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The Impact of China's Mercantilist Policies on Global High

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The Impact of China's Mercantilist Policies on Global High Heading Off Track: The Impact of China’s Mercantilist Policies on Global High- Speed Rail Innovation NIGEL CORY | APRIL 2021 Chinese high-speed rail firm CRRC is less innovative than European and Japanese firms, but mercantilist policies help it dominate in China and expand globally. This starves superior firms of revenue, reduces their R&D, and slows the pace of global innovation. KEY TAKEAWAYS ▪ China’s state-directed bid for a leadership position in the high-speed rail sector has distorted the global market with massive subsidization, mandated mergers, forced technology transfers, and other mercantilist practices. ▪ With its vast resources, China could have financed win-win trade and innovation. Instead, it pursued zero-sum mercantilism, closing its own market and subsidizing its rail firms to help them take advantage of open foreign markets. ▪ There are only a few large high-speed rail projects at any one time worldwide. It’s critical that they go to market- and innovation-driven firms, not state-driven players like CRRC. ▪ CRRC is already working on high-speed projects in developing countries, and with its state backing it is now tirelessly pursuing its first big prize in a developed country. ▪ The huge diversion of global market share and revenue to CRRC has helped it catch up to its competitors. But each project lost to CRRC means fewer new patents and technologies from the world’s most innovative high-speed rail firms. ▪ If CRRC’s global market share was 15 percent instead of 70 percent, then non-Chinese high-speed rail firms would have doubled the number of U.S. rail patents. ▪ Canada, Europe, Japan, Korea, and the United States need to restrict Chinese rail firms and products in domestic procurement markets while supporting R&D, trade, and market opportunities for innovation-driven high-speed rail firms. INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | APRIL 2021 CONTENTS Introduction ....................................................................................................................... 3 High-Speed Rail Technology and Innovation: The Past and Future........................................... 5 The Competition Between China, the EU, Japan, and the United States for Global Rail Production and Exports ..................................................................................................... 10 Market Size and Shares ................................................................................................. 10 Export Share ................................................................................................................. 13 Leading High-Speed Rail Firms ...................................................................................... 14 Japan ....................................................................................................................... 15 Europe ..................................................................................................................... 16 United States ............................................................................................................ 17 China’s Mercantilist Toolbox for High-Speed Rail................................................................. 18 Forced Technology Transfer for Market Access ................................................................. 19 Massive Financial Support for Domestic High-Speed Rail Firms ......................................... 23 Discriminatory Procurement ........................................................................................... 24 Limiting Access of Foreign Firms and Products While Creating and Supporting Local Ones ................................................................................................................... 27 Creating a Monopolist National Champion: CRRC ............................................................. 31 China’s High-Speed Rail Mercantilism Goes Global .............................................................. 32 Use Subsidies to Gain International Market Share ............................................................ 33 China’s Success (and Failures) in Global Rail Markets ...................................................... 35 A Harder Nut to Crack: Entering and Competing in Developed Country Markets ................ 38 Testing the Hypothesis: Assessing the Comparative Innovation Performance ........................... 40 Comparative Analysis of the Profit Margins That Drive R&D Investments ............................. 42 Patents ........................................................................................................................ 43 Comparative Patents of Traction, Bogie, and Braking Technologies ................................. 45 Comparative Patents for Vibration Technologies ............................................................ 46 Comparative Patenting of Bogie Technology ................................................................. 47 Comparative Patenting of Maglev Technologies ............................................................. 48 Estimate: Impact of Chinese Mercantilism on Innovation in the Global High-Speed Rail Sector .......................................................................................................................... 52 Policy Recommendations .................................................................................................. 54 Restricting China .......................................................................................................... 54 Block Chinese Acquisitions ......................................................................................... 54 INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | APRIL 2021 PAGE 1 Create Fairer Procurement Markets .............................................................................. 56 Stop World Bank Support for Chinese Rail Projects ....................................................... 59 Supporting Domestic Innovation and Market-Driven Firms ................................................. 60 Expand Export Financing ............................................................................................ 60 Host International Standards Discussions and Help Local Representatives Attend ............ 61 Consider Allowing Rail Firms to Merge ......................................................................... 62 Increase R&D Support and Coordination ...................................................................... 63 Conclusion ...................................................................................................................... 64 Appendix 1: Kawasaki’s Battle to Keep Ahold of its Technology in China ............................... 67 Appendix 2: CRRC’s Growing Role in Europe’s Rail Market ................................................... 68 Appendix 3: CRRC and Other Chinese Rail Firms’ Global Acquisitions to Access Rail Technology and Markets.................................................................................................... 71 Endnotes ......................................................................................................................... 74 INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | APRIL 2021 PAGE 2 INTRODUCTION High-speed rail is a technology-driven sector that has taken decades for the leading Japanese and European firms, and the broader ecosystem of component suppliers in the United States and elsewhere, to master. Yet, over the previous 20 years, China used mercantilist policies to rapidly and unfairly close the gap. For example, it used the development of its massive high-speed rail network to unfairly seize foreign technology and know-how to support its local champion, CRRC, and other rail firms. This diverted huge amounts of revenue that, had China’s high-speed rail network been based on comparative advantage and market-based industrial development, would have otherwise gone to leading foreign firms. The impact continues to grow as China supports CRRC’s efforts to seize global market share. Chinese rail firms are increasingly competitive with foreign rail firms but remain less innovative. By taking global market share from these more-innovative firms, China’s rail industrial policy continues to detract from innovation in the high-speed rail sector, which otherwise would be developing better, cheaper high-speed rail systems. Chinese rail firms are increasingly competitive with foreign rail firms but remain less innovative. China could just as easily have used its vast financial resources to import foreign rail products and rail systems. But it did not want to do that, even as it ran massive trade surpluses with the rest of world. It could have attracted foreign firms to set up their own local production and research facilities as part of a normal pattern of foreign trade, investment, and industrial development. Instead, it wanted local firms to control the rail sector. Over time, China’s mercantilist policies evolved as its firms became more competitive. It ratcheted up restrictions to help those firms move up the value chain and throughout the sector from freight to light rail and metro to large and fast passenger trains, before ultimately getting to the crown jewels: high- speed rail. China wanted to build up its own high-speed rail industry, to sell not only in China but around the world. China did this through an array of unfair, mercantilist practices. In violation of World Trade Organization (WTO) rules, China linked domestic rail contracts
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