China’s Industrial Policy: A New Era of Strategy

Beijing’s industrial policy shift slipped under the radar, but its ripple effects—from DeepSeek to quantum—are now making global headlines.

Many have prudently warned of the US and China falling into a Thucydides Trap with Taiwan as a catalyst in the hegemonic friction between Washington and Beijing. However, this platitude yields little insight relative to a quieter, but equally important phenomenon: the Promethean Trap.

Much like the Thucydides Trap, the dynamics of this iteration are being driven by the rising imperial power’s desire to challenge the existing hegemon on the technological frontier - the boundaries of which may very well determine who writes the next global order.

In 2019 alone, China and the US accounted for almost half of all global R&D research with each putting aside $526 and $656 billion, respectively. The dynamics of the Promethean Trap are fueling global innovation, and while the externalities of technological diffusion may have commercial and public applications, their underlying driver is to prepare for war.

The Biden Administration passed the CHIPS and Science Act in 2022, which will invest approximately $250 billion in R&D and semiconductor manufacturing over a period of 5-10 years (depending on the program).

At the same time, former President Joe Biden placed fresh restrictions on the exportation of strategic technologies—most notably, high-performance graphic processing unit (GPU) chips—to China. These chips are essential for AI model training, supercomputing, and military applications, including weapons development and intelligence-gathering uses.

See my previous intelligence reports for US export restrictions:

• Quantum Computing Leap: Impact on Geopolitics, Cryptocurrencies

• US-China Tech War Escalates

• Biden EV Tariffs Echo Trump China Trade Policy

• US Extends Chip Controls on China, What Now?

It is therefore no surprise that China’s President, Xi Jinping, has made an aggressive push to manufacture semiconductor chips at home as part of the Made in China 2025 initiative. The Asian giant still heavily relies on microprocessing chips made in the US, Taiwan, South Korea, Japan, Germany, and the Netherlands, all of whom are mutually aligned on their concern of China’s global aspirations.

Consequently, China has taken steps to remove their dependence on strategic technology imported from the west in the form of a new, high-risk, targeted, industrial policy.

A Little History

In order to understand China’s new industrial policy, it is crucial to embed the analysis in a historical context. At the third plenum in December 1978, Deng Xaoping famously announced his reforms which decades later would propel China to a global, economic superpower.

As an example of the severe restrictions before Deng, it would take the President’s personal approval to permit purveyors of watermelon seeds to expand their enterprise beyond the household.

Between the late 1970’s and 2006, China made enormous expenditures in developing its infrastructure in a broad sense (horizontal) without preference to a particular sector.

However, there has been little to no precedent for “targeted industrial policy interventions” (vertical) and its effects on delivering targeted growth. The latter was triggered in part not only by the increased hostility with the US, but by the 2008 financial crisis and ensuing recession.

To offset falling exports amid a global recession, the Chinese government engaged in a massive fiscal and credit stimulus program, but then allocated funds to “specific industrial sectors”.

This is what differentiates Beijing’s strategy from others: China was not only investing in specific sectors but creating market conditions for particular industries to advance a top-down political-economic agenda.

Enter the strategic emerging industries (SEI) program. This framework was announced in 2010, and was focused on cultivating “indigenous innovation” in frontier technologies and “basic research areas”. This marked a decisive shift from a decade ago, where market forces were expected to determine which sectors within the broader economy would be developed. Here are two key technologies they are looking at: