chinese industrial policy

=economics =china




The consensus of American and European economists used to be that Chinese economic growth was just catch-up growth, and Chinese industrial policy was actually counterproductive. Now that Chinese per-capita GDP has blown past Brazil's and is still growing faster than India's, this consensus has shifted, and more people are starting to ask if maybe industrial policy is actually effective sometimes.

So, what has China been doing right?





In a Ricardian model, a country should always focus on whatever it has a comparative advantage in. The model that works is to focus on what you could have a comparative advantage in and to do whatever it takes to get that advantage.

- Lessons From the East Asian Economic Miracle


Lots of things are better at a big scale.

Gas turbines are better at bigger scales, up to at least 100 MW. Seals around the edges are better for big blades, and the gas is compressed so the inner blades of even big turbines are fairly small, and those inner blades have little cooling holes in them.

When you build chemical plants, it's better to do a lot of things in the same location to reduce transportation costs and use waste heat. The optimal scale for chemical plants is large enough that even big ones in America are often too small, because the companies can't afford to make a bigger complex.

The ultimate example of minimum scale these days is making a new city, and China has been doing a lot of that. Americans mocked Chinese "ghost cities" for years, and now I'm embarrassed to remember going along with that assessment. China built a bunch of empty buildings and had workers in malls with now customers, but now the apartments are (partly) occupied and the malls are busy.

Even better than just building a new city is creating a new city specialized in an expanding industry with benefits to large scale. I'm talking, of course, about Shenzhen, the global capital of electronics.

Automotive manufacturing is another industry that benefits from scale, and the Chinese government has tried hard to develop it. They put large tariffs on imported cars, and forced foreign carmakers operating in China to share knowledge with Chinese partners. Now, it makes the most automobiles by far, more than America and Japan combined.





In 2021, lumber prices briefly tripled, due to a shortage of lumber mills. From the perspective of the economy of a whole, this is a failure of the lumber milling industry, but it profited greatly from this failing.

Companies put much effort into trying to shift profits from other parts of the supply chain to themselves. The Chinese government has a different view.

To the Chinese government, zero-sum transfers within China don't matter. If they subsidize batteries heavily and those batteries get used in China, then that's fine; the only question is how much production is desired, and the Chinese government will just give directives about production volumes directly.

Because of this, the Chinese government is less concerned about oversupply than private corporations, especially oversupply of raw materials. If there's too much steel, then let prices drop, and if that means steelmakers lose money, then just give them government money and tax some things steel is used in.

Big chemical plants are big, which leads to a small number of big chemical companies. Some chemical plants are bigger than the optimal bet size for even big chemical companies. So, they want a partnership with banks or something, but they don't want to make a big plant producing something they already make if they don't have full ownership, because they're not getting all the profits but they're reducing their profits from existing plants because of the increased supply lowering prices. The chemical industry leads to natural oligopolies but because the products are very commoditized the result is underinvestment.

On the other hand, state-run companies in China and the middle east have just made giant methanol plants and it worked out economically.



market prices


How much does an MRI cost? Sorry, that's a trick question.

Which insurance plan is the best one for you? Companies seem to deliberately make it difficult for you to know.

How much does 1000 tons of glycerol or hexanediol cost? Sorry, that's another trick question: there is no consistent market price for many chemicals, even fairly common ones. Chemical companies do private contracts at different prices, and often have different prices for "internal customers" and external ones. Publishing those prices is only disadvantageous to them.

When selling a commodity product without benefits to more scale, there's no incentive to get an extra customer, so it's better for companies to drive away ten customers to overcharge one.

Publishing price data reduces transaction costs, so it's normal for small transactions, but in many cases that benefit is negligible, in which case you can consider publishing price data and transactions publicly to be a positive externality. When you look at things this way, it makes sense to subsidize it, and that's what the Chinese government seems to do: to get subsidies, you need to report your prices and transactions, and this makes the market more efficient.

Imagine if American hospitals had to publicly publish their fees through a standardized system whenever they do something in order to get subsidies. That would be a very different situation, wouldn't it?



national security


The government of China has been trying to reduce the impact a blockade of China would have. So, China has been, for example, hoarding chips, which has been the main cause of a global shortage.

China also wants to be able to make all the chemicals it needs using domestic raw materials, which basically means coal. So, it's interested in massive coal-to-methanol production, and is working on turning that methanol into aromatics and potentially gasoline. Yes, China only has enough coal for a few decades, but they're not concerned about long-term sustainability - they're concerned about war. (My source for this is reading lots of scientific papers from China about industrial chemistry, looking at what chemical plants they're building, and knowing basic chemistry.)



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