Indigenous innovation 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 environment-related 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. 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:

• Become a signatory to the World Trade Organization’s Agreement on Government Procurement (GPA) in order to build a solid system that can legally incorporate certain mechanisms that stimulate indigenous innovation while keeping markets open. China should follow through on commitments made during the most recent Strategic and Economic Dialogue by submitting a revised application that is robust and in line with international best practices.
   
• Clarify the scope of the government procurement law
   
• Strengthen China’s intellectual property rights (IPR) regime so as to encourage innovative solutions being brought to the government
   
• De-couple NIIP and government procurement, both nationally and locally.
   
• Include in government procurement teams experts who know how to make the government an “intelligent customer”
   
• Improve the governance and transparency of national and local procurement entities
   
• Create national-level sustainable procurement guidelines (but not product lists) for key product areas (energy, transportation, construction, IT, chemicals) in order to mandate quality and performance levels connected with national goals in the areas of climate and sustainable development

Finally the United States and China could lead by example by working to form a joint sustainable procurement agreement. This will not only increase innovation in both countries; it will also increase overall technological progress worldwide.