China is a ‘fire-breathing dragon on government steroids’ whose tech will surpass Western firms in a decade, U.S. think tank says

It’s time to reject the view that “China can’t innovate,” says a leading U.S. think tank, as Beijing tries to foster its own advanced technologies to get a strategic edge against Washington.

A new report from the Information Technology and Innovation Foundation, a non-partisan Washington-based think-tank focused on tech, argues that China is already ahead of the U.S. in some industries, and rapidly catching up in sectors where it doesn’t have a lead.

The ITIF also reported that research and development expenditures are roughly equal between the U.S. and China in absolute terms. Yet China is ahead in top-level academic journal publications, and has a rising number of highly cited researchers.

China’s development of nuclear power, electric vehicles and AI is at a level close to, if not greater than, Western countries, the ITIF says, though it lags in semiconductors, machine tools and biopharmaceuticals.

“Chinese firms will likely equal or surpass Western firms within a decade or so,” Stephen Ezell, a contributor to the report, said at a Wednesday briefing.

Over the past decade, China has become a competent producer of technologically complex goods like telecommunications equipment, drones and solar panels. While Western products may still have an edge, Chinese firms are able to offer similar products at a lower price, helping it gain market share in developing economies.

Chinese firms also benefit from a more protected domestic market and, at times, significant state subsidies. But competition is fierce inside China, forcing local companies to find ways to keep ahead. Western firms often operate in China through joint ventures that allow local manufacturers to get industrial knowhow.

“China is not the Soviet Union, and its firms have considerable degrees of freedom to act in largely free markets,” ITIF wrote in its report. Instead, the think tank described the world’s second-largest economy as more like the so-called Asian Tigers of Hong Kong, South Korea, Singapore and Taiwan, or a “fire-breathing dragon on government-provided steroids.”

The U.S. response

The U.S. and its allies are limiting exports to China of advanced technology, like AI chips and quantum computers, in a bid to preserve their technological edge. Western governments are also trying to diversify their supply chains, relying less on China and Chinese manufacturers for critical components.

That’s encouraged a drive for self-sufficiency in China. Companies like Huawei and Semiconductor Manufacturing International Corporation are investing in domestically-produced components like semiconductors to replace those sourced from overseas.

Beijing is backing up this effort with subsidies, like the recent $47.5 billion “Big Fund” to encourage local chip production, and regulations to encourage government departments and state-owned companies to wean themselves off foreign technology.

In order for the U.S. to preserve its technological edge, ITIF proposed a tripling of the tax credit for research and development and establishing a national industrial development bank.

This story was originally featured on Fortune.com