Sino-US Trade War In The Technology Domain – OpEd

The US and China are the world’s two largest economies, and the trade between two sides also had been the world’s largest bilateral relationship. Therefore, the future trajectory of international trade is substantially dependent on evolving Sino-US relations.

Nevertheless, the contemporary national psyche of the US had witnessed a kind of rebellion against long-perceived globalization. The victory of Donald Trump in the US presidential election augmented nationalist narratives overthe long dominated cosmopolitan worldview. Thereby, the Trump administration came up with a vision of America first on the one side and launched aggressive diplomacy to persuade and pressure allies, strategic and security partners to dissuade from using Chinese companies offered 5G communication technologies, on the other side. Since China has taken the lead in 5G technology, the Sino-US trade war has entered into unchartered waters with an adverse impact on the global telecommunication sector. 

The United States Position 

In the 1970s, the US recorded its last trade surplus of the twentieth century. It came to face global competition in strategic industries. For instance, Europe decided to take on global dominance of the US aerospace industry and set the European consortium of Airbus in 1970. The massive government subsidies enabled Airbus to become a global competitor to Boeing in the 1990s. Similarly, Japan challenged the US hegemony over the electronics and car manufacturing sector in the 1980s. However, then, the international competition did not turn into geopolitical rivalry, as both Japan and Western Europe were dependent on the security cover provided by the US and were hosting American military bases. Then the utmost US interest was the technological expertise of these nations should not make way to rival countries.

Meanwhile, the Fourth Industrial Revolution in the present century has been revolutionizing the manufacturing process, industrial practices, and communication modes. And despite global slowdown caused by the Euro-Atlantic financial crisis, growing protectionist waves, and coronavirus, the influence of technology and internet companies continued to grow. In the Forbes’ Global 2020 list, a record of 161 technology companies were measured as the largest public companies in the world. And around 65 percent of technology and internet companies are located in the US, while next is China, home to about 20 percent of technology companies. 

China’s potential to lead the fourth industrial revolution are enormous. It is the largest trading country in the world. It replaced Germany as the leading exporter in the world in 2009 and overtook the US as the largest importer in 2015. It alone manufactured over 90 percent of personal computers, 7 out of every 10 cell phones (1.1 billion), 80 percent air conditioners, 74 percent of global solar cell production, and 63 percent shoes of the total global production in 2011. 

China accounts for 13 percent of world exports and 18 percent of world market capitalization. It has moved in the direction of transforming its economic might into geopolitical influence, market access, and alliance cultivation. In 2013, Beijing launched the New Silk Road or One Belt and One Road (OBOR), a multi-billion investment plan to address the ‘infrastructure gap’ in friendly states and provide greater market access to its companies.

Currently, 64 countries are actively involved in the OBOR. These include 10 ASEAN countries, 18 countries in Western Asia, 8 in South Asia, 5 in Central Asia, 7 in the Commonwealth of Independent States, and 16 in Central and Eastern Europe. Also, China has launched Made in China 2025 in (2015) to make its industrial sector completive and global. According to the US National Science Foundation (NSF), the gap in Research and Development (R&D) funding between the US and China is closing fast. From 2000 to 2017, R&D spending in the US grew at an average of 4.3 percent per year, while spending in China grew by more than 17 percent per year during the same period. The US accounted for 25 percent of the $2.2 trillion spent on R&D worldwide in 2017, and China made up 23 percent. In response to rising Chinese challenge, the US has launched a tariff war and securitization of technology.  

The Case of 5G Technology

5G is the next generation of networks that promise more bandwidth and faster internet speeds. 5G and its associated infrastructure are poised to be critical building blocks for the digitization of the global economy. The potential payoffs of being a 5G leader are enormous. China, South Korea, Finland, Sweden, and the US are currently leading the race to 5G. In 2018, the top seven telecommunication equipment manufacturers were Huawei, Nokia, Ericsson, Cisco, ZTE, Ciena, and Samsung.

China’s Huawei and ZTE had emerged a global brand by offering LTE and LTE-Advanced products and smartphones often at lower prices. With sales of $123 billion, Huawei is known for its razor-sharp prices and dedication to the industrial goals of China. Huawei is a global R&D powerhouse in the telecommunication sector. Of its 180,000 employees worldwide, about 80,000 or 40 percent are engaged in some form of R&D. In 2018, the company said it would increase annual spending on R&D to $15 billion to $20 billion annually, and it has tens of thousands of patents in China and abroad.

Chinese Strategy

For yearsChina had pushed up a wall against the US-based telecommunication service providers like Google, Facebook, and Twitter. This controlled environment allowed progress in which home-grown companies like ByteDance, Alibaba, Tencent, and Baidu. Next the Chinese government has Made in China 2025, ten years state-led industrial policy that seeks to push the economy through the difficult transition phase and over the so-called middle-income trap. Nevertheless, this industrial plan has received international criticism. But China’s leadership says that their commitment to a state-led industrial policy is necessary to increase incomes for their people and compete in the fast-changing global marketplace. They argue that they are only imitating what successfully the US, Germany, Japan, and South Korea have done. 

Beijing wants to achieve 70 percent self-sufficiency in high-tech industries by 2025. Interestingly, China accounts for about 60 percent of global demand for semiconductors but only produces some 13 percent of global supply. Therefore, the Chinese government envisions achieving self-sufficiency in the semiconductor industry and taking per capita income to a higher level by way of leading the global digital economy. 

The United States Response

The US has come to sense China a fierce rival in the Indo-Pacific rimland, trade and economy, technology, and military sphere. In his inauguration speech, President Donal Trump vehemently argued that “we have enriched foreign industry at the expense of American industry. Subsidized the armies of other countries while allowing for the very sad depletion of our military.” To correct imbalances in bilateral relations, Trump has resorted to transactional diplomacy or transactional hegemony. Trump described China as a strategic “competitor” in his first national security strategy.

The US trade deficit with China had risen to $419.5 billion in 2018 from an average of $34 billion in the 1990s. Trump administration began setting tariffs and other trade barriers on China to force it to address growing bilateral trade deficit and “unfair trade practices.” There has also been anongoing process of securitization of Chinese technology and investment. In 2016, China investment was $18.7 billion in 107 US technology firms, and these numbers dropped to $2.2 billion, following the scrutiny measures from the Committee on Foreign Investment in the United States (CFIUS). For instance, the CFIUS helped kill a proposed merger between MoneyGram and the Chinese firm Ant Financial. The US further strengthened the CFIUS process, with the approval of the Foreign Investment Risk Review Modernization Act of 2018. Subsequently, the Trump administration began to target at Chinese telecommunication major, Huawei and ZTC, and popular global services providers like TikTok and WeChat.

In 2018, US Vice President Mike Pence in his speech on the Trump administration’s China policy claimed that “Chinese security agencies have masterminded the wholesale theft of American technology and using that stolen technology, the Chinese Communist Party is turning plowshares into swords on a massive scale.” Pentagon banned Huawei and ZTE phones from being sold at US military bases. At a Senate Intelligence Committee hearing in February 2018, top US intelligence chiefs said Huawei and ZTE posed potential national security risks to the US. Following those developments, the US Federal Communications Commission formally designated Chinese’s Huawei Technologies Co and ZTE Corp as threats to US national security on May 30, 2020. 

More broadly, the US policymakers worry about China’s state-led model, and its ambition to control entire supply chains means that the whole industry could come under the control of a rival ideological and geopolitical power. Consequently, the Trump administration issued a new report detailing its Strategic Approach to the People’s Republic of China in May 2020. Its goals are twofold: “to improve the resiliency American institutions, alliances, and partnerships” and “to compel Beijing to cease or reduce actions harmful” to American, ally, and partner interests.

This was followed by a hawkish speech by US Secretary of State Mike Pompeo in California titled as titled “Communist China and the Free World’s Future.” He declared the failure of 50 years of engagement with China and called for free societies to stand up to Beijing. He called on democratic nations to form an alliance against the Chinese Communist Party and dismissed the need for empty engagement with it. More importantly, Pompeo said there would be a new form of engagement. “We must also engage and empower the Chinese people—a dynamic, freedom-loving people who are completely distinct from the Chinese Communist Party.”

Taking the confrontational line, the US had made Chinese policies on Hong Kong and the north-western province of Xingjian the diplomatic issues. Escalating tensions between Beijing and Washington have raised questions over the future of Hong Kong as an international financial hub. Similarly, the US Department of Commerce blacklisted many Chinese entities in October 2019 and May 2020, imposing restrictions on exports and access to US technology for their alleged complicity in human rights abuses in Xinjiang. On May 27, 2020, the US Congress passed the Uyghur Human Rights Policy Act, and on June 17, President Donald Trump signed it into law. The bill authorizes the imposition of US sanctions against Chinese officials responsible for the detention and persecution of the Uyghur community of western China. 

The US Global Campaign 

The US reached out to its NATO members, strategic and security partners, to sensitize them about the shared threat posed by the Chinese model of development and alleged nexus between Chinese telecommunication and software companies and the communist party. The US strategy has begun with signing a memorandum of understanding with countries that agree not to use Huawei and its 5G technology.

The US first reached out to the English world. The UK and Australia have ruled out any role for Huawei in setting up their respective 5G networks. Whereas, Canada arrested Meng Wanzhou, the chief financial officer of Huawei, upon her arrival at Vancouver International Airport at the request of the US, on December 1, 2018. However, Canada and New Zealand have yet to decide on the future of cooperation with Huawei. 

Meanwhile, the European Union does not have a single digital market, but two of the global player in the telecommunication sector, Nokia and Erickson, are from Europe. Both are precisely the kinds of industrial champions that the US would like the EU to promote.

Although the closing market access to Chinese tech companies means opportunities for both Nokia and Erickson to fill the void, the matter is could Europe seize the moment. The US has been lobbying in European Capitals to follow the UK suit. The US national security adviser, Robert O’Brien, met European counterparts in Paris in July 2020 to press them to exclude Huawei from their networks. The US line is supported by countries like Romania, Poland, and Estonia because those countries constantly view Washington bulwark against Russian aggression. 

Still, the EU-China economic ties are strong. China buys a lot from Europe, with Germany its largest trading partner in the bloc. Yet, the EU had already shifted from their earlier embrace of China to a more guarded posture of balancing and limiting Chinese influence. An official EU document from 2019 calls China a systemic rival. The investment flows from China to Europe have dropped by 69 percent from the peak in 2016. Germany and France, have decided to increase security measures to safeguard against backdoors into communication channels that are feared are part of Huawei’s technology. In contrast, the US strategic and security partners like Japan, Taiwan, and India have effectively banned Huawei.  

Conclusion

The evolving Sino-US trade and technology have raised two pertinent issues: one, the World Trade Organisation has failed to set up universal rules for evolving digital economy, and second, the US has been facing a dilemma to come to terms with a rising technological superpower whose values are fundamentally opposed to the western one. In an emerging global great power politics, the global market could not effectively exploit the benefits of international cooperation in the technology sector. 

The countries that have banned products by the Chinese smartphone and wireless technology company Huawei represent more than one-third of the world’s GDP. Despite the US warnings about Huawei, the company continues to expand at a fast clip, accounting for the largest share of the global 5G market. Over 170 other countries believed the potential miss-use of data collected by Chinese companies is manageable through updating their domestic laws and security measures and are willing to roll out the next-generation 5G network in cooperation with China. 

Thus the current Sino-US standoff has divided the world and turned 5G race into a zero-sum affair. But in reality, neither China has won the 5G race, nor has the US lost the race. The overall playing field can emerge as non-competitive and complimentary if both the global player adopt a conciliatory approach. This is because China’s strength is in manufacturing telecommunication equipment, and the US is leading player advancing software that would dominate the 5G platform. Among the top ten global technology and internet companies, eight are US-based. Both the players will be better off by keeping the global market open and competitive. The steps in that direction would be both sides should provide each other market access and allow their companies to compete and cooperate. Both the states should lead the world in shaping the global digital economy based on norms and rules, which would redress nations’ concern over data safety and security collected by the international telecommunication and internet entities. 

*Mumtaz Ahmad Shah is a research scholar in the Indian Institute of Technology Madras.