US-China Trade War: It is not about Trade, not about Trump, but about Innovation


66 - US-China Trade War: It is not about Trade, not about Trump, but about Innovation

The escalation of tariffs between China and the United States isn’t really about trade at all. “Manageable, orchestrated trade skirmishes” is perhaps the most appropriate description. But when it comes to a headline, “trade war” is so much better.

Some observers agree it is not a trade war but they misinterpret the real intention of Trump’s diplomatic move. They assume that the US administration’s primary goal is to create a deficit-reducing trade with China so that Trump could crow about it in front of his blue-collar voter base ahead of this year’s midterm elections.

If that were the case, it would make no sense for Washington to initially ban American companies from selling components to ZTE for a period of seven years, and now use it as a negotiating chip to force China to step back. After all, the prohibition imposed on ZTE has nothing to do with international trade. It is all about the control of its core technology and the leading position in innovation in the 21st century. If you dig just below the surface of “trade war” tweets, you’ll easily find out the administration’s focus on China’s growing innovation ability is quite obvious – “China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation…” – nothing about steel or manufacturing jobs at all.

Recently, this view has been reinforced by hardliners within the US national security establishment, who worry that continued forced technology transfers and vast Chinese governmental subsidies would harm the US technological edge over China, and ultimately shake its military dominance over the world. However, while US is currently trying to force a change in China’s whole economic and industrial policy approach, China gave US the exactly opposite result. Beijing shows every sign that it will respond to US immature actions by intensifying its Made in China 2025 import substitution program that allocates large sum of state subsidies worth thousands of billions of US dollars on favored industries in order to compete globally in emerging hi-tech industries such as artificial intelligence and robotics. According to Goldman Sachs, China intends to invest around $150 billion in AI by 2020. It is a looming enormous advantage to China, as over the period 2012-2016, the United States has much bigger advantage with its AI investment worth of $18 billion, when China only spent $2 billion at that time.

661 - US-China Trade War: It is not about Trade, not about Trump, but about Innovation

Nevertheless, so far Washington fails to have China scrap subsidies or open its markets. Beijing, on the contrary, has doubled down on centrally planned mercantilism to accelerate its steps towards an emerging scientific power. Such a response will undoubtedly build a self-reinforcing feedback loop that inevitably exacerbate the escalating tensions between the two largest world economies.

  • How will it evolve?

The stakes of the trade spats between China and the U.S. are much higher when the future of innovation is involved. Now “who wins” in innovation is not our main focus, because the whole world will benefit from technology development wherever it comes from. Furthermore, it is apparent that the U.S. and China are complementary where innovation is concerned. The U.S. is superior in incubating innovation, while China is adept at scaling it. This makes cooperation much better than conflict.

The problem is in the current situation, the economic competition bleeds quickly over into concerns about military and security competition. Take cyber security as an example. The advanced technology makes industrial espionage possible and puts on more risks about personal data security (think about Facebook data breach in this April). In reality, majority technology will eventually fall under “dual use” rubric, playing a significant role in both commerce and security. The underlying China-U.S. competition over global pre-eminence in innovation will only intensify even after the recent trade tensions have faded.

Calling it a trade war is not only misleading, but largely underestimates what is really going on between the rising power (China) and the incumbent power (the U.S.).


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