China has become the world's largest manufacturing nation, the largest exporter and the second largest economy. Nonetheless, once there are more advanced alternative technologies available, China may be replaced by today's emerging markets if it fails to adapt. There are many people in emerging economies that are studying China's development path in order to surpass it. It is very likely that one or more of these countries already have enough resources and the capability to take advantage of their late-mover status in some sectors. Those helping them might even be innovators from China.

In September 2010, India launched its biometric identification system and issued a 12-digit unique identification number called Aadhaar for residents. It is part of Prime Minister Narendra Modi's Digital India initiative. Beijing-based EyeSmart participated in this biometric identification system and provided key technological support.

India can establish the world's largest biometric identification system and adopt the most advanced iris recognition technology mainly because the country had no ID verification system before. Now that it has enough resources and the capability to build a national identification system, it chooses to employ the most advanced iris recognition technology. With affordable mobile iris recognition terminals developed in China, EyeSmart makes it easier for India to have one of the most advanced population databases in the world. Despite that, China has not yet established its own national iris recognition system.

China has outperformed Western countries in many technological aspects, but how can it maintain its leadership?

Lessons from the U.S.

In the United States, some industries that used to be global market leaders are facing difficulties. The steel industry is one of them. The U.S. steel industry now has to depend on protectionism for survival. In February the U.S. Department of Commerce determined that Chinese stainless steel imports would be subject to anti-dumping duties from 63.86 percent to 76.64 percent, with anti-subsidy duties ranging from 75.6 percent to 190.71 percent.

Such astonishing duties have demonstrated how uncompetitive the U.S. steel industry has become. Decades ago it was an absolute leader of the global market. Since the beginning of the 20th century to the end of World War II, the U.S. steel industry had significant technological and productivity advantages over its competitors. But by the 1980s it had fallen behind its counterparts in Japan and Europe. In 1982, 77 percent of steel output in Japan was produced through the advanced process of continuous steel casting, while 45 percent of those in the European Community used the method. In the United States, however, the proportion was only 21 percent, according to Chen Baosen, a research fellow with the Chinese Academy of Social Sciences.

A study on the manufacturing industry organized by the Massachusetts Institute of Technology showed that at the beginning of the 1990s, it took four to five years in the United States to plan, design and build a new blast furnace, but in Japan it took only three years. It took an average of $1,700 to produce a ton of steel in a newly built steel plant in the United States, while other countries needed to spend only $700-1,500 to do the same.

The U.S. automobile industry also faces similar difficulties. Due to the decline of steel and automobile industries, the part of the United States which used to be the engine behind the world's No.1 industrial power has now become a "rust belt."

What caused the decline of the U.S. steel industry? The most important factor was its long dominant status, which made the industry careless in adopting improvements to productivity. It was dependent on its dominance to maintain profits and invested heavily in failed diversification operations. In order to maintain its dominance, the industry resorted to various protectionist measures instead of making technological progress and improving productivity.

Since the 1968 lawsuit against dumping by the Japanese steel industry, almost every U.S. president has launched trade remedy measures against imported steel products. From 1980 to the end of 2001, the United States launched 538 anti-dumping and countervailing investigations against imported steel products, an average of 25 cases per year and accounting for 42 percent of the country's total number of cases of the same kind. Particularly between 1995 and 2001, 201 cases were initiated, an average of 29 cases per year and 66 percent of the country's total.

By the end of 2002, the United States had launched 179 protectionist measures for its steel products, accounting for 58 percent of the total trade safeguards in the country. The decline of the U.S. steel industry since the 1980s was mainly because of trade protectionism which blocked steelmakers' determination to innovate.

China's competitiveness

What can China do to prevent the double-edged sword of the late-mover advantage from hurting it? The most important is to maintain competitiveness as long as it can. To achieve this it must work to reduce costs and eliminate barriers to new technology.

One of the most important economic barriers is manifested in the huge sunk costs of outdated technology. Unwilling to abandon their investment, many industrial leaders are reluctant, or even refuse to use new technologies. To avoid this, the government should impose faster depreciation rates for manufacturing equipment, and in some industries with fast technological progress, depreciation should be accelerated.

To encourage companies to replace outdated equipment with new ones, the government must promote the development of second-hand equipment markets in order to reduce the costs for corporations to invest in new technologies and equipment.

Monopolies must be broken to stimulate corporate incentives in technological progress, thus advancing reforms and maintaining Chinese enterprises' competitiveness.

(The author is a researcher with the Chinese Academy of International Trade and Economic Cooperation)