Technology at the Heart of US–China Trade Dispute

China is willing to concede some territory on trade in order to advance its technological ambitions
By Diana Choyleva, Enodo Economics
May 8, 2018 Updated: May 16, 2018

This year’s U.S.–China trade skirmishes could well be the start of a much more profound schism in the world economy.

Beijing has no intention of abandoning its “Made in China 2025” plan—the real target of President Donald Trump’s threats and actions. The comprehensive upgrade of China’s industry and focus on developing advanced technology is the cornerstone of regime leader Xi Jinping’s economic vision.

A U.S. government delegation returned from its brief Beijing visit empty-handed, as the high-level talks failed to break the deadlock. But China is not yet ready to stand up fully to the United States, so Beijing will try to limit the damage Washington’s actions could do to its economy and technological ambitions by offering some trade “wins” as November’s mid-term elections draw nearer.

China’s leaders have no choice but to talk tough. Yet their actions suggest a less confident stance.

At an unprecedented three-day seminar the week before the U.S. visit, organized by Tsinghua University in Beijing, a number of senior officials and influential advisers set out the Chinese regime’s position in detail to selected foreign journalists and other analysts. Chinese leaders are not prone to explaining themselves to the wider world, so it seems to me that this initiative is not an expression of strength.

Beijing realizes that the West has begun to look at China differently. It is willing to offer concessions in boosting its imports from the United States and opening its financial sector to foreign players. But at the same time, Beijing has also responded by fast-tracking the buildup of its own capability in high-tech industries and their supply chains.

Semiconductor Push

China’s electronics sector stands out as the one with the highest foreign content. Policymakers worry about relying on foreign chips. China currently imports 80 percent of the semiconductors it uses. The global supply chain for the chip industry is widely dispersed but concentrated in the West. So Beijing is loath to see the rest of the world, in particular, Europe, following Trump’s tougher stance toward China.

On the semiconductor front, Beijing has just achieved a significant breakthrough. According to the Nikkei Asian Review, a joint venture between Arm Holdings, which is controlled by Japan’s SoftBank, and its Chinese partners took over the British chip company’s operations in China at the end of last month.

The joint venture is controlled by Chinese investors and will be responsible for handling all local licensing and royalties. Arm is one of the most influential chip technology providers in the world. The company’s chip blueprint is used in roughly 90 percent of mobile devices globally.

At the same time, China’s state-backed semiconductor fund is near to closing a 120 billion yuan investment round for a second fund to support the domestic chip sector and help cut reliance on imports.

In a further advertisement of its ambitions, China is aiming to produce its own optoelectronic communication chips for commercial use by 2025, officials said at the opening of a national information and optoelectronic research center in Wuhan. They made the announcement during a visit to Wuhan by Xi, who called for China to become self-sufficient in emerging technologies.

Technological Battle

These developments come hard on the heels of Washington’s seven-year ban on a leading Chinese telecoms equipment manufacturer, ZTE, from using American components (although Trump has recently made some concessions), as well as its investigation on a second telecoms giant, Huawei.

The United States has also blocked a number of prospective semiconductor deals and is considering measures to block Chinese citizens from performing sensitive research at American universities and research institutes, over fears they may be acquiring intellectual property.

At the Tsinghua seminar, The New York Times reported, one subject was repeatedly avoided: whether China might try someday to link trade disputes to national security issues.

But this present conflict is clearly about more than just trade and the U.S. trade deficit with China. The United States is particularly concerned that China will steal a march over it in the area of machine learning and artificial intelligence, because Beijing is able to collect and manipulate vast volumes of data without the privacy concerns that constrain Western governments and companies.

Technology is set to be the main U.S.–China battleground for years to come. Given that the Chinese and the Western economic models are unlikely to converge for the foreseeable future, the risk is that globalization will fracture.

Diana Choyleva is the chief economist at macroeconomic consultancy Enodo Economics.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.