Misreading China: Innovation, Power, and U.S. Blind Spots
Ambassador Craig Allen, former President of the US-China Business Council, told the Foreign Press Podcast that many Americans underestimate China’s innovation capacity due to ingrained biases about both the U.S. and communist systems. On our latest episode, he breaks down his recent Hinrich Foundation paper, “The Greatest Show on Earth,” offering our audience of correspondents valuable insights into the U.S.-China relationship and what might lie ahead.
There is indeed much Americans can learn about China’s strengths and weaknesses, particularly as China surges ahead in tech competition. The relationship between the two countries is currently being tested amid President Donald Trump’s attacks against the global trading order but there is no doubt, as Allen points out, that Chinese innovation capacity can have serious consequences for the U.S. in the event it falls behind.
Allen shared his thoughts during a wide-ranging conversation with Alan Herrera, who oversees AFPC-USA’s editorial operations.
This episode of the Foreign Press Podcast was produced in partnership with the Hinrich Foundation. AFPC-USA is solely responsible for the content of this episode.
Alan Herrera: Hello and welcome to the Foreign Press Podcast! I’m Alan Herrera. This podcast is an educational program brought to you by the Association of Foreign Press Correspondents in the United States. That’s AFPC-USA. This episode has been produced in partnership with the Hinrich Foundation. AFPC-USA is solely responsible for the content of this episode.
What if the US has been misreading China’s innovation trajectory all along? Craig Allen, former President of the US-China Business Council and longtime diplomat, joins us to unpack the myths and realities behind China’s rise as a tech superpower. Drawing from his recent paper, “The Greatest Show on Earth,” Allen discusses how China is redefining innovation, what the US gets wrong, and why this global race is more complex — and consequential — than many realize. We explore the strengths of China’s unique innovation model, what the US can learn from it, and the potential consequences of falling behind. From TikTok to semiconductors, from state subsidies to data as a factor of production — this is a candid look at the forces shaping the next era of global competition. Stay tuned for our conversation.
Craig, thank you for being here with me today on our Foreign Press Podcast. It is very interesting to be here with you this morning of all mornings, considering that Beijing at this moment has been confronted with the latest threat from President Donald Trump of an additional 50% tariff on Chinese goods unless Beijing reverses its retaliatory levies on US imports. So this is a very rocky time, of course, and I think that you're going to provide excellent insight for our community of foreign correspondents about all the things that they probably don't understand about the US-China relationship. So thank you for being here with me today.
Craig Allen: Thank you, Alan. It's a pleasure to join you and I look forward to our conversation.
Craig Allen
AH: Excellent. As do I, again. Thank you, and grateful to our partners at the Hinrich Foundation for making this happen. I'd like to start, Craig, by noting that you've mentioned that American views of China oscillate between overestimation and underestimation. So why is it that you think that the United States consistently struggles to assess China's innovation capacity accurately?
CA: I think that Chinese innovation capacity rubs against our own preconceptions about both ourselves and about a communist country's ability to be creative and to innovate our own conception, both of ourselves and of scientific development, is that it only happens in a free and open society where institutions and individuals are free to follow their passions. But in fact, I think that we need to double click on that and question our own assumptions. Both Russia previously or the Soviet Union previously and China were indeed extremely innovative and creative. And the Chinese are unleashing a new generation of innovative companies so we need to look at squarely and understand from within their context, why is it that Chinese private sector firms are so innovative? Why are they pushing? How are they pushing the frontier of science and technology so systematically across any number of industries and what does that mean for America and Europe and the West's place in the world as we go forward? I don't think that those questions have been adequately or even honestly yet advanced. We have underestimated China because we have overestimated ourselves. At least in my view, the Chinese innovation capacity is not only because they have four, five, six times the number of engineers, but also because of their manufacturing capabilities, their great institutions, and very strong government support. And all of those things challenge us, particularly as we look at the future of technology, the future of high-tech manufacturing and the future of innovation.
AH: Well, on the subject of innovation, you've noted that China has redefined innovation to fit its own needs. So how exactly does that redefinition differ from traditional Western models? I find it interesting that you just said that we've overestimated ourselves, so I'd love to hear more about your perspective.
CA: Sure, yeah. Well, China has combined tremendous innovative capabilities with the world's largest and most integrated industrial base manufacturing base. So today, China has approximately 34% of global manufacturing, but there's a United Nations Industrial Development Organization report suggesting that China might within five years have up to 45% of global manufacturing capacity. And that is a scary prospect, I think unfortunate for the world, and I would argue unfortunate for China as well. But this combination of tremendously flexible innovation and global spanning manufacturing is something that we've never confronted in the past. And I would say that when you go industry by industry, and we could talk about pharma, we could talk about space, we could talk about green energy, we could talk about automotive, talk about any number of industries, and it's driven by the private sector in China. And these are companies that are not well capitalized.
Oftentimes they're not particularly profitable, and indeed, perhaps it's as a result of scarcity and that lack of profitability that they're driven towards further innovation. They're competing against each other in a resource-scarce environment. And it reminds me very much of 1950s Japan, where you had companies like Honda or Toyota or Sony or Panasonic that were very resource-scarce but who were engineer-heavy and dedicated to manufacturing at scale, and they changed the world. They introduced systems like the Kanban system, the quality control Six Sigma, and just in time inventory. And I think that we're seeing the same type of innovation and competitive dynamics coming out of China now, and it's going to teach us a couple things, whether we wish to learn them or not: this is going to change the world, and we are not necessarily as well prepared as we should be.
AH: Well, China appears to have significant long-term advantages. You've mentioned in particular these “four rivers” of Chinese innovation. Which of these do you believe gives China the greatest advantage, and why do you think that is the case?
CA: Well, I think that scale is the advantage that gives them the most important advantage. Silicon Valley was successful because Silicon Valley doesn't really manufacture, it's working at the digital level and software, and thereby they've been very successful. But to the extent that manufacturing is required at global scale, it's almost only in China that that type of rapid flexible manufacturing can be done. And I think that associated with that is just simply the number and the amount and the quality of Chinese engineering talent and STEM (science, technology, engineering, and mathematics) talent in general. And that's something that we underestimate. Chinese engineers and Chinese STEM workers are just as well educated and just as productive as those in the West in America. We were blessed with a good amount of inbound immigration in this field, but even with that, we're producing far fewer STEM, maybe a quarter of the STEM graduates and engineering talent that the Chinese are.
And that's a cumulative and growing disparity, and that has an effect. The other factor here is that because China's market is inherently not particularly profitable for private sector Chinese companies, they're born global. They have to either export or invest overseas. They have no choice. And that creates a different dynamic from American or European companies who are oftentimes quite happy to remain domestic or regional. And so we're facing a very different type of challenge than we've ever faced before, and we need to look at it square-on and figure out how we need to adjust to this challenge. And it's going to be difficult because challenges are fundamental assumptions about ourselves, about the innovation process, about our role in the world, and about how we should conduct our own domestic policies, including education policies, science policies, manufacturing policies, and all of those are going to have to adapt to this challenge or else.
AH: There are significant implications here for our competitiveness in all sectors, particularly the tech sector. You mentioned in particular that China is catching up to and may soon surpass the US in spending on research and development in particular.
CA: Yeah.
AH: So what is your message to policymakers in Washington in light of all of that?
CA: Well, many in the American scientific community are extremely concerned about federal government funding to science and technology. And I would argue that that has been heretofore, say for the last 270 years, our strongest competitive advantage. And if we do not fund our science and technology establishment, at least at the rate of our competitors, then there might be dire consequences in future years. And the further out you go, the more dire those consequences are. And therefore, I would urge the Trump administration to reconsider its funding to American university scientific establishments, NIH (National Institutes of Health) and others, as this isn't indeed the enduring advantage that we have. Now, there's been research done about MIT (Massachusetts Institute of Technology), about Stanford, and other universities that suggests that it is as a result of their innovation prowess that has produced economic returns that are as big as the ninth or the 10th largest country in the world.
And currently the scientists in those and the university administrators of those universities don't feel a lot of love from the US government. They are the prosperity makers within our country. They have been for decades, and I hope that they will be for decades, hence. But I think that currently they are feeling challenged. Of course, the other element to that is America's strength in innovation is due to our diversity. That is a fact. And what I would argue is that immigration and free flow of people and ideas, the issuing of visas to scientists and engineers to come into our institutions, is absolutely vital to the long-term viability of those same institutions. And by restricting visas, we are cutting off our nose to spite our face. So I think that the scientific and academic community, the innovation community, is very much under stress due to self-inflicted actions by our own government. And I hope that they will be reconsidered in the very near term. Thank you.
AH: I'd like to discuss, next up, there's this concept of the new productive forces that you mentioned, right?
CA: Right.
AH: Yes, and that is a refinement of Made in China 2025.
CA: Yes.
AH: What distinguishes this new phase in China’s industrial policy?
CA: Well, I think that there are a number of things. Firstly, if one were to reread the press conference following the National People's Congress, one can only marvel at the six economic ministers competing against each other to describe how they were going to help the new productive forces. So the entire Chinese government is focused on innovation, manufacturing, and the new productive forces. Increasing total factor productivity is the holy grail that they — that is the Chinese government and the Communist Party — are chasing, and they're going to succeed at least at some level doing that. The other thing that I think has really changed and is really interesting for future scholars to study is that the DeepSeek moment in China is profound. This is an open-source software, and the Chinese government is encouraging, insisting, and demanding that AI (artificial intelligence) be incorporated into traditional manufacturing to improve efficiencies there. And I find that really fascinating.
How quickly will AI be diffused through China's traditional manufacturing? And I don't know the answer to that. We don't have the evidence yet, but I suspect that it'll be very rapid and that that will lead to economic dislocations probably around the world as China continues to expand its global share of manufacturing and to increase its kind of comparative advantage across all types of manufacturing. At least that's their plan. To what degree it will be successful, I don't know. But what I do know is that it's going to be disruptive to manufacturing in Europe, in America, in Southeast Asia, and around the world. And simply raising a tariff is not going to do the trick. And indeed, the raising of tariffs might very well be counterproductive as it will deny American manufacturers and American companies the ability to import cheap components or software parts, chemicals, plastics, whatever, that they need to be globally manufacturing competitive.
And so I'm deeply worried that the tariff walls that we're constructing are going to have a grossly opposite effect of what is intended, and it will lead to a decline in American manufacturing and in America's innovation competitiveness. That's what economic theory suggests. And I suspect that we're going to test that in the near term. And I worry about small, medium-sized manufacturers all over this country who are going to be threatened by going out of business because the cost of their inputs have risen so high above their competitors outside of the country. And I regret the economic costs that that will impose upon our people. Thank you.
AH: Well, what would a — and I'm spitballing here right now — I always end up doing this on Hinrich Foundation podcasts, I've come to be very fascinated by these topics, and I know that they're very happy about that. Regarding just this theme here of a Western misunderstanding, right?
CA: Yeah.
AH: What would a more informed US strategy toward China look like, Craig?
CA: Well, certainly it wouldn't be 100% tariffs, that's for sure. I do think that we need to look at our own industrial policies, and at least the public policy discussion about the virtues of welcoming Chinese investment in the areas where they're demonstrably ahead. And one could have an informed discussion here by looking at restrictions on inbound investment, requiring Chinese companies to take a minority position if they were willing to invest in batteries, EVs (electric vehicles), solar panels. And Chinese companies, due to the profit scarcity in China, I am certain would be willing to invest here in a minority position. They've told me 10% would be fine, and to transfer their technology to their American joint venture or licensing partners. And yet we seem to have an allergy to that. The political disputes over the CATL (Contemporary Amperex Technology Co.) licensing agreement with Ford or the other licensing or joint venture agreements that have been considered are totally out of proportion to the risk that we face.
And indeed, they're, if you will, ignorant of how far advanced technologically and from a scientific innovation perspective that some of these Chinese companies are. And if we're going to be a world leader, then we've got to be dealing with other world leaders and we're not going to be able to prosper through tariffs. Tariffs make just very tiny segments of our population wealthier at the expense of the other 97, 98% of us. We need a more nuanced, more flexible, and more thoughtful policy if our children and our grandchildren are to prosper in this world.
AH: Well, to that end, do you see any weaknesses or any specific vulnerabilities in this model of the Chinese government, and specifically the fact that it's willing to throw, I believe your exact quote was that it's willing to throw vast sums of capital and engineers at innovation?
CA: Well, that is exactly true. I'll stand by that. The downsides of that policy are enormous. The Chinese government and the party are investing far too much in innovation and manufacturing per capita. Consumption, household consumption in China is only 40% of GDP (gross domestic product) compared to about 70% in the United States and 60% across the world. And so the cost of this is to the Chinese people. The average rural pension in China is 220 renminbi or US$30 a month. Healthcare in China is only 6.4% to 6.8% of GDP. That is far too high a cost for the Chinese people. And indeed, there needs to be a total rebalancing of the Chinese economy in favor of increased demand, increased consumption, increased social safety welfare net, and away from this over-investment, this wasteful investment on innovation and manufacturing. Now, the Chinese government knows that, and rhetorically, they're talking about the importance of consumption, but they're not taking the policy steps necessary to shift the major emphasis of the Chinese economy from manufacturing to consumption.
And that's what we really need to see. It's a complex economic transition that they need to go through to increase consumption, decrease industrial investment, but they have to do it for most importantly, the good of the Chinese people, but also for the continued, if you will, strength or vitality or health of the global trading system. The current trading architecture cannot take such excessive investments by the Chinese government into innovation and manufacturing. The current global architecture cannot accept, as the United Nations has forecast, China having 45% of global manufacturing. This is not going to be sustainable. The Chinese government must shift course here. The sooner the better, not for the good of any foreigner, but for the good of the Chinese people who deserve a stronger social safety welfare net, a higher degree of spending on public health, unemployment, insurance, and better pensions.
AH: I think, Craig, that this is an excellent note to end this on. I think that you've provided me with just, and again, I know our partners at the Hinrich Foundation will be very happy to know that there are always opportunities to further my own understanding of these topics as I've engaged with them. And I know that our audience of foreign correspondents will greatly appreciate your insights, especially as the current tariff situation continues to develop. It's just unfortunate that there are going to be significant consequences. And again, thank you. And are there any final thoughts that you'd like to share?
CA: Well, I want to thank the Hinrich Foundation for the tremendous work that they do at keeping us honest and talking about the benefits of free trade, which are manifestly clear, but oftentimes ignored. Thank you very much.
