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Tech, the Battleground of the Sino-U.S Trade War

MioTech Team 2019-01-21

Escalating tensions between the world’s two superpowers may seem like it’s about trade, but upon closer look, the race for technological supremacy is what’s at the heart of this war.

Aluminium. Steel. Solar. The tit-for-tat trade wars between the U.S and China have seen tariffs being slapped on multiple industries spanning from raw materials, industrial parts to vehicles, chemicals and more. This has led to China’s largest trade surplus with the U.S in more than a decade at $323.32 billion, rising 17% from 2017. But what started off as an IP theft problem, seems to have now evolved into what appears to be a larger U.S backlash to stunt China’s rise to technological power. If we examine the tariffs even deeper, the tariffs affect 10 crucial sectors that encompass China’s industrial policy strategy, “Made in China 2025”.

 

Source: Forbes

 

One look and it’s easy to see that the trade deficit is not the core issue of this conflict. Shaun Roache, Chief Economist at APAC, S&P Global Ratings said to “Forget politics or trade or soybeans. It’s all about technology and not trade.” Technology seems to be at the heart of the friction between the U.S and China.

 

It’s for this reason, China has a lot at stake. While China’s explosive growth can be attributed to old economic drivers such as a growing labor force and high investment rates, these two engines have been slowly exhausted through the past decade. China’s leaders then turned to its domestic market of 1.37 billion people to drive growth. With a more consumer market led economy, China can rely less on state-owned enterprises, and more on privately-owned companies. The government threw its back into boosting the growth of innovative digital technologies and infrastructure and producing more of its own products to cut down on exports.

 

“Forget politics or trade or soybeans. It’s all about technology and not trade.”

 

Today, China’s digital technologies have become a force to be reckoned with. The country is not only a major global investor in digital technologies, it’s the world’s leading adopters of technologies. The digital landscape shoulders the decline in overcapacity and overleveraged industries with the tech industry accounting for 32.9% of the nation’s GDP or USD$4.1 trillion in 2017, according to the China Academy of Information and Communications Technology. 171 million people is also stated to have worked in technology driven sectors, accounting for 22% of the nations employment last year. Moving forward, China’s focus will be to harness new technologies like 5G networks and cybersecurity, high-end precision tools, A.I, robotics, and aerospace to boost China’s economic growth and global influence.

The U.S is looking to hit China where it hurts. Tariffs imposed under Section 301 of the 1974 Trade Act addressed technology-related issues like forced technology transfer, discriminatory investment restrictions, predatory acquisitions, cyberattacks and espionage. If tariffs continue persisting, or worse surmounting, it will encourage firms in supply chains to shift production elsewhere. This is only the first slap in China’s face.

 

In a move to slow-down China’s technological growth, in August 2018, Donald Trump signed off on the Export Control Reform Act of 2018 which puts further controls on U.S. exports of “emerging and foundational technologies.” This move will make it tougher for companies in Chinese supply chains to source high-value added U.S. technology and can also be used to ban sales of components and technologies to China. In December 2018, China’s total imports fell to US$164.19 billion, a drop of 10% from last month and down 7.6% a year earlier, signalling China’s economic slowdown and the weakening of Chinese domestic demand.

 


The clamping down of Chinese Investments

 

Also passed was the Foreign Investment Risk Review Modernisation Act, specifically targeted to curb China from obtaining U.S. technology through investments and acquisitions. Acquisitions has been crucial to the economic development of China’s tech sector. This is reinforced by Xi Jinping’s new economic plan, ‘Made in China 2025’ stating,  “We will support enterprises to perform mergers, equity investment and venture capital investment overseas.” in 2017’s 19th Congress.

 

From 2015 to 2017, Chinese investors not only pumped their money into big names like Uber and Airbnb, they also invested into small, burgeoning U.S tech startups that worked on robotics, energy equipment and next-generation IT. This all took a turn last year, with Chinese companies completing just US$4.8 billion in new business acquisitions and investments in the U.S, down 84% in 2017 and 90% from in 2016.

Chinese Technology Companies’ investments in the U.S from 2015-2018

For example, if we looked into Chinese technology companies and its investments into U.S companies across all sectors, according to our analysis, from 2015 to 2018, investments have dropped by almost half.

 


Chinese Technology Companies’ investments in the U.S from 2015-2018

 

While tougher screening on investments and M&As, especially tech related companies that raise national security concerns "is unlikely to derail rebalancing or trigger a sharp growth slowdown in the near term. It would, however, probably lower China's potential growth - the speed limit for the economy - over the medium term. This will make it harder for China to rebalance the economy smoothly and stabilise its debt-to-GDP (gross domestic product) ratio," Mr Roache said.

 

Since it is unlikely that China will make any compromises on its industrial and technological goals, and equally unlikely for the U.S to stop stunting China’s technological advancements through tariffs and policies, it’s safe to say that trade wars, or more so, tech wars, is likely to persist for a period of time.

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