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One lesson the U.S. can learn from China to improve its competitiveness

Joseph Kannarkat and Norman R. Augustine

According to a September 2020 report from the American Academy of Arts and Sciences (AAA&S), China will soon surpass the United States (U.S.) in research and development (R&D) investment (Norman Augustine cochairs the AAA&S committee that published this report). China has already overtaken the U.S. in the number of scientific journal publications, bachelor’s degrees awarded, and number of researchers. These changes demonstrate the impressive transformation of China into an economic powerhouse in the span of a few decades. From 1999 to 2015, the country’s poverty rate fell from 40.3% to 0.5% (< $1.90 USD/day international poverty line). Despite the U.S. and China’s starkly contrasting political ideologies, China’s R&D milestone suggests that the U.S. reexamine China’s approach to R&D to reinvigorate its own.

The most overt factor contributing to China’s success was the country’s shift away from a potentially planned economy. In a planned economy, the government determines the supply, coordination, and pricing of goods and services. Such systems often have trouble maintaining economic stability, encouraging entrepreneurship, and efficiently distributing resources. As China shifted towards free market governance, two major changes occurred: (1) China better utilized its comparative advantage in manufacturing and (2) markets became segmented to cater to a variety of consumers. With regards to the former, China’s generally lower standards of living and wages make it cheaper to employ laborers. Nobel prize-winning economist Paul Krugman argues that these laborers ultimately see their standard of living rise as their country’s unemployment falls and export industry rises.

The second part, however, is not as well understood. In the mid-2000s, the market for Chinese counterfeit brands of American products, colloquially called “shanzhai”, exploded. These counterfeits would take recognizable products, particularly in the technology industry, and recreate cheaper versions of them. Although these knockoffs often lacked the bells and whistles of the authentic product, they made important technologies like cell phones accessible to large swaths of the population. Connecting the population digitally paved the way for apps like WeChat, which allow users to do everything from messaging to mobile banking. These advances have become so widespread that companies like Xiaomi and Tinno have spawned from the shanzhai ecosystem to become authentic technology competitors on the world stage. .  .  .

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