The Attaché

Yunkai Xu | Originally Published: 4 April 2026

On December 31, New Year’s Eve, Xi Jinping congratulated the nation on completing China’s 14th Five-Year Plan, stating that China has become “one of the economies with the fastest growing innovation capabilities.”This marked a cornerstone of Xi’s ‘Made in China 2025” (MIC2025) industrial policy, launched in 2015, aimed at developing China’s manufacturing sector into a global leader in technological innovation. In retrospect, China’s economy has benefited considerably from the rapid progress in industrial and technological development under MIC2025. However, others argue it is a failed policy, posing unforeseen risks to China’s trade relations. This essay argues that although Made in China 2025 has been successful in meeting industry targets, it is limited as a long-term strategy because of worsening structural problems in the economy.  

“Made in China 2025” marks the third wave of the Chinese industrial revolution, focused on enhancing quality and innovation within China’s manufacturing sector. The communist revolution under Mao Zedong and the “Open Door” policy under Deng Xiaoping initiated the first and second waves. Starting in 2015, MIC2025 under Xi introduced a third wave aimed at elevating China’s manufacturing industry to “globally advanced levels of innovation capabilities”. The policy unfolded in two stages: first, to improve the overall quality of manufacturing by 2025, and second, to position China among the middle tier of the world’s manufacturing powerhouses by 2035. It set explicit targets in key technological sectors, including next-generation IT, CNC machines and robots, aerospace and engineering equipment,  high-tech ships, advanced rail transportation, new energy vehicles (EVs), agricultural machinery, new industrial materials, biotech, pharma, and high-performance medical devices. To attain these objectives, MIC2025 employed interconnected policy measures, including subsidies, tax incentives, market-entry barriers, forced technology transfer policies, and government and state-owned enterprise (SOE) procurement. 

Government economic incentives under MIC2025 have successfully met its key industry targets by reducing barriers to entry, attracting investment, and increasing China’s comparative advantage in said sectors. First, MIC2025 significantly reduced barriers to entry by offering generous subsidies and government procurements. Advanced technological industries have high upfront costs to acquire intellectual property and conduct research and development, which discourages private-sector investment. Subsidies enabled EV companies to overcome these barriers and maintain corporate operations in the early stages, while procurement supported their transition to autonomous operation. In the EV industry alone, leading firms such as BYD received a total of $1.4 billion in government grants under MIC2025. Second, subsidies and tax incentives drew increased foreign investment to help reach targets. Western original equipment manufacturers operating in China also benefit from similar incentives, such as reduced corporate income tax rates and local government grants. Greater international investment not only promotes industry growth but also eases the state’s investment burden. Finally, subsidies give domestic companies a competitive advantage in global markets by artificially lowering prices. Government subsidies may alleviate technology companies’ pressure to maximize profits, thereby allowing them to focus on technological innovation while still sell at lower prices than in international markets. For example, BYD lowered the Seal’s sticker price from $30,198 to $24,190 between 2022 and 2025, while maintaining a per-vehicle cost advantage of roughly $4,700 over Tesla. The combined impact of these factors is evident in the Chinese EV industry surpassing the target of 3 million local NEVs, with 3.5 million sold by 2021. Overall, the success of MIC2025 stems from strong central support that reduces barriers to entry, incentivizes investment, and decreases costs.

Nevertheless, MIC2025’s failure to meet targets in industries focused on basic research reveals its limitations in overcoming the growth stagnation of China’s manufacturing-based economy. A report from the U.S.-China Economic and Security Review Commission indicated that MIC2025 missed key targets in sectors that rely heavily on basic research, including aerospace, robotics, and integrated circuits. David Adler points out that, unlike the United Kingdom or the United States, which industrialized through invention and innovation, “late industrializers” typically develop by “borrowing” foreign technology and adapting it locally. China, being a late industrializer whose industrialization only started in the late 70s, has struggled to enter industries that require substantial upfront investment and the accumulation of IP. It becomes clear that MIC2025’s failure to meet targets in those industries stems from China’s fundamental weaknesses in basic research and from the dominance of a small number of global incumbents that control the market through specialized intellectual property. As predicted by Adler, innovations under MIC2025 mainly occur within production lines and factories, where technologies can be readily adapted to leverage China’s strength in large-scale manufacturing. China’s economic development, which has long relied on cheap manufacturing and factory-floor innovation, is now facing stagnation due to weaknesses in basic research that underpins all advanced technological sectors. MIC2025’s failure to significantly enhance China’s basic research capabilities highlights its limitations in addressing the country’s economic dependence on large-scale manufacturing.

Furthermore, progress under MIC2025 risks hindering long-term productivity growth due to declining market competition. To reach MIC2025 industry targets, the Chinese government prioritized support and subsidization for state-owned enterprises. Milton Friedman warned in Capitalism and Freedom that nationalization impedes competition, which in turn hampers product improvement. Essentially, state-owned enterprises do not face the same pressures to compete and innovate as the private sector. Thereby,  market competition has declined under MIC2025, as government pressure on companies to source domestically has helped less-competitive domestic firms, whose products are inferior to those of some international companies, gain significant market share. In the semiconductor industry, the requirement to use only domestically produced chips led Chinese firms to compromise on the quality of chips or to use domestic chips for secondary functions only, while the core functions continued to rely on imports. Since productivity growth relies on continuous improvement in the quality of inputs within the economy, a decrease in domestic competition, which reduces the need to constantly improve inputs in the economy, undermines China’s capacity for long-term productivity growth. As a result, China’s total factor productivity growth has stagnated alongside overall economic growth over the past decade. It becomes clear that preferential subsidies under MIC2025 create a less competitive environment, thereby weakening productivity growth across China’s economy. 

Simultaneously, MIC2025’s push for automation has exacerbated structural unemployment, raising concerns about its long-term impact on economic growth. Erik Brynjolfsson highlighted the risk of machine substitution in the labour market, stating that “workers lose economic and political bargaining power and become increasingly dependent on those who control the technology.” Under MIC2025, this concern has manifested as machine substitution rather than the augmentation of the existing workforce to foster industrial development. In Guangdong province, the goal to become China’s leader in factory automation under MIC2025 has prompted the provincial government to promote a “Robot-Replaces-Man” slogan, leading to layoffs to subsidize robot procurement. As a result, many traditional sectors such as agriculture and mining have experienced reduced employment demand due to the rise of automation. Meanwhile, China’s youth unemployment rate reached a record high of 21.3% in June 2023. Rising structural unemployment creates additional concern about a declining labour force, as employment difficulties in the younger generation disincentivize them from looking for jobs. Structural unemployment, combined with a declining labour force, could potentially offset productivity gains from automation. If unaddressed, rising structural unemployment caused by the rapid automation under MIC2025 could impede economic growth. 

The coexistence of industry-specific success and structural limitations under MIC2025 highlights the need for policy adjustments in the long term. On the one hand, within ten years, MIC2025 has achieved noticeable industrial success in transforming China’s economy from a low-cost manufacturing base to one that prioritizes innovation. Overall, China’s global tech output increased by 8% over ten years, while R&D expenditure rose from 1.6% of revenue to 8.4%, demonstrating China’s growing international impact. On the other hand, MIC2025 falls short in addressing China’s fundamental weakness in basic research, while decreased market competition and increased structural unemployment could hinder economic growth. Since MIC2025 is a 30-year economic strategy extending through 2035, it is difficult to predict whether structural economic barriers will surpass China’s ongoing technological development or whether China will be well-positioned to overcome them. What is clear is that China’s economy is showing signs of strain. According to the Federal Reserve Bank of Dallas, high-growth asset sectors in China are experiencing deflation, with 12 of the 39 affected industries being MIC2025 targets. This indicates that, in the long run, further adjustments within the MIC2025 framework are necessary to tackle barriers to basic research and to stabilize market imbalances.