WASHINGTON—Chinas unfair trade practices since joining the World Trade Organization (WTO) in 2001 have harmed industrial innovation in developed nations, causing companies—particularly in North America and Europe—to lose their competitive advantage in advanced industries, according to a new study.
For years, economists and policymakers have said that Chinas rapid economic growth and trade expansion after it joined the WTO had a positive effect on the global economy. Any adverse impacts in developed markets were believed to be largely temporary or borne by workers in low-tech industries or certain regions.
However, a recent study by the Information Technology and Innovation Foundation (ITIF), a U.S. think tank, finds the opposite.
The conventional view “was overly optimistic, if not Pollyannaish, and the harms were worse than many had forecasted,” Robert Atkinson, founder and president of ITIF, said in a report titled “Innovation Drag: Chinas Economic Impact on Developed Nations.”
“The scholarly literature shows Chinas rise, backed largely by unfair, mercantilist policies, has harmed innovation in the global economy—particularly in North America and Europe,” Atkinson wrote in his report.
The study, supported by the ITIF and the Smith Richardson Foundation, examines the academic literature on the effect of Chinas economic growth and trade policies on global innovation.
One of the key takeaways of the research is that many policymakers have focused on job losses in Western economies as a result of intense competitive pressures from China. However, the losses extend beyond jobs.
“Much less attention has been given to the impacts on innovation in those economies, and even less on the impacts on global innovation writ large,” Atkinson said.
For many years, economists believed that Chinas integration into the world economy boosted welfare not only in China but also in other countries. They believed global market integration increased what they called “allocative efficiency,” which led to more efficiently produced English textiles or Portuguese wine, for example.
However, Atkinson says that the assumption only works when market forces are at work.
“Its time for economists and policymakers to consider that mercantilist trade is different from market-based trade,” he wrote.
China has embarked on “innovation mercantilist” policies, which include funneling hundreds of billions of dollars in government subsidies to support its key industries. It also has resorted to various tactics such as industrial espionage, cyber theft, forced joint ventures in exchange for market access, and acquisition of foreign companies to attain sensitive technologies.
These policies spurred innovation in China, but that came at the expense of innovation in Western economies, according to Atkinson.
“Mercantilist trade can reduce innovation by shrinking markets and cutting profits innovators need to invest in research and development. China exacerbates both dynamics by propping up weak competitors, closing markets, creating overcapacity, and limiting revenue.”
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