Innovation Drag: China’s Economic Impact on Developed Nations


An examination of the scholarly literature shows that China’s mercantilist-powered economic rise and trade expansion have slowed the progress of innovation in the global economy—particularly in North America and Europe.


▪ Policy debates about China’s economic impact on developed nations have largely focused on jobs. But the negative impact on innovation is likely to have been even greater.
▪ Conventional trade theory holds that global market integration enhances welfare by increasing allocative and dynamic efficiency. But it’s time for economists and policymakers to consider that mercantilist trade is different from market-based trade.
▪ The scholarly literature shows China’s rise, backed largely by unfair, mercantilist policies, has harmed innovation in the global economy—particularly in North America and Europe.
▪ Mercantilist trade can reduce innovation by shrinking markets and cutting profits innovators need to invest in R&D. China exacerbates both dynamics by propping up weak competitors, closing markets, creating overcapacity, and limiting revenue.
▪ Especially in innovation-driven industries, mercantilist-powered trade is likely to be welfare- and innovation-reducing, not just for affected nations, but globally.

For many years, the prevailing view—particularly among those in trade policy circles—was that the rapid growth of China’s economy after it joined the World Trade Organization (WTO) in 2001 had a positive effect on developed economies. Any deleterious impacts were thought to be largely temporary and borne by only a relatively modest number of workers in particular subnational regions. But as more and better research has since been performed, it has become clear this view was overly optimistic, if not Pollyannaish, and the harms were worse than many had forecasted. To date, most of this discussion has been focused on the impact of the rise of China on jobs in Western economies. Much less attention has been given to the impacts on innovation in those economies, and even less on the impacts on global innovation writ large.

The Information Technology and Innovation Foundation (ITIF), supported by the Smith Richardson Foundation, has embarked on a year-long project to examine—and hopefully answer—this question of how China’s rise and its policies, many mercantilist in nature, have affected technological innovation globally. As a first product of this research initiative, this report examines and summarizes the scholarly literature on the effect of Chinese economic growth and trade on innovation in developed economies. Here, the key question is not whether Chinese policies spur innovation in China—while there is some debate over this point, the evidence suggests they do. Indeed, how could funneling hundreds of billions of dollars in subsidies, including for research and development (R&D), and instituting policies such as providing free intellectual property (IP) to Chinese firms (via theft or forced technology transfer) not have increased Chinese innovation? The question for this project is whether that innovation success came at the expense of innovation in foreign firms and economies. While the results of a few studies suggest it was beneficial, most, including those that convincingly rebut the former studies, find the effect of Chinese economic growth and trade expansion has been negative for innovation in most developed nations—particularly in North America and Europe.

Read the Full Study Here.