What’s Next for the US-China Tech War

Chinese manufacturers of technology hardware – from telecoms equipment to drones – make a significant proportion of their revenue from the international market. In the case of Huawei Technologies, in 2019, this was about 372 billion renminbi (US$55 billion), or 41 percent of the total (down from 48 percent in 2018), despite crippling US sanctions. Drone maker DJI makes about 70 percent of its sales overseas. Both companies are on Washington’s blacklist.

Meanwhile, software makers, notably WeChat (owned by Tencent) and TikTok (owned by ByteDance), have been under threat from US President Donald Trump and his administration, which ordered a ban on further downloads in the US starting on September 20. But the two companies avoided that sanction – ByteDance forged a Trump-blessed deal with Oracle and Walmart to sell TikTok’s US operations, while a judge in California blocked the action against WeChat.

The big question now is: Who will be next? And does the US campaign against Chinese technology companies continue to presage a new Cold War between the two strategic competitors?

To be sure, software makers have some immunity to American attacks due to their focus on the domestic China market. For example, the proportion of non-China revenue at voice recognition software maker Iflytech is less than 1 percent. At Tencent, gaming accounts for 30 percent of sales, but less than a quarter of that is generated outside the domestic market.

The situation at TikTok is more difficult. In 2019, the short-video platform had at least 50 million active users in the US market (out of 700 million globally). The forced sale could be complicated. The latest catalogue of restricted export technologies published by the Chinese government on August 28 includes personalized information from data analysis. This means that the sale of TikTok’s US operations would require seller ByteDance to apply for an export permit from the Chinese government. TikTok’s core algorithm cannot be a part of the deal. Another valuable asset is the application’s platform and user base in the US, Canada, Australia and New Zealand. ByteDance, with 2019 turnover estimated at over US$15 billion, could face heavy losses and would need to invest more in the domestic market.

The next battlegrounds

A much bigger threat to Chinese companies is the looming unavailability of microchips. The Trump administration’s plan for tighter sanctions would see Chinese companies cut off from the supply of US-made chips. Already, to comply with US rules, Taiwan wafer maker TSMC halted further shipments to Huawei this month.

Domestic market demand is the key for Huawei. About 600,000 5G base towers will be constructed in China in 2020 alone, half the world’s total. And then there are projects under the 1-trillion-renminbi (US$147-billion) New Infrastructure Plan that includes ultra-high-voltage projects, new energy vehicle chargers, data centers, artificial intelligence, industrial internet, high-speed railways and intercity railway transit.

US suppliers such as Qualcomm and Intel as well as Japan’s Murata and Germany’s Infineon will lose out as China develops more of its ownchipmakers. Chinese ICT products are cost effective and of high quality. As with many goods that China has produced over the decades, once in markets around the world, they will help consumers and households save a significant amount of money and time.

The US could next target cloud computing providers. Most cloud providers are also leading artificial intelligence players, as they employ a lot of data engineers. Almost all applications and data are integrated and stored in the cloud. In ICT, cloud and communication equipment (e.g. 5G or optical fiber) are the equivalent of train stations and high-speed rail in physical infrastructure.

The challenge of social inequality in the US

What is behind Washington’s weaponization of technology competition?

The US is facing a dual challenge: protecting domestic industry and promoting more open and fair trade (as Washington defines the term) globally. They are contradictory goals. The Trump administration has pursued the ruination of the existing global trade order as the solution to the domestic challenge. In this effort, the US launched a trade, technology and financial decoupling from China and the world. In 1990, the world’s most valuable companies were mainly banks and industrial companies. In 2020, technology now dominates. But whether industrial or technological, giant multinational companies benefit from global markets and the freer flow of capital, labor and raw materials.

Between 2002 and 2019, US per capita disposable personal income rose  76.76 percent from $28,153 to $49,763. In China during the same period, disposable income of urban residents increased from 7,703 renminbi ($1,122) to 30,733 renminbi ($4,477), a surge of 298.98 percent. By 2019, China had reduced the number of its people living under the poverty line to 5.51 million from 100 million in 2012 . Its approaches to globalization, free trade and investment in rural areas have created more opportunity and reduced inequality more than the US has managed to do in recent years.

Consider Hongshan village, 24 kilometers from Chongqing: It boasts a high-speed train station, a 5G network, a data center and cloud services, unmanned aerial vehicles for use in agriculture, widespread deployment of Internet-of-Things sensors, and a thriving e-commerce market. Annual per-capita income in Hongshan is about US$2,900. China still has a long way to go to eliminate poverty but is on the right track.

Time to get the house in order

The underlying challenge for the US is not China but its own social inequality and power structure. The Trump administration set itself up as the guardian of the people, taking aggressive action to protect US interests. These have included economic sanctions, political threats, demonization of Chinese and other foreign businesses, military provocation, and weaponizing the idea of decoupling while rejecting as unfair the very global order for which the US was the main architect. Washington has also threatened to impose extra taxes on US multinationals, pressured the Federal Reserve to maintain low interest rates, and suppressed information about the Covid-19 pandemic.

All this has to do with winning a presidential election, not ensuring prosperity. The US has no long-term plan to save jobs or protect families. Globalization has decreased living costs through cheaper products from overseas markets, opened more markets for US businesses, and brought more global talent to the US. Protectionism, as Trump has advocated, may bring companies or production back to the US – but at what cost? Where will they get the skilled workers? If the US private and public sectors buy more 5G equipment from Nokia, Ericsson or Samsung, denying sales to Huawei and ZTE, how does that improve national competitiveness when it means higher costs, delayed digitalization and unstable signals for users?

The US government could invest more in research and development and training. Cost-effective infrastructure is needed to attract foreign direct investment. More people with higher education and, as a result, higher salaries will mean stronger purchasing power to help the US domestic economy flourish. And a more inclusive rather than confrontational society would attract the global talent that would maintain the international competitiveness of US universities and companies.

Meanwhile, the Trump administration’s confrontational strategies on issues requiring a concerted multilateral approach to address – climate change, public health, global trade – have weakened the global status of the US and trust with other countries. Appeals to nationalism and calls for firms to bring jobs back home are not serious policy but mere sloganeering.

A Cold War is avoidable

The US challenge can only be addressed by domestic reform. Yet there is no indication that Washington will adopt a balanced strategy. Even well-educated American elites keep silent about social inequality and its consequences. Reversing its domestic course in the short term is too difficult, especially given the country’s divided politics. It has been easier to forge a consensus on shifting blame abroad – to China, in particular.

But is a Cold War truly unavoidable? A new US president taking office in January could open a fresh chapter in relations between the two countries. While the China-US geo-tech competition may be fierce now, this is but one episode in their shared history. The dynamics of the relationship could change quickly.

For China, the challenge is to keep the doors of its market open. China’s leaders need to pursue national reforms to reduce systemic financial risks, social inequality, and environmental pollution. Compared to other markets, the Chinese economy still offers the biggest opportunities. China has no intention to replace the US as the dominant economic and strategic power; its focus, at least for the next few decades, is – and must be – on its domestic challenges. The US will remain indispensable for dealing with global issues. Rather than fight a Cold War, the US and China should focus on building trust so that they can have a working partnership that will be effective in combatting the most pressing tasks on the international agenda, including developing rules of governance for the digital world.