I think it nicely illustrates the dynamic. And what this person told me was that when the Chinese government embarked on this high-speed rail journey in 2004, they brought the CEOs of the big four high-speed rail companies, Kawasaki, Alstom, Siemens, and Bombardier to Beijing, put them all in adjacent hotel rooms in the same hotel in Beijing. and over the course of a week or two, circled between these rooms, extracting essentially the most technology at the lowest price possible, precisely by playing these firms off against each other. Because, of course, from the firm's perspective, they rightly judged that this would be the largest high-speed rail market in history, and they were not about to give up that opportunity.

17:11But China was able to leverage that desperation to gain a piece of the Chinese market to secure really quite substantive technology transfers from these firms. And it's hard to say exactly how decisive these technology transfers were. A lot does depend, again, on the absorptive capacity of Chinese firms. But I think it's very clear that in a counterfactual world without these technology transfers, China's progress would have almost certainly been much slower. Okay, so you've got high-speed rail. That seems like a success story. The other seeming success is in the wind turbine industry. Were there similar dynamics at play there?

17:48In fact, very similar dynamics. So one of the things that I explore in the paper is sort of the evolution of these central regulatory institutions from the 1990s through the 2000s. And in particular, the rise of this organization, the NDRC, which is formed in 2003 and by 2004 and 2005 has gained this centralized FDI regulatory authority. So it is the one actor that is really bargaining with most foreign firms in most sectors, especially in energy, around the conditions of market access and investment. What the NDRC does is it implements a local content requirement. At first, it's a 50 % local content requirement.

18:27By 2005, they expand that to a 70 % local content requirement across the entire country. And again, the point is because, in fact, there wasn't a body of suppliers that firms like Gamesa or Vestas, the leading wind turbine makers globally, could draw on in China, their response to these policies was to invest heavily in expanding their training capacity in China. They sent hundreds of engineers fanned all across the country to actually build up that supplier base without which they wouldn't have been able to meet this local content requirement. between 2004 and 2005, China goes from having something like 1 % of global installed wind power capacity to something like 20 or 30%.

19:11And at the same time, we also see that over that same period, the share of foreign firms in supplying that wind power capacity declines from about 90 % to about 10%. So in the span of maybe half a decade, we see this absolutely tremendous growth in Chinese firms' capacity to manufacture large-scale wind turbines. And a lot of that capacity growth derives from these original local content requirements. Okay. I mean, it sounds like the lesson is force companies to hand over their tech and do local content requirements, which is maybe distressing to the free traders, the liberals among our listeners.

19:51I think a big part of the reason that industrial policy is now back on the agenda in all of these countries is because we can observe that although these policies have not necessarily been particularly efficient in the Chinese context, they've been very, very effective in many cases. I want to emphasize, I mean, the way that I tend to think about this is that technology transfer policies have made significant but very uneven contributions to China's economic and technological rise. They absolutely do not always work, and certain conditions are very important for ensuring that they work. But nonetheless, we shouldn't underestimate the role that these can play for countries or companies that have found themselves falling behind the technological cutting edge.

20:31Okay, well, maybe let's go into some examples where they don't look to have been so successful, at least not for a while. So for a long time, the main example that people pointed to was cars. How should we think about technology transfer in the car industry? So I should say I have a modestly contrarian view when it comes to the effectiveness of these policies in automotive. So you're absolutely right. People point to JVs and automotive manufacturing in the 80s and 1990s as really the poster child of the failures

21:01Soumaya Keynes: of this trading the market for technology strategy. I think it's really important to just keep in mind where China was in the 80s and 90s, both in terms of overall state capacity, which was extremely limited. The China of the 80s and 90s is not the China that we know today. Very, very different conditions in terms of the central government's ability to design, implement, and enforce policies, especially vis-a-vis pushback from local governments, and so on and so forth. Also really important is that before the 1990s, the late 1990s, the state-owned enterprises that were on the receiving end of these joint venture policies were essentially unreformed government bureaucracies.

21:41Their incentives were not aligned with this idea of becoming competitive, profitable, technologically innovative firms. The second thing I would say is I think that we tend to hold China in conventional automotive manufacturing to a somewhat unfair standard. It's important to, I think, take a more nuanced view to look at the ways in which local content requirements, JV policies, and related efforts in automotive manufacturing in the 80s, 90s, and early 2000s did play a really crucial role in seeding these broader supplier ecosystems, secondary, tertiary components, in ways that probably would not have happened or would have proceeded much more slowly in the absence of these policies.

22:25And China's ability now to manufacture globally competitive both conventional automotives as well as new energy vehicles in myriad ways has benefited from the sort of downstream secondary effects of that seeding of supplier ecosystems in the 90s and early 2000s. Okay, so the Chinese car industry didn't clear the high bar set for it, but that's not to say that it didn't benefit over the longer term. Can I ask now about planes? China's been trying really hard for a long time to develop its own plane manufacturer to compete with Airbus and Boeing. Why hasn't it succeeded? Well, I think the most important reason that it hasn't succeeded yet is because it hasn't had very much time.

23:14Boeing is over a century old. Airbus is a half-century old company that builds on 50-plus years prior to that of the development of aircraft manufacturing capabilities. China, for all intents and purposes, in the early 2000s began from scratch. They'd had efforts at developing a homegrown airliner going back to the late part of the Mao era. And there'd been efforts at developing sort of jointly with other American aircraft producers in the 80s and 1990s. But the C919 was really the first of its kind in terms of an effort to develop a homegrown large commercial aircraft. And these are incredibly complex machines.

23:53After advanced semiconductors and some of the tools used to make them, a large commercial aircraft and the key high-value components in them, like jet engines and avionics systems, are probably the most complex technical systems human beings have ever developed. So in any world, it was going to be difficult for China to develop these things. And China naturally set unrealistic goals for itself. The idea that they were going to go from zero to 100 in a decade and a half was never going to happen, given the complexity of developing these kinds of systems. So it just takes time. They're really, really complex pieces of technology.

24:30Nonetheless, through the process of developing the C919, China has learned a tremendous amount, both about the development of specific systems from its foreign partners, but also about the broader process of actually integrating all of these into a finished product. But wait, how were these companies in the aviation sector actually forming the joint ventures with the Chinese counterparts? Airbus and Boeing have both formed various kinds of partnerships, primarily Airbus, Less so Boeing, largely because Boeing for so long was the clear market leader. So Boeing had less incentive to engage in broad-based technology transfer in exchange for market access because it dominated the Chinese market already.

25:07But Airbus, when it was trying to take market share away from Boeing in the 1990s and in the 2000s, did form various partnerships. Whether they were formal joint ventures in every case, I'm not entirely sure. But they did things like set up their first final assembly line outside of Europe in Tianjin. They set up R &D centers. I mean, they did a lot to try to chip away at Boeing's dominant market position, a lot that involved training engineers, transferring technology, doing all of these sorts of things. So Airbus, Boeing, they've all done it. But I think the more important story when you look at aircraft manufacturing is what's happening at the level of the tier one and tier two suppliers.

25:45So all of the major avionics producers have formed joint ventures or various kinds of partnerships with COMAC or with AVIC, which is the other major Chinese aircraft manufacturing company. Most notably, you have General Electric, which formed a joint venture to essentially supply the core avionics system to the C919, and in doing so transferred an enormous amount of technology and know-how. So foreign firms are deeply embedded in the sector in providing technology, but most of it is less at the level of system integration, which is what Boeing and Airbus specialize in, and more at the level of how to build these core components, the wings, the engines, the avionics systems, and so on and so forth that go into that finished product.

26:29Okay. Well, look, we are going to throw to a break now. And when we get back, I want to talk about the mystery that you identify in your paper, which is why China didn't apply these technology transfer requirements in some sectors.

26:52We are back from the break. So reading your paper, Re-Innovation Nation, there was this mystery, right? China tried to boost its strategic industries by formally forcing companies to hand over their technology. But there were some exceptions, one being semiconductors. Why? A lot of factors contribute to this. But the one that I focus on, which I think is really important because it shapes the options that were available to Chinese officials, is where China sat in global production processes in this industry. So if we contrast semiconductors with these other sectors we've talked about before, aircraft, automotive manufacturing, high-speed rail, all of these are sectors where China used these policies very, very energetically in the post-WTO period.

27:38In all of these sectors, China was, for all intents and purposes, downstream of global production processes. It was a final market. A lot of production happened in China, but everything that entered China stayed in China in the end. It was consumed there. In semiconductors, starting in the late 1990s and accelerating dramatically after WTO accession, China became firmly embedded in global production processes as an intermediate export processing hub. Now, what that meant was that in semiconductors and consumer electronics more broadly, the vast majority of what entered China didn't stay there.

28:13It was processed locally, assembled into more finished goods, and exported back out to consumers elsewhere. What this meant was that in these sectors like semiconductor production, China relied very heavily on foreign multinational enterprises to drive export growth and associated employment. And of course, the post-WTO period is the period where exports rise to the equivalent of almost 40 % of China's GDP. So China was incredibly dependent on exports during this period. And what that meant is that foreign shipmakers were in a relatively strong bargaining position vis-a-vis the Chinese government where they could push back on any demands that Beijing would make to share technology.

28:53And they could mobilize their allies and local governments, which were also very dependent on the export growth that they generated, to help them lobby the central government to remove or to refrain from introducing these policies in the first place. Okay, so the Western companies had leverage because the Chinese government needed them more than they needed the Chinese. Were there examples where actually the Chinese did try to be more assertive in requests for technology and companies responded by moving somewhere else? Or was it just kind of a theoretical concern that these companies could, you know, up and leave and put their manufacturing facilities elsewhere?

29:34There absolutely are numerous cases where foreign firms made these kinds of threats or communicated that if the Chinese government were to introduce stringent technology transfer requirements, that they would be forced to find options elsewhere. And this was a very live threat for China, especially in the early 2000s, because we weren't yet at the stage then that we are now where China has something approaching a monopoly on various forms of manufacturing such that foreign firms essentially can't leave the Chinese supply chain. That wasn't yet there in the early 2000s. So I think from Chinese authorities' perspective, they were very cognizant of these kinds of threats.

30:13And for them, people I've interviewed have talked about how these are people who worked at major American semiconductor companies that were involved in these kinds of negotiations in China in the early 2000s, that they were very aware, that the Chinese authorities were very aware, that they basically had nothing but the export engine. and they were very reticent to do anything that would upset the growth and vitality of that export engine. Okay, well, that's semiconductors, but that's not the only case in which the Chinese government did not apply these stringent joint venture technology transfer requirements.

30:47The famous example is, of course, Apple, where they never had to enter into a joint venture. What's your story there? Apple is a really great case, and I think in many ways is actually an extension of the broader logic of the role that, from China's perspective, being embedded as an intermediate processing hub in these value chains, the ways that that constrains the Chinese government's bargaining power or policy space. And in a sense, when I talk specifically about semiconductors, we can think about that applying more broadly to many parts of electronics manufacturing because that was, of course, where China was very deeply embedded in these supply chains as an export processing hub.

31:26The Apple case is really interesting, though, because I think it actually speaks to some of the dynamics that begin to shift over time in the semiconductor or broader consumer electronics industry, which is to say in the early post-WTO period, because most of what foreign firms were doing in China wasn't selling to the Chinese market but using China as a production base to service customers elsewhere. And that gave these foreign firms a lot of leverage vis-a-vis China. Well, what we see is over the course of the 2010s in particular, with the growth of a domestic consumer electronics market in China, some of that bargaining power begins to shift back in China's favor.

32:06And in fact, by the middle of the 2010s, we see China beginning to put really significant pressure on a lot of electronics companies and chip makers specifically to begin to share more technology. So in 2016, Qualcomm enters into a joint venture with a Chinese company in response to an antitrust action, but it was effectively a backdoor technology transfer policy. We begin to see Intel, Western Digital, various other chip makers form these kinds of partnerships. largely under duress or under pressure from the Chinese government. And Apple faced these same kinds of pressures in the middle of the 2010s.

32:43And this, of course, is what Patrick McGee documents in his book, Apple in China. But the story that Patrick tells there, which I think is really fascinating, is how Apple was able to effectively reframe what it had been doing in China over the past decade as a kind of voluntary technology transfer policy. So Apple's story was, look, you don't have to force a joint venture on us because, in effect, we've been engaged in a joint venture or we've been engaged in dozens of joint ventures across the supply chain over the past decade. And it turned out that that was a very convincing piece of public relations from the Chinese government's perspective.

33:21Yeah, and then the Apple case, I think, informed the Chinese government when it came to, say, investments from Tesla, right? Maybe they didn't need a joint venture. Do you think that was the right message to take away in that case? To some extent. I mean, so what we see with the Tesla case is that what in the Apple case had previously been kind of an emergent property of happenstance events unfolded this way. By the time we get to Tesla, it's beginning to congeal into something like a conscious strategy on the Chinese government's part. And the name that's been given to the strategy is what we call the catfish effect.

33:54The idea is you want to bring in a hyper-competitive foreign multinational enterprise both to drum up competitive pressure for other original equipment manufacturers. In Tesla's case, BYD, Xpeng, so on and so forth. But also you want to bring in a firm that, like Apple, has very high standards when it comes to sourcing components and parts and will very actively work with your domestic supplier ecosystems to build them up. So with Apple, it happened almost by accident. By the time we get to Tesla, this becomes a concrete strategy. Now, is the message of this that joint venture requirements are not useful or that you can just pursue Kappa strategy in every particular case?

34:34And I would say no. in the sense that, one, I think we have to recognize that Apple and Tesla are pretty unusual companies. I think in the demands that they place on suppliers and the extent to which they're willing to invest in working to build up those supplier bases, I don't think that that is going to replicate itself organically in most cases. Two, although there are real limits and real problems with joint venture requirements, it can generate rent-seeking incentives on the domestic party's part and so on and so forth, At the same time, the benefit of a joint venture requirement is that it gives you a direct ownership stake in the venture.

35:12And through that, formalized control over what the foreign partner is doing in a way that, especially, I think, in developing contexts like China in the early 2000s, can be really beneficial. Okay. Well, let us now move on from what China did and talk more concretely about today. because we do have Western governments thinking about doing a reverse dung and trying to pull in this Chinese technology. Now, you're obviously sounding quite positive about joint venture requirements. What message would you give to, say, European policymakers today considering trying to change their regulatory system, you know, impose these conditions on Chinese companies considering investing in Europe?

35:56Europe has some really significant advantages and resources that it can leverage to do this pretty effectively. And I think the first of these is that it has a very large market, which, as in the Chinese case, can be a really important source of bargaining power vis-a-vis foreign enterprises. The second, and this is something that China didn't enjoy in the early 2000s, is that Europe already has a lot of firms with very high absorptive capacity. This idea that You've got firms that already invest very heavily in R &D and therefore should be very well positioned to take on new knowledge and implement it relatively quickly.

36:30That was something that China had to develop the hard way over the course of the last two or three decades. Europe's major challenge, and I think this is a real lesson from the Chinese case, is that the market alone is not sufficient to generate market power. You can have a large internal market, but a fragmented regulatory environment, and it's going to be very, very difficult for you to leverage that market as a source of bargaining power vis-a-vis prospective foreign investors. So, again, what we saw in China was that although you had a large and rapidly growing market, certainly in the 1990s in China, because the central state was highly fragmented, it wasn't in a position to really effectively utilize that market to push forward technology transfers in a significant way.

37:15I think Europe faces a similar challenge, which is to say if it wants to effectively implement these policies, it's going to have to find a way to centralize that regulatory authority over FDI to prevent foreign firms from form shopping, either across different countries or across different sectors, and to provide that focal point for these negotiations with the Chinese. So what you mean by that is going to, say, Hungary or Spain and saying, hey, we're happy to invest, but you need to be nice to us. We're not going to hand over our tech. Exactly. That's the risk for Europe. Okay, so that's Europe.

37:48Should the U.S. be embracing this policy as well? I think in the U.S. case, the picture is more complicated precisely because unlike Europe and China, the U.S. and China are engaged in what we could describe as a strategic competition. And so I think from the U.S.'s perspective, there are legitimate security concerns that we need to be cognizant of. That said, I think that it is possible to find circumscribed domains where there is learning that can take place from the Chinese in the U.S. context. There are real benefits that could be gained from these kinds of policies. But because of these, on the one hand, legitimate security concerns associated with things like connected vehicles, data security, so on and so forth, along with the political environment layered on top of that, I'm not particularly optimistic that in the U.S.

38:37case, we're going to see the same kinds of opportunities for really large scale Chinese foreign direct investment into the U.S. in high technology industries and the technology transfers that that could bring. I suppose there's also a question about the supply, right? And so, you know, the EU, the US, they may or may not want to attract Chinese investment. I suppose the big change, though, is that one, those Chinese investors may worry about expropriation if the government were to change and suddenly decide that actually they think the security risk is overwhelming. But also, I think what you've seen is the Chinese state being much less relaxed than Western governments were about this tech transfer, right?

39:21So we're seeing technology export controls, you know, companies may not be allowed to go forth and share their technology with Western companies. How much of a constraint do you think that could be? So I would say I think in certain industries and vis-a-vis certain countries, this will be potentially a very significant limiting factor. I would not be surprised, and we've already seen reporting to this effect, if China actively polices the kinds of technologies that its firms transfer to India, for example, potentially to certain European countries and probably certainly to the U.S., anyone that they see as either a current or a potential future competitor.

39:59That said, I think even in the Chinese context, one, we should remember that the existence of export controls or an export control regime itself doesn't necessarily mean you are actually blocking the export of certain technologies. It simply means that there will be licensing requirements. It requires approval. And so there may be certain cases where the Chinese government has an active interest in supporting the flow of technology out of China to other countries. Here I'm thinking probably more likely global south countries than Europe. But the second thing I would know is that even in a case like China, where you have a high capacity state with a relatively high ability to monitor the behavior of its firms, there are still real limits to what the state can do vis-a-vis the hundreds, thousands of Chinese firms that are now beginning to go abroad in a very significant way to establish greenfield manufacturing operations.

40:52And so I think it probably will be the case that Chinese firms, although they're likely to be maybe more savvy than their Western counterparts were 20 years ago when it comes to sharing technology, they are at the end of the day firms. They want to expand their market share. They want to gain a presence in these countries. And I think especially in cases where they are not particularly concerned about a competitive threat, I think they might be willing to do some of this. Again, maybe the opportunities are greater in this sense in global south countries where local producers are likely to lag significantly behind Chinese competitors.

41:28But I think they also potentially exist in places like European countries. I just have one final thought, which is, you know, you are much more positive about, you know, restrictions on inbound investment in the form of these technology transfer requirements than, you know, the I suppose the Washington consensus would have been. And so the risk is that you impose these requirements and then you just chill overall investment. And so for a poorer, smaller country without that big market as the carrot to lure companies in, there is a risk that these technology transfer requirements just end up hurting you because they end up putting off investment.

42:06How important a caveat do you think is that when going out to governments around the world and saying, look, these technology transfer requirements are awesome? It's an important point, and the caveat is absolutely warranted. As I mentioned at the top, there are real challenges to execution of these policies, and this applies for any country, regardless of your level of development. But for a long time, the conventional wisdom was these policies never work, therefore we should never use them. And my argument is that we should be focused on how we can implement them more effectively. And in this respect, I think that there are valuable lessons to be learned from both the successes and the failures that China's experienced.

42:51Well, I think that is a great note to end it on. John, this has been such a treat. So last year when we spoke for my book, I was like, I must get John on the podcast. and I'm so glad that we made it happen. It's fantastic to be here. Thank you for having me. Thank you.

43:08That is all for this week. You have been listening to The Economics Show with Samaya Keynes. If you enjoyed the show, then I would be eternally grateful if you could rate and review us wherever you listen. This episode was produced by Misha Frankel Duval with original music and sound design from Breen Turner. Our executive producer is Manuela Saragossa. I'm Samaya Keynes. Thanks for listening.