[Insight & Opinion] Sophisticated Chinese Industrial Policy, Korea Continues to Fall Behind

The biggest reason for the trade deficit with China is that China has moved away from the industrial structure of importing intermediate goods and selling finished products to the U.S. and Europe, and has developed the capability to produce intermediate goods on its own. China is rapidly gaining competitiveness in advanced manufacturing sectors as well. Strategic decisions and judgments by the central government, supported by local government support and competition, and massive investments by state-owned and private enterprises are appropriately combined to produce results. This approach, which started with solar panels, is now proving effective again in secondary batteries. The painful reality is that we continue to clash and fall behind China in sectors where we have been investing since the mid-2000s under names like new growth engines.

Contrary to common perception, China’s industrial policy effectively mobilizes competition and support. Once a direction is set for a specific industry, subsidies and support funds are initially distributed evenly. Companies that survive fierce competition are given clear incentives, leading to expanded investment and technological advancement. When companies with a certain level of competitiveness emerge, China actively promotes demand stimulation based on its huge domestic market to grow the market size itself and provides appropriate protection against external competition. Through this process, Chinese companies that have grown in size and secured technological capabilities possess world-class competitiveness.

The Chinese government continuously manages the entire ecosystem, including upstream and downstream related industries and raw material supply, and combined with companies’ efforts to seek opportunities, a complete ecosystem is created. Proper experts based on a rich talent pool are sufficiently positioned in each detailed field, and government officials have the qualifications and capabilities to understand the flow of this system. China’s industrial policy is evolving in a direction that maximizes its strengths.

In our case, we succeeded in making Japan’s industrial policy our own through trial and error while imitating it. The greatest strength of our industry was achieving economies of scale and efficiency through scale-up. Companies quickly decided on trillion-won level investments and implemented them to preoccupy the market. While the U.S. and Europe placed excessive value on basic research and overlooked the value of process technology, we learned and materialized it on the ground, pioneering new areas. At the same time, we understood the basic research domain and acquired what was necessary one by one.

China is operating more effectively than us, beyond merely imitating our style. Although there are many side effects in the process of the central government setting directions and local governments implementing them, visible results have been produced. Criticism that excessive investment by Chinese local governments is only inefficiency and debt accumulation is valid, but the achievements in the process are clear. Above all, as know-how accumulates and virtuous cycles repeat, confidence is spreading across all industrial sectors.

Our problem lies in not being able to see China as it is. Not only China, but also Japan and the U.S. are not properly seen or understood by us. We tend to underestimate others due to excessive pride in past successes, then at some point become overly pessimistic and fail to view the situation objectively. We have seen enough from Japan’s case how past success can hold back the future. We might be on the same path. Competition with China is not easy, and the next five years will be a decisive moment for us. What is most needed for this is to change our thinking and shift the way we view the world.

Choi Jun-young, Specialist at Law Firm Yulchon