Federal government of the United States

© 2010 Carnegie Endowment for International Peace. All rights reserved. The Carnegie Endowment does not take institutional positions on public policy issues; the views represented here are the author’s own and do not necessarily reflect the views of the Endowment, its staff, or its trustees.

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About the Author
Nathaniel Ahrens is a visiting scholar in the Carnegie Energy and Climate Program, where his research focuses on climate, energy, and sustainable development issues in China. He is the president of Golden Road Ventures Ltd., a business development and strategic advisory firm that provides expertise and support for critical projects in China, including sustainable development, government procurement, agriculture, and media. Previously, Ahrens was senior product manager and director of international sales for Intrinsic Technology, a Shanghai-based telecommunications software provider.

He also founded Shanghai Pack Ltd., a luxury-brand packaging company based in Shanghai and Paris. Ahrens is a member of the National Committee on U.S.–China Relations, the Asia Society, and serves as an honorary ambassador for the State of Maine.

Indigenous innovation1 has become the greatest immediate source of economic friction between the United States and China. This trend is not unique to these two countries; policy makers globally are actively trying to stimulate domestic innovation.

The burgeoning markets for biotech and environmentrelated products and services and, potentially even more important, countries’ efforts to emerge from the global economic slowdown all reinforce this trend. Mindful of this global scene, China has made indigenous innovation one of the core elements of its attempt to make a structural shift up the industrial value chain.

Recently, however, indigenous innovation has been tarred with a protectionist brush. In both China and the United States, there have been increasing calls for buy-local stipulations and the erection of tariffs and non-tariff barriers to trade. In China, these measures primarily take the shape of government “local content” mandates and through the preferential treatment given to products officially classified as “national indigenous innovation products” (NIIP) in the government procurement process. In the United States, they have taken the form of buy-local provisions and efforts to shut out foreign companies.

The conflict has been escalating dangerously. In the run-up to the recent Strategic and Economic Dialogue, the U.S. business community ranked indigenous innovation in China as its number one policy concern, above even the currency issue. As of this writing, the key points of contention remain unresolved.

Yet despite the loud cries of protest against it, the global trend toward “homegrown” innovation is a healthy, positive development. Without innovation, countries cannot continually raise wages and living standards.2 Government procurement should play an important role in stimulating innovation, but maintaining open markets and international linkages is critical.

But instead of following its current approach of short-term product substitution and picking winners by protecting them from competition, China should focus on proven, market-friendly ways of stimulating innovation. Government procurement’s primary roles should be market signaling, de-risking R&D, bridging the finance gap, and stimulating demand.

The United States would also benefit by refocusing its government procurement policies along the lines indicated in the key findings of this paper, especially concentrating on facilitating more open markets and elevating the importance of sustainable procurement. The following set of specific recommendations for China will stimulate innovation through open markets and the effective use of government procurement

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