The usual goal of industrial policy is to, by supporting or protecting a particular industry, allow it to more quickly achieve the economies of scale necessary to be competitive. China has plenty of experience with this type of industrial policy: witness how it has scaled up in the manufacturing of solar power, lithium batteries, and electric vehicles to a size that dominates global markets. But the official rhetoric on industrial policy is now turning to a different and less well-trodden path: pursuing economies of scope as well as scale. Or, to put it in less technical terms: China’s government wants to preserve and improve competitiveness in a wide range of different industries, not just specialize in the most profitable ones. It sounds like a simple change, but it’s a significant one for China’s trading partners.

As is usual in China today, the signal of this change in priorities has been delivered by the man at the top, Xi Jinping. At the May meeting of the Central Commission on Financial and Economic Affairs, one of many steering groups he chairs, Xi laid out his vision of a “modernized industrial system.” He explained that such a modernized system has three key characteristics: it is “complete” ( 完整, also translated as “comprehensive”), “advanced” (先进) and “secure” (安全). The most novel of these objectives is “completeness,” and Xi briefly explained what that objective means in practice: “We must keep promoting the transformation and upgrading of traditional industries, and not take them as ‘low-end industries’ to be simply eliminated.”

On its surface, this could sound like one of the invocations of the importance of blue-collar manufacturing jobs now common in other countries on both the populist right and left. In fact, this statement is an intervention in a specific Chinese policy debate that clearly indicates a reversal of the previous direction. China’s turn toward high-technology-focused industrial policy well predates Xi, and actually began in the prior administration of General Secretary Hu Jintao and Premier Wen Jiabao (see Barry Naughton’s excellent short history of industrial policy for more).

In the mid- to late 2000s, “upgrading the industrial structure” was a regular buzzword, and official support for “emerging” and “strategic” industries ramped up. At the same time, though, the government tried to restrict resources going to less-desirable industries, usually defined as those that are highly polluting, energy-intensive, or in excess capacity. These efforts reached a peak in 2008; here is some representative language in Wen’s government work report from that year:

It is essential to appropriately control the scale of fixed asset investment and improve the investment structure. We will maintain strict control over the availability of land, credit and market access, and pay particular attention to strengthening and standardizing supervision of new projects to ensure they meet all the conditions for launching. Haphazard investment and unneeded development projects in energy intensive and highly polluting industries and industries with excess production capacity will be resolutely stopped, and market access will be tightened and capital requirements will be increased for industries whose development is discouraged. Work on illegal projects will be resolutely stopped.

In this vision of industrial upgrading, there is both positive and negative discrimination: the government pursues policies that favor high-end industries and disfavor low-end industries. Such a vision is based on ideas of national specialization and integrated global trade. It’s influenced by the “flying geese” model originally articulated by a Japanese scholar and popular among development economists in the 1980s and 1990s. The idea is that, as nations advance up the technological ladder, they leave behind production of low-value or commoditized products, which then creates opportunities for lower-income countries to industrialize by making those goods. Nations at different income levels specialize in making different kinds of products, and by trading with each other everyone becomes better off.

Xi’s vision of “completeness” or “comprehensiveness” does away with this. Rather than allowing China’s low-end industries to shift to other, lower-income countries, and then importing those products, the idea is to maintain the ability to produce the full range of goods within China. Low-end industries are not abandoned but become targets for technological upgrading in order to preserve their competitiveness. As the Chinese economist Xu Zhaoyuan explained in an exegesis of Xi’s remarks:

We cannot allow traditional industries to transfer abroad too quickly. This requires continuous strengthening of policy support for the upgrading and transformation of traditional industries, improving product innovation and efficiency to enhance their competitiveness, while also continuously reducing the cost burden of the real economy, especially reducing various transaction costs. 

The background assumption is clearly no longer that nations can specialize to take advantage of an open global trading system, but rather that they need to minimize external dependencies and vulnerability to trade disruption. The Chinese economist Yu Yongding called it part of China’s response to the US decoupling campaign:

Re-emphasizing the importance of comprehensiveness is a reaction to the new geopolitical reality. While China cannot and should not produce everything – autarky is impossible for a modern economy – it should be able to quickly launch or increase production of critical goods, as needed.

China does indeed have a very broad range of manufacturing competence: according to Yu, “China ranked among the world’s top three exporters (by volume) in 2,400 of 4,000 categories of intermediate goods traded globally between 2017 and 2020.” More simply, there are very few goods that China does not make. I looked at China’s exports broken down by 4-digit HS code; out of 1,241 categories, there were zero exports in fewer than 50, a share that has remained largely constant over the past decade.

In a sense, then, achieving a “complete” industrial industrial system would just mean maintaining the status quo. On the other hand, as China is probably only a few years away from qualifying as a “high-income” country on the World Bank’s definition, one might expect that rising incomes would have at least some impact on China’s cost structures and competitiveness in making in different products.

As is often the case with these high-level slogans, it’s not totally clear what the practical implications of Xi’s policy shift are going to be. It would not be that unreasonable for Xi to say, “I don’t think we should have government policies that actively try to shut down particular industries, because those industries employ Chinese people and earn money and there’s just no good reason to get rid of them.” It would be somewhat less reasonable, certainly from the perspective of China’s trading partners, for Xi to say “Instead of just subsidizing the high-tech industries of the future, I think we should subsidize every single industry that China has so that China can have a comparative advantage in making everything.”

At the least, the rhetoric of “completeness” does not offer a lot of hope that other countries are going to be able to benefit from China’s growth by selling it stuff. The “flying geese” theory is now criticized, not totally unfairly in my view, for contributing to the hollowing-out of industry in the US and other high-income countries. But it did offer a basis for mutually beneficial trade with the developing world: as high-income countries lost competitive advantage in some industries, the low-income countries gained it, and could use those industries to raise their own incomes.

China these days is trying to knit together a coalition of other developing countries also opposed to US dominance of the global system. But its official economic theory does not offer much of a basis for what it likes to call “win-win” ties with other developing countries. China wants to keep producing itself all the stuff that poorer developing nations in Africa, Asia and elsewhere might want to sell it. China acknowledges a need to import necessary raw materials, and that’s about it. Is this maximum mercantilism really an attractive vision for an alternative global economic order?