If you only scan the headlines, you could be forgiven for thinking that the US-China trade war is mainly about tariffs. After all, US President Donald Trump and trade-warrior-in-chief has called himself “Tariff Man.” And a tentative trade deal between Trump and Chinese President Xi Jinping (習近平) was mainly about tariffs, especially on items like cars.
However, the startling arrest in Canada of a Chinese telecom company executive should wake people up to the fact that there is a second US-China trade war going on — a much more stealthy conflict, fought with weapons much subtler and more devastating than tariffs. And the prize in that other struggle is domination of the information technology industry.
The arrested executive, Meng Wanzhou (孟晚舟), is the chief financial officer of telecommunications equipment manufacturer Huawei Technologies Co (華為) — and its founder’s daughter. The official reason for her arrest is that Huawei is suspected of selling technology to Iran, in contravention of US sanctions.
Illustration: Mountain People
It is the second big Chinese tech company to be accused of breaching those sanctions — the first was ZTE Corp (中興) last year. The US punished ZTE by forbidding it from buying US components — most importantly, telecom chips made by US-based Qualcomm.
Those purchasing restrictions were eventually lifted after ZTE agreed to pay a fine and it seems certain that Huawei will also eventually escape severe punishment. However, these episodes highlight Chinese companies’ dependence on critical US technology.
The US still makes — or at least, designs — the best computer chips in the world. China assembles lots of electronics, but without those crucial inputs of US technology, products made by companies such as Huawei would be of much lower quality.
Export restrictions, and threats of restrictions, are thus probably not just about sanctions — they are about making life harder for the main competitors of US tech companies.
Huawei has passed Apple to become the world’s second-largest smartphone maker by market share (Samsung Electronics Co is first). This marks a change for China, whose companies have long been stuck doing low-value assembly while companies in rich countries do the high-value design, marketing and component manufacturing. US moves against Huawei and ZTE might be intended to force China to remain a cheap supplier instead of a threatening competitor.
The subtle, far-sighted nature of this approach suggests that the impetus for the high-tech trade war goes far beyond what Trump, with his focus on tariffs and old-line manufacturing industries, would think of. It seems likely that US tech companies, as well as the military and intelligence communities, are influencing policy here as well.
More systematic efforts to block Chinese access to US components are in the works. The Export Control Reform Act, passed in the summer, increased regulatory oversight of US exports of “emerging” and “foundational” technologies deemed to have national security importance.
Although national security is certainly a concern, it is generally hard to separate high-tech industrial and corporate dominance from military dominance, so this too should be seen as part of the trade war.
A second weapon in the high-tech trade war is investment restrictions. The Trump administration has greatly expanded its power to block Chinese investments in US technology companies through the Committee on Foreign Investment in the US, which has already canceled a number of Chinese deals.
The goal of investment restrictions is to prevent Chinese companies from copying or stealing US ideas and technologies. Chinese companies can buy US companies and transfer their intellectual property overseas, or have their employees train their Chinese replacements.
Even minority stakes can allow a Chinese investor access to industrial secrets that would otherwise be off-limits. By blocking these investors, the Trump administration hopes to preserve US technological dominance, at least for a little while longer.
Notably, the EU is also moving to restrict Chinese investments. The fact that Europe, which has opposed Trump’s tariffs, is copying US investment restrictions, should be a signal that the less-publicized high-tech trade war is actually the important one.
The high-tech trade war shows that for all the hoopla over manufacturing jobs, steel, autos and tariffs, the real competition is in the tech sector. Losing the lead in the global technology race means lower profits and a disappearing military advantage.
However, it also means losing the powerful knowledge industry clustering effects that have been an engine of US economic growth in the post-manufacturing age. Bluntly put, the US can afford to lose its lead in furniture manufacturing; it cannot afford to lose its dominance in the tech sector.
The question is whether the high-tech trade war will succeed in keeping China in second place. China has long wanted to catch up in semiconductor manufacturing, but export controls will make that goal a necessity rather than an aspiration. And investment restrictions might spur China to upgrade its own homegrown research and development capacity.
In other words, in the age when China and the US were economically codependent, China might have been content to accept lower profit margins and keep copying US technology instead of developing its own. However, with the coming of the high-tech trade war, that codependency is coming to an end.
Perhaps that was always inevitable, as China pressed forward on the technological frontier. In any case, the Trump administration’s moves against Chinese tech — and some similar moves by the EU — should be seen as the first shots in a long war.
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