Forget tariffs, tech will be the key battleground in trade war
Economists at National Australia Bank (NAB) have downplayed the impact of trade tariffs between the US and China, saying instead that the key battleground will be technology and intellectual property (IP).
Tariff barriers may “shave a few percentage points off global GDP” in the very worst case scenario, but are relatively immaterial in the grand scheme of things, Christy Tan, head of markets for Asia at NAB, told a press conference in Hong Kong yesterday.
“The trade deficit and US$200bn [to be cut off the US trade deficit] by 2020 is just a number. At the end of the day, if China is not buying from the US, it’s buying from Brazil, or South Korea, for instance. If the US is not buying from China, it’s not going to just manufacture locally, it will shift its demand to India, Sri Lanka, etc. The key issue is technology and IP.”
China is looking to increase its role as an important player in tech industries such as electric vehicles and artificial intelligence (AI).
President Xi Jinping has clearly laid out plans for China to become a leader in innovation, spearheaded by the “Made In China 2025” initiative to upgrade the country’s industry. It’s been described by the Council on Foreign Relations as “the real existential threat to US technological leadership”, but according to Tan, it is “not up for negotiation”.
Meanwhile, the US has long harboured concerns over China’s alleged IP theft, as well as its heavy government support for such industries.
Dinny McMahon, a fellow at the MarcoPolo programme of the Paulson Institute and author of the recent book China’s Great Wall Of Debt, tells GTR that China will replicate the heavy subsidies it applied to traditional industries in the technology space over the coming years.
“China’s vision of how it becomes a rich nation, how it builds new drivers of growth, is a big bet on new industries: robotics, electric vehicles, semiconductors. It wants a forced march to become a global leader in those industries, and that requires the same techniques it applied to heavy industries in the past,” he says.
These opposing stances appear to place the superpowers on a path for further collisions.
The US has already hit Chinese smartphone maker ZTE with paralysing sanctions, barring it from importing from US companies. As a result, China’s second-largest telecoms company has this week been forced to halt major operations, after being banned from purchasing the Google Android software and Qualcomm chips on which it depends.
ZTE was penalised after breaking the terms of previous sanctions laid on after it was found to be shipping goods to Iran and North Korea, then subsequently lying about it.
Huawei, China’s largest smartphone company, appears to be next in the US’ crosshairs. AT&T and Verizon have already dropped plans to sell Huawei phones, amid allegations of stolen IP, while it is also alleged to be under investigation for flouting US sanctions on Iran.
The US government has also blocked the sale of a number of US companies to Chinese buyers, including the proposed takeover of Moneygram by Alibaba-owned Ant Financial.
If further sanctions are handed down, Tan expects an immediate retaliation.
“China responded immediately [to ZTE sanctions], by hiking the tariffs on sorghum by 178.6%. China is making its presence felt, sending the message clearly that if you hit tech and IP, there will be retaliation where it hurts quite badly, the US agri sector. Steel and aluminium are small issues in the grand scheme of things. Tech and IP is something that is going to be long drawn,” she says.
As it stands, tit for tat tariffs have seen the US government place levies on products ranging from washers and solar panels to aluminium and steel. In addition to the whopping levy on sorghum, a cereal used in livestock feed, China has retaliated with tariffs on products such as fruits, nuts and frozen pig parts.
In high-level trade negotiations which are set to resume next week, the US is demanding that China cut its trade surplus with the US by more than US$200bn – the logic of which was questioned by NAB analysts at the briefing.
“It’s hard to frame a trade negotiation in that way, trying to put a numerical value on reducing your bilateral trade deficit. They are pretty meaningless things, they’re a consequence of savings and investment decisions by thousands of people. So the idea that you can make it some numerical number by lowering it by US$200bn is not an economic reality. No economist would frame it like that,” said Peter Jolly, global head of research.take me back