Trade war with US may push China to innovate

Trade war with US may push China to innovate

People walk past a Huawei retail store in Beijing on May 23, 2019. (AFP)

When the Trump administration placed Huawei on the so-called “Entity List,” it was the ultimate sign that US-China trade skirmishes had developed into a full-blown trade war — or, more precisely, a fight for who will dominate the technology of the future. US companies will no longer be able to do business with the Chinese telecoms giant without obtaining a government license. The same holds true for foreign companies who own proprietary technology of US origin, like the UK’s Arm Holdings, which is owned by Japan’s SoftBank.

US companies were quick to respond, with Google announcing it would no longer grant Huawei access to its operating system or apps for new phones. Intel, Qualcomm and Broadcom, who sell their chips to Huawei, followed suit. On Wednesday, Arm Holdings joined the list of companies who have ceased supplying Huawei.

The circle goes well beyond Huawei’s smartphone and tablet offerings, which accounted for 48 percent of its business last year. The company is a major manufacturer of hardware and software behind the advanced 5G technology, which will enable the internet of things, driverless cars and artificial intelligence (AI). Several telecoms operators and governments in Europe find themselves in a bind as to what to do about their relationship with Huawei.

Like most things, there are many sides to this story. And, in the long run, the US action may be counterproductive.

US intelligence agencies have been worried for a long time about China’s ability to spy with the help of its technology. They have a point. Even if Huawei reassures clients that it has no connection with the government, Xi Jinping’s civil servants have a long arm. China is still an authoritarian regime and the government can insert itself into any activity at will. Google’s search engine is a point in case: It is no longer available in the country due to government censorship rules.

The Trump administration also has a case when it criticizes the forced transfer of technology and intellectual property by foreign companies investing or operating in China. This issue has apparently got worse over the last two years.

Still, banning Huawei may be shortsighted and may well backfire in the medium term. The company is a major client of Intel, Qualcomm and Broadcom. Some of them export as much as 50 percent of their chip production to China. The three-month grace period on the Huawei ban, which the US government extended on Monday, might help some. However, it will not be easy for these US companies to redirect their production and it will be near-impossible for Huawei to realign its entire supply chain within months.

It is disconcerting that the US-China war on trade and technological dominance is fast spinning out of control.

Cornelia Meyer

The world has become an interdependent place with highly integrated supply chains. Nowhere is that truer than in the technology sector between China and the US.

At this point, the US may have the upper hand in terms of technology by the virtue of Apple and Google having pretty much the only functioning operating systems. Will it be easy for the Chinese to engineer their own operating system? It most certainly will not. The process to get there will be painful and fraught with errors and bugs that need to be ironed out. However, necessity has been the mother of many inventions.

One should also not underestimate Chinese ingenuity and technological skill — particularly in light of the “Made in China 2025” strategy, which heavily focuses on technology, the economy 4.0, robotics and AI. Once China Inc. has a new operating system, it will be competing with Goggle and Apple. This alternative system may well have a captive market in the “Belt and Road” sphere of influence. So far, about 60 countries collaborate on the Chinese initiative, which is aimed at recreating the trade routes of the ancient Silk Road.

But the issue goes well beyond operating systems. Necessity will force China to build an independent ecosystem for tech companies, which will be a force to be reckoned with.

There are other considerations too. Rare earths have become “the new gold” as far as technology companies, particularly chip manufacturers, are concerned. And China has by far the largest deposits of these precious minerals, which could easily be “weaponized” as a bargaining chip in the raging trade war.

Let us also not forget about the thousands of US companies who have invested in and operate in China. They are not just complaining about higher tariffs, but also about longer delays at customs, in licensing, and approval times. The two countries have highly integrated supply chains. They function well when the going is good, but they are fragile in the face of geopolitical tensions such as trade wars. Both countries stand to lose in equal measure.

In the end, the question has to be whether outright confrontation is a wise step to address concerns over national security and the ownership of technology and intellectual property. The laws of physics suggest that a strong action will result in an equally strong reaction. Psychology suggests that people do not forget perceived aggression easily — especially not when they are Chinese and have very long planning horizons, and even longer memories.

It is disconcerting that the US-China war on trade and technological dominance is fast spinning out of control. Bilateral tit-for-tat actions will not resolve issues and may potentially aggravate them down the road. Donald Trump is skeptical of multilateral mechanisms and prefers settling issues on a bilateral basis. In an interconnected world, that may not yield optimal solutions. It might be better to address the US concerns on security, technology and trade with the help of multilateral frameworks, such as the World Trade Organization and other relevant bodies.

The US created the post-Second World War system of multilateral institutions aimed at creating a fair system for countries to interact, and in which to resolve issues peacefully. The current bellicose rhetoric and confrontational style threatens to undo that precise system. For sure the Pax Americana had its faults, but fairness was the (admittedly sometimes elusive) aim. The current system is the proverbial “devil we know.” It will be interesting to see what evolves if we don’t put an end to the acrimony.

  • Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources
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