USA-China Tech War - And how trade wars now play out as tech-wars

The USA-China tech war

“Technology wars are becoming the new trade wars” (Garcia-Marcia and Goyal 2021)

How the tech war is playing out ->

Daniel W. Drezner (Drezner 2019) has argued that technological advancements alters the balance of power between nations, transforming both the nature of conflict and co-operation on the global stage. States leverage technological innovations to enhance their military capabilities, surveillance systems, and cyber warfare tactics; hence tech becomes the determinant of a state’s economic prowess and geo-political influence.

Strategic level of an asset depends on its importance, externality and nationalism (Ramanathan n.d.) - technology, has a high economic and military utility, uncordinated markets for it are not enough and has advantages to the states and its allies – hence fitting into the sweet spot of being an asset of strategic importance.

“Trade is insignificant. The bigger issue is technology, which leads to military and defence. That’s first and foremost, that’s the root of the problem of the trade war … Even secondary, perhaps, is the currency. So trade is really a tertiary issue.”, says Ronnie Chain, the Hong Kong property developer, and US citizen (Ma and Cheung 2019)

This is evident from the top 14 emerging technologies highlighted as being “national security risk” to USA, and represented in the visual below.

Figure 1: US Federal Register – Review of Controls for Certain Emerging Technologies
Source: https://merics.org/en/report/export-controls-and-us-china-tech-war

Figure 2: Trade liberalization in digital services is giving way to increased restrictions
Source: https://www.imf.org/external/pubs/ft/fandd/2021/03/international-cooperation-and-the-digital-economy-garcia.htm

 
Actions taken by both parties in the tech-war ->

·       Chinese growth in high-tech sectors such as ICT, 5G, semi-conductor has worried the US establishment from the time of the first Obama administration.

·       China itself has had a Made in China 2025 vision, launched back in 2015, to reduce its dependence on imported tech, by spending billions of dollars on wireless comms, robotics and micro-chips. (Mullen 2018) (Disis 2020)

·       From 2017 onwards, President Trump launched a open tech-war on China in the form of trade sanctions, investment & export control from US to China and restriction on exchange of tech-personnel. (Haiyong 2019)

·       The intensive pressure on Huawei, has been believed to be, by Chinese observers, to be an “asymmetrical war” cut in the same cloth (Zhaokui 2019). This extended much beyond Huawei, to also include other companies linked to the state govt of China – ZTE, Hytera, Hikvision, Dahua technology included.

“President Trump’s willingness to use Huawei as leverage in the trade talks with China has blurred the lines between US legal processes, the US–China trade war, and the quest for technological leadership.” (Schneider-Petsinger, et al. 2019)

·       The US aims to debilitate the Chinese state's ability to lead in its high-tech industrial policy transformation. The USA accuses China of stealing proprietary technology.  (Disis 2020)(Disis 2020) (Disis 2020)  However, China has made tremendous progress in ensuring intellectual property is respected within its borders, after its entry into WTO post-2001, and in fact an American Chamber of Commerce in China survey shows how “70% of firms felt that China’s enforcement of intellectual property” has improved. (Huang 2021) Their IP protection has resulted in foreign plaintiffs winning more than domestic ones, and also get higher damages than the locals (Sharafutdinova 2020) These have all been attempts by the Chinese state, to endear itself to the global high-tech space.

·       Foreign ownership restrictions - China’s restrictions on foreign ownership, through joint-venture stipulations and foreign equity limitations, is seen as pressuring technology transfer from American to Chinese companies. (Schneider-Petsinger, et al. 2019)

·       In its National Strategic Security document, the US govt. has openly talked about how China’s military modernisation and economic expansion, has a lot to do with the easy access to the US innovation economy (America 2017)

·       About 2/3rds of China’s exports to USA are intermediate goods, with the high value-added component being produced in Japan and South Korea and eventually assembled in China, for making products for American companies through the cheap labour in China. This too is now being replaced by multiple other destinations such as Vietnam, India and Mexico. (Lazarus 2023) (NA, BBC 2019) The US has its technological allies on its side – Netherlands and Japan joined it in export curbs for advanced semiconductor manufacturing equipments, and UK and other allies also joined it in taking away contracts from Huawei to help build the 5G network in these countries. To respond to this, China is also looking now at Germany and South Korea as potential replacement allies (Allen 2023)

·       China, itself, has not been quiet to these tariff wars on technology, playing out in the realm of international trade, as its curbs on rare earth minerals (like graphite, gallium and germanimum) exports to USA for its defense needs, is being seen as a point of critical retort – given that China itself controls majority of the processing and refining for these rare earth metals. The supply chain for these rare earth metals currently have China as a vital cog in its wheel. (Worstall 2023) (Lu and Iyengar 2023)

·       China has also hit American companies where it hits them the most. Attacking mergers or acquisitions led to Intel’s suspension of its acquisition of Tower Semiconductor. Then, it threatened Micron’s $3.3 billion sales to China by putting it under a cyber-security review.

·       The Chinese State Council’s semi-conductor policy (adopted nearly a year before Biden took office) described imports of foreign semiconductor manufacturing equipment as a “temporary” necessity until Chinese companies had sufficiently advanced to replace their foreign competitors. (NA, CSET - Center for Security and Emerging Technology 2020)

·       Despite these tariff barriers, when Biden came to power in 2021, US-China trade was at an all-time high. However following the “popular” domestic move of sanctions on China, executive orders during the time of Joe Biden (2021-2024) have continued the same trend of de-coupling from Chinese technology and making attempts to localise semi-conductor manufacturing through its CHIPS Act (Trueman 2023)

Outcomes of the tech-war ->

Beijing has assumed that de-coupling between USA and China for tech-dependence is “inevitable” (Bremmer and Kupchan 2020) The Eurasia group research, back in 2020, has predicted this to be at the core of risks of the future

Figure 3: Top risks as of 2020, by the Eurasia Group report
Source: https://www.eurasiagroup.net/live-post/risk-2-great-decoupling

Global governance and codes on science & technology, much in need, with the new race of Generative AI, will take a further hit due to the ongoing US-China trade war. The battle over TikTok in the US Congress and social media debates, has clearly shown that “it is becoming harder to be a truly global tech platform” (Disis 2020)

“Firms must choose between giving up on part of the world, or decentralizing their operations to such a point that the company is essentially two or more different entities.”- said Michael Witt, a senior affiliate professor of strategy and international business at INSEAD, the international business school. (Disis 2020)

Lack of tech-talent and long-term funding continues to plague the attempts to localise chips-manufacturing for USA (Mearian 2022)

Dan Wang, a Visiting scholar at Yale Law School’s Paul Tsai China Center, highlights that “China’s rise in high-tech is not inevitable”, (Wang and Agrawal 2023) as along with multiple other challenges that China faces today w.r.t. its real estate crisis and a demography that is no longer its dividend, China will indeed have many more challenges to face off with in the coming years and decades.

The EU has been at the forefront of pioneering legislation when it comes to anti-trust practices, artificial intelligence as also data protection guidelines - The time is ripe for the US and China to also follow suit.

Reframing the international rules that address the economic role of the state – With state-directed/owned enterprises (China) or state-fed enterprises (America) getting huge investments, the WTO regime which balks at the sign of an industrial policy, will have to re-think its approach to the same. (Ciuriak 2019)

 

Figure 4: BCG Analysis of potential scenarios for re-settling US-China tech trade
Source: https://www.bcg.com/publications/2019/us-china-tech-trade-war

The above is a matrix by BCG from back in 2019, but as much applicable today. The case of “true reciprocal access” could be because of the market forces itself shifting towards countries like Vietnam, Brazil and India. “Managed trade” would be the two countries dealing one on one in resolving issues, while “Walls and drawbridges” would risk each individual dispute become a flashpoint or a bargaining chip of negotiation. A high intensity tech cold war would only come out of escalating restrictions, a full de-coupling, cyber espionage and would certainly lead to fragmentation of the hopes of any global tech standard or codes.

 USA seems to be entering a phase of “creative insecurity”, which has been a result of the international relations challenges, its own domestic economic factors and the multiple military challenges externally – also with China in the South China Sea, resulting in ramped up investments into science & technology, and its associated industries becoming its focal point not just for its international relations, but, also its domestic politics.

And if all of these recent government policies and actions are an indication, then it does point to “technology” turning into the new arms race of geo-political dominance; with USA and China playing key roles in it.

 
________________

Bibliography

Allen, Gregory C. 2023. Time. 20 July. Accessed March 25, 2024. https://time.com/6295902/china-tech-war-u-s/.

America, National Security Strategy of the United States of. 2017. The White House. December. Accessed March 25, 2024. https://www.whitehouse.gov/wp-content/uploads/2017/12/NSS-Final-12-18-2017-0905-2.pdf (Original source - currently not accessible).

Bremmer, Ian, and Cliff Kupchan. 2020. Eurasia Group. 06 January. Accessed March 25, 2024. https://www.eurasiagroup.net/live-post/risk-2-great-decoupling.

Ciuriak, Dan. 2019. Centre for International Governance Innovation. 11 January. Accessed March 25, 2024. https://www.cigionline.org/articles/trade-war-fuelled-technology/.

Disis, Jill. 2020. CNN. 10 July. Accessed March 26, 2024. https://edition.cnn.com/2020/07/10/tech/us-china-global-tech-war-intl-hnk/index.html.

Drezner, Daniel W. 2019. “Technological change and International Relations.” International Relations, 1-17.

Garcia-Marcia, Daniel, and Rishi Goyal. 2021. International Monetary Fund. Spring. Accessed March 25, 2024. https://www.imf.org/external/pubs/ft/fandd/2021/03/international-cooperation-and-the-digital-economy-garcia.htm.

Haiyong, Sun. 2019. “U.S.-China Tech War - Impacts & Prospects.” China Quarterly of International Strategic Studies, Summer: 197-212.

Huang, Yukon. 2021. Carnegie Endowment for International Peace. 16 September. Accessed March 25, 2024. https://carnegieendowment.org/2021/09/16/u.s.-china-trade-war-has-become-cold-war-pub-85352.

Lazarus, Leland. 2023. The Conversation. 18 September. Accessed March 26, 2024. https://theconversation.com/india-and-vietnam-are-partnering-with-the-us-to-counter-china-even-as-biden-claims-thats-not-his-goal-213329.

Lu, Christina, and Rishi Iyengar. 2023. Foreign Policy. 06 July. Accessed March 26, 2024. https://foreignpolicy.com/2023/07/06/china-tech-us-metal-export-yellen-gallium-germanium/.

Ma, Josephine, and Tony Cheung. 2019. How China misread the US on trade during Donald Trump's early days, according to Ronnie Chan. 20 January. Accessed March 25, 2024. https://www.scmp.com/news/china/diplomacy/article/2182783/ronnie-chan-donald-trump-and-what-china-got-wrong-trade-war.

Mearian, Lucas. 2022. Computer World. 12 October. Accessed March 26, 2024. https://www.computerworld.com/article/3676128/will-the-chips-act-really-bring-back-semiconductor-production-and-tech-jobs.html.

Mullen, Jethro. 2018. CNN. 18 December. Accessed March 26, 2024. https://edition.cnn.com/2018/12/17/tech/china-tech-us-future/index.html.

NA. 2019. BBC. 11 December. Accessed March 26, 2024. https://www.bbc.com/news/business-50733120.

—. 2020. “CSET - Center for Security and Emerging Technology.” CSET - Center for Security and Emerging Technology Website. 02 September. Accessed March 26, 2024. https://cset.georgetown.edu/wp-content/uploads/t0195_IC_software_policy_EN.pdf.

Ramanathan, Aditya. n.d. “Technology and National Power (Class Notes from Takshashila Institution PGP in Public Policy).”

Schneider-Petsinger, Marianne, Dr Jue Wang, Dr Yu Jie, and James Crabtree. 2019. chathamhouse. 07 November. Accessed March 26, 2024. https://www.chathamhouse.org/2019/11/us-china-strategic-competition/behind-us-china-trade-war-race-global-technological.

Sharafutdinova, Zukhra. 2020. Asia Power Watch. 20 December. Accessed March 25, 2024. https://asiapowerwatch.com/the-intellectual-property-aspects-of-the-us-china-tech-war/.

Trueman, Charlotte. 2023. Computer World. 11 August. Accessed March 25, 2024. (https://www.computerworld.com/article/3704610/biden-fuels-tech-trade-war-with-china-banning-ai-chip-and-quantum-system-investments.html. .

Wang, Dan, and Ravi Agrawal. 2023. Foreign Policy. 20 June. Accessed March 26, 2024. https://foreignpolicy.com/live/inside-the-u-s-china-tech-war/.

Worstall, Tim. 2023. The Diplomat. 10 October. Accessed March 26, 2024. https://thediplomat.com/2023/10/dont-worry-about-chinas-gallium-and-germanium-export-bans/.

Zhaokui, Feng. 2019. “Globalization of Science and Technology.” China’s Choice and Response Global Review, 69.