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21. China’s quest for innovation: progress and bottlenecks

Author:
Alicia Garcia-Herrero and Robin Schindowski
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
As the Chinese economy continues to decelerate, the central government is investing heavily in innovation, doubling down on research and development (R&D) spending and STEM-oriented human capital. In this paper, we assess China’s progress so far, looking at the inputs to innovation (R&D and human capital) as well as intermediate targets, such as scientific research and patents. We then evaluate how China has fared with respect to the ultimate goal of commercialising this progress, by looking at the value-added of Chinese exports and the overall productivity of the economy. We identify three potential bottlenecks that might be hindering the translation of China’s innovation efforts into productivity growth.
Topic:
Industrial Policy, European Union, Economic Growth, Innovation, and COVID-19
Political Geography:
China, Europe, and Asia

22. Global trends in countries‘ perceptions of the Belt and Road Initiative

Author:
Alicia Garcia-Herrero and Robin Schindowski
Publication Date:
04-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Drawing on global media reports, we conduct a sentiment analysis of the image of China’s Belt and Road Initiative (BRI) and the evolution of its image over time. Our main finding is that perceptions of the initiative deteriorated significantly in many geographies from 2017 to 2022. The notable exception is in sub-Saharan Africa where the BRI’s image remains positive, even if slightly less so than in the past. This is notwithstanding increases in debt levels with China, much of which now face potential restructuring. Furthermore, we find significant inter- and intra-regional differences in the average sentiment towards China’s landmark project, as well as a much worse image of the initiative in countries which, until today, are not part of the BRI. Finally, we focus on the European Union, Africa and China’s immediate neighbourhood to better understand the complexities behind the perceived benefits and challenges associated with China’s Belt and Road Initiative.
Topic:
Bilateral Relations, European Union, Geopolitics, Economy, and Trade
Political Geography:
China, Europe, and Asia

23. Time to say goodbye? The impact of environmental regulation on foreign divestment

Author:
Haiou Mao, Holger Görg, and Guopei Fang
Publication Date:
09-2023
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
We look at divestments by foreign firms – a topic that has received comparatively little attention in the literature – and investigate how changes in the regulatory environment in the host country may impact on such divestment decisions. We use the implementation of China’s Two Control Zone (TCZ) policy as a “quasi-natural experiment”, using detailed firm level combined with city level data for the empirical analysis. Our results show that the implementation of TCZ policy has led to higher probabilities of divestments by foreign firms in targeted TCZ cities and industries. The mechanism behind this seems to be a TCZ-induced increase in discharge fees and efforts to reduce SO2 emissions. Allowing for heterogeneity of effects, we find that the effect is particularly strong for firms from source countries with less stringent environmental regulation, and those using less advanced technology. We furthermore show that firms using intermediates from polluting industries also experience a higher probability of divestment.
Topic:
Climate Change, Environment, Foreign Direct Investment, Regulation, Business, and Divestment
Political Geography:
China and Asia

24. China as an International Lender of Last Resort

Author:
Sebastian Horn, Bradley C. Parks, Carmen M. Reinhart, and Christoph Trebesch
Publication Date:
03-2023
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial system. A key finding is that the global swap line network put in place by the People’s Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. The swaps bolster gross reserves and are mostly drawn by distressed countries with low liquidity ratios. In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China’s overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China’s rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China's Belt and Road Initiative. These findings have implications for the international financial and monetary architecture, which is becoming more multipolar, less institutionalized, and less transparent.
Topic:
Debt, Emerging Markets, International Trade and Finance, Financial Crisis, Belt and Road Initiative (BRI), and Sovereign Debt
Political Geography:
Africa, China, and Asia

25. Enhancing small state preparedness: Risks of foreign ownership, supply disruptions and technological dependencies

Author:
Mikael Mattlin, Shaun Breslin, Elina Sinkkonen, Liisa Kauppila, and Annika Björkdahl
Publication Date:
08-2023
Content Type:
Working Paper
Institution:
Finnish Institute of International Affairs
Abstract:
The post-Cold War liberalist view, according to which interdependences supported a virtuous cycle of mutual gains, has given way to a realist-tinged view that regards economic interdependence as a cause of insecurity and an element in conflicts. In this new environment of increasing great power competition and technological decoupling, all states are not created equal. Major states such as the United States and China can be system shapers, whereas small states tend to be system takers. Unlike smaller states, they have a greater ability to use their investment leverage, supply chain dominance and control of core technologies. For smaller states with open economies, such as Finland and Sweden, these capabilities of major powers create vulnerabilities in the form of security risks of foreign ownership, supply disruptions and critical technological dependencies. The report explores how small states can mitigate such risks. A series of innovative Delphi backcasting exercises in Finland and Sweden brought together 113 sectoral experts and generalists to ponder ways to prevent dystopian scenarios from unfolding. The target years of the scenarios extended from 2027 to 2035, encouraging ideas on both short- and longer-term solutions. Instead of aiming for a consensus of expert views, the process sought to produce a variety of effective means and measures that a small state could choose to adopt. The exercise consisted of nine scenarios, presented as comic art. The narratives on the risks of foreign ownership focused on 1) acquisitions of gaming companies gathering personal data, 2) transfers of real estate ownership in Lapland and 3) venture capital investments in emerging technology start-ups. The scenarios on supply disruptions dealt with 4) discriminatory practices limiting access to antibiotics, 5) political retaliation limiting access to water treatment components and 6) sanctions on wind power materials, components and minerals. As for high technology dependencies, the cases included 7) the maintenance of military technology, 8) the cybersecurity of health technology and 9) the supply of chemicals for research and development activities. According to the report, small states have the least leeway in navigating the risk environments created by technological dependencies, whereas the toolkits to tackle the potential dangers of foreign ownership and supply disruptions are more extensive. Although different issues and insecurities require different bespoke solutions, all the risk categories call for active mitigation efforts. Most of the suggested Finnish and Swedish expert solutions can be clustered into three alternative approaches: protectionist/interventionist, liberal and technologically oriented. Protectionist/interventionist solutions would expand the state’s powers in controlling, guiding and limiting economic activities. Key suggestions included: covering acquisitions and greenfield investments in national foreign direct investment screening screening real estate acquisitions with a wide range of countries of origin imposing country-specific limitations to real estate acquisitions screening venture capital investments in emerging technologies initiating a national security act to limit foreign control rapidly imposing country- and company-specific limitations to bids in critical industries increasing tariffs supporting domestic or EU-level production through subsidies and industrial policy friendshoring the production of critical goods expanding the scope of supply stockpiling in pharmaceuticals and water treatment components The more liberal approach towards national preparedness would focus on solving the challenges primarily through carrots instead of sticks – to avoid limiting entrepreneurial freedoms and interfering with the dynamics of the capitalist market economy. The proposed solutions included: initiating value debates to guide individuals’ choices when accepting investments formulating a national innovation strategy to boost domestic companies’ operating conditions in emerging technology fields teaching “technology literacy” to guide the use of foreign-owned products engaging all stakeholders in making decisions on foreign ownership diversifying the sources of critical goods such as antibiotics enhancing awareness of risks and making “plan Bs” in supply chain management deepening the EU’s single market to offer genuine scalability opportunities for start-ups The third, more technologically oriented approach would rely on new innovations or technical solutions to enhance small state preparedness. Key ideas included: innovating new medicines to replace antibiotics prioritising non-conventional technologies such as small modular reactors (SMRs) enhancing domestic capacity to produce key components with 3D printing researching alternative materials to replace critical chemicals developing the recycling, recovery and transportation of critical chemicals adopting geofencing and coding solutions to enhance cybersecurity designating emerging technologies as focus areas in higher education increasing the adaptability of technical solutions through standardisation These three approaches prioritise different key solutions for enhancing small state preparedness. However, they represent generic policy preferences rather than ready-made policy recommendations. Ideally, states can formulate their own pick-and-mix toolkit by combining elements from the different approaches. The complementary nature of some of the expert views was also suggested by the fact that many – even most – respondents argued for diversification as a solution to various challenges. For example, and regardless of the chosen strategy, tendering rules could be improved by placing quality over price, taking geopolitical risks into account and allowing multiple winners in contrast to the currently dominant winner-takes-it-all logic, which leads to overly concentrated supply chains. Moreover, at least minor legislative tightenings were widely proposed to be made on foreign ownership – especially with regard to that of nationals of authoritarian states. These changes were, however, typically proposed to be complemented with such balancing acts as long-term leases and incentives to develop and acquire domestic products and companies. Ultimately, by highlighting alternative approaches to small state preparedness, this report seeks to encourage democratic discussion on a broader political choice: what type of state and economy do we want in the future? It is not only their identity that guides what states do; adopted policies and means also shape state identities over time.
Topic:
Security, Science and Technology, Supply, and Geoeconomics
Political Geography:
China, Finland, Asia, Sweden, and United States of America

26. Made in Europe: An EU Green Industrial Plan to respond to the challenge of US and Chinese protectionism

Author:
Alekos Kritikos and George Pagoulatos
Publication Date:
01-2023
Content Type:
Working Paper
Institution:
Hellenic Foundation for European and Foreign Policy (ELIAMEP)
Abstract:
The EU needs to urgently formulate a response to US and Chinese protectionism. US decarbonization legislation poses a threat of deindustrialization for Europe. Europe needs a plan to support EU green, industrial and technological competitiveness, while protecting European cohesion and the single market, and promoting European strategic autonomy. Relaxing EU state aid rules must be an inevitable first component of Europe’s response. But this would overwhelmingly benefit the stronger economies of Germany and France, undermining EU cohesion and the integrity of the single market. Thus, the second component of EU response must be a European Sovereignty Fund, of a size commensurate to the magnitude of the challenge. The new Fund must support value chain categories that include as many EU member states as possible. SURE, extended to encompass the energy crisis and green transition, should be an integral part of the mix, and so should promoting technological skills and reskilling for the “Clean Tech Economy”. Investment funding should seek to contribute to vertical integration, including as many stages in the supply chain as possible. It should contribute to the return of specific supply chains and production units from third countries to the EU and seek to include the EU’s weakest economies. Subsidies should rise if the investment is cross-border in nature and carry a bonus if made in an EU region with a low GDP per capita compared to the EU average. Funding could also promote European strategic autonomy by including cross-border partnerships of EU member states in the defence technology industry. It should involve new funding rather than simply recycling money from existing programmes, and certainly avoid deploying undisbursed resources from the Recovery & Resilience Fund.
Topic:
European Union, Investment, Industry, Protectionism, and Strategic Autonomy
Political Geography:
China, Europe, and United States of America

27. Peninsula Plus: Enhancing U.S.–South Korea Alliance Cooperation on China, Multilateralism, and Military and Security Technologies

Author:
Jacob Stokes and Joshua Fitt
Publication Date:
03-2023
Content Type:
Working Paper
Institution:
Center for a New American Security (CNAS)
Abstract:
The United States–Republic of Korea (ROK or South Korea) alliance has entered a critical phase. In 2023, the two countries will commemorate the 70th anniversary of signing their bilateral mutual defense treaty. This year also marks the first full year under national leaders President Joe Biden and President Yoon Suk Yeol. After several challenging years in the two countries’ relationship, ties are improving. Better alliance relations have, unfortunately, coincided with a deterioration in the regional and global security environment, specifically due to threats from North Korea, China, and Russia. This report examines the U.S.-ROK alliance as it adapts to the new regional context by exploring how the United States and South Korea can sustain and deepen their relationship in three vital policy areas: coordination on China, alignment in minilateral and multilateral settings, and defense technology collaboration. Perhaps the biggest shift in alliance priorities in recent years has been the growing importance of the China challenge. During Chinese Communist Party General Secretary Xi Jinping’s decade in power, Beijing has adopted a more muscular foreign policy. Both the United States and South Korea have reshaped their approaches toward China in response. ROK concerns about China have grown as Beijing shields Pyongyang and acts aggressively elsewhere in the region, including toward Taiwan. But South Korea’s approach to China will continue to differ from that of the United States. The allies have divergent preferences regarding the speed, manner, and degree of partial decoupling with China. Moreover, South Korea’s deep trade ties with China will continue to make it vulnerable to Chinese political and economic coercion.
Topic:
Security, Science and Technology, Alliance, Multilateralism, Cooperation, and Military
Political Geography:
China, Asia, South Korea, and United States of America

28. Digital Sovereignty: European Policies, American Dilemmas

Author:
Mathilde Velliet
Publication Date:
01-2023
Content Type:
Working Paper
Institution:
Institut français des relations internationales (IFRI)
Abstract:
European digital sovereignty has been made a priority by Ursula von der Leyen’s European Commission. Due to the privileged position of American companies in the European market, Brussels’ efforts towards digital sovereignty (on privacy, antitrust, data sovereignty, etc.) are closely scrutinized by American policymakers. They often view European initiatives as “protectionist” and unfairly targeting U.S. companies. However, the American vision of European digital sovereignty has evolved in recent years under the influence of two main factors. On the one hand, awareness of the problematic effects and practices of platforms has led to a consensus on the need for reform in the digital sector. On the other hand, technological competition with China has been elevated to a priority. This vision remains fraught with contradictions, along inter-party, intra-party, inter-agency, state-federal, and issue-based fault lines. Washington’s position on anti-monopolistic practices is an illuminating example, characterized by a double discourse between a desire to reform the U.S. digital sector domestically and active diplomacy to dilute these efforts at the European level. Nonetheless, several American actors – particularly in the legislative branch – are seeking to learn from the successes and flaws of European regulations for American reform projects, such as on platform regulation or privacy. The China factor reinforces the ambiguity of the U.S.’ position. It creates new opportunities for cooperation in the face of perceived common vulnerabilities (infrastructure security, inbound investments, etc.) and autocratic definitions of digital sovereignty. However, it also raises tension and misunderstanding on the American side towards European reforms that often target American companies more than Chinese ones. Lastly, while American and European companies have adapted to the need for digital sovereignty through a range of technical and commercial solutions, the temptation of a maximalist definition of European sovereignty continues to create major stumbling blocks, particularly on the cloud.
Topic:
European Union, Regulation, Cloud Computing, Digital Sovereignty, and Data Governance
Political Geography:
China, Europe, Asia, North America, and United States of America

29. South Korea and IPEF: Rationale, Objectives and the Implications for Partners and Neighbors

Author:
Jaewoo Choo
Publication Date:
02-2023
Content Type:
Working Paper
Institution:
Institut français des relations internationales (IFRI)
Abstract:
As a key manufacturer of high-end technology components critical to the sustainability of the Fourth Industrial Revolution, South Korea is essential in any effort to rebuild a resilient global supply chain but also to the promotion of a clean economy. South Korea can thus contribute to two of the pillars of IPEF (Indo-Pacific Economic Framework), specially to pillars II and III (supply-chain resilience and a clean economy). However, as the US executive and legislative branches intensify their hawkish approaches to China, they have not given much consideration to the possible damage they will inflict on the strategic interests of some of their allies. In particular, they have not fully considered Korean factors when legislating on bills such as the Inflation Reduction Act (IRA). This paper argues that allies such as South Korea and France must make the White House and US legislature aware of the external consequences of their decisions and behavior, and that they must cooperate within the confines of US-led strategic initiatives.
Topic:
Science and Technology, Economy, Supply Chains, and Semiconductors
Political Geography:
China, Asia, South Korea, and United States of America

30. How the War in Ukraine is Changing the Space Game

Author:
Guilhem Penent and Guillaume Schlumberger
Publication Date:
02-2023
Content Type:
Working Paper
Institution:
Institut français des relations internationales (IFRI)
Abstract:
The war in Ukraine has become a showcase for the new commercial paradigm emerging in the space sector (New Space). As such, it seems to confirm the relevance of adaptation efforts led by the United States – more specifically the Pentagon – since the mid-2010s. Thus, it highlights ongoing transformations and announces potential disruptions in the exploitation of orbits, particularly in the fields of satellite connectivity and remote sensing. It also shapes future tensions, while the structuring of international relations around the two poles constituted by the United States and China raises questions about the consequences on the safe, sustainable, secure, and stable use of space. With these developments, Europe is faced with the challenge of remaining relevant.
Topic:
International Relations, European Union, Space, Satellite, and Russia-Ukraine War
Political Geography:
Russia, China, Europe, Asia, and United States of America