Despite the fanfare, the phase 1 agreement that the US and China signed last week does not represent a truce in the ongoing trade “war”. It is not even a temporary ceasefire, as tariffs mostly remain in place and there is no indication how or when they will be lifted. The deal is at best a waypoint in the increasingly adversarial relationship between the world’s only superpower and its prospective challenger.
China promised to buy an additional $200 billion of US agricultural and energy products in two years, but it is hard to see how the Chinese economy can re-direct trade patterns of such magnitude in such a short period. As one US think tank expert told me, it’s not even clear if the US has “that much farm and energy stuff to sell” in the first place. China also solemnly promised not to steal intellectual property from high-technology companies, but how this will be enforced remains an open question. Moreover, Beijing astutely refused to make any commitment on hacking and cyber aggression, taking refuge in the argument that this is not a trade issue. In return, the US agreed to hold back from further increases in tariffs on Chinese goods.
While the optics of the deal gives US President Donald Trump something to boast about in his re-election campaign, the US has used the “constructive ambiguity” to acquire leverage over China. The US is quite likely to use the terms of the deal to press Beijing on a host of issues covered under the deal, with each item a potential pressure point. Beijing knows this, but has little choice in the matter at this time. In the coming years, we can expect China to work on ways to resist and deflect US demands over the terms of trade. This is 21st century’s first major international conflict, and it’s not going to end soon.
Technology is already a crucial front in this conflict. Just two days before the signing of the phase 1 deal, US secretary of state Mike Pompeo was in San Francisco talking to Silicon Valley grandees, to “remind each of you as Americans, as citizens of a free nation, that it is increasingly at risk from Chinese actions that may undermine the very freedom that you have to build your business.” His speech is more revealing of US strategy than anything else that has come out of Washington in recent times.
Arguing that both sides of the political aisle “now see China for what it is, not what we wish it would be”, he went on to compare the current situation to World War II and 9/11, when US companies had put patriotism ahead of pure capitalism.
He quoted General Joseph F. Dunford, the former chairman of the US Joint Chiefs of Staff as saying that Google’s work in China is indirectly benefiting the Chinese military. The concern that China will use technology developed by American companies to acquire military capabilities that will then be used to challenge the US is driving Washington’s policy. We can expect this techno-political competition to dominate the international affairs over the next decade.
The US has already imposed severe constraints on technology supply chains that involve sales of semiconductors and components to China. Over 200 Chinese entities have been placed on a blacklist, including telecom equipment manufacturers like Huawei and ZTE, artificial intelligence companies like SenseTime, Megvii, Yitu and iFlytek, and surveillance system makers like HikVision and Dahua Technology. While the ostensible reasons for their blacklisting is national security and human rights, isolating some of China’s most competitive technology firms from the global supply chain will set them back, at least in the short-term.
In response, China plans to increase domestic production of key components, especially semiconductors, from around 30% now to 75% by 2025. That is an impressive target, but the economics are such that even China will find it extremely difficult to break into the leading edge semiconductor manufacturing business. Last month, the Central Office of the Chinese Communist Party ordered all government offices and public institutions to replace their computer equipment with those produced by domestic manufacturers. The transition is to be completed by 2020. The hardware itself is easy to replace, but changing operating systems and application software will not be easy. Think of it as a Y2K-kind of project that has to be executed without the benefit of an army of Indian software engineers.
To the extent that an efficient, global supply chain will get decoupled as a result of the US-China technology war, we will see deadweight losses, higher costs and higher carbon emissions. Now, asking corporations to be sensitive to the national interest is a good thing, but it will come at the cost of dissonance among shareholders, foreign employees and customers. It will become even more complex for technology firms—not just Chinese or American ones—to deal with domestic and international regulators.
New Delhi must realize that at least in the technology space, India’s interests are better aligned with those of the US. So far, due to India’s disinterest, Vietnam has been the primary beneficiary of the ongoing US-China trade war. The coming technology war is an opportunity for India as US companies shift their supply chains. It would be a shame if we let it go.
Nitin Pai is co-founder and director of The Takshashila Institution, an independent centre for research and education in public policy