U.S.-China Trade War Intensifies Over Technology Disputes
By Jack Wu, Executive Director
Can the world’s two largest economies find a mutually beneficial way to exchange their goods and technology, or will they keep antagonizing each other?
After trade talks between the U.S. and China collapsed May 10, with both sides raising tariffs in quick succession, prospects for a trade agreement, months in the making, suddenly appeared dim. But underneath both sides’ tough posturing and national pride lie economic realities, and as the consequences of tariffs set in, the two nations may be more motivated to settle their differences.
The stakes extend well beyond traditional concerns about manufacturing and agricultural costs. Behind the scenes is a battle between two superpowers over which will dominate as transformative technologies including artificial intelligence, machine learning and 5G mobility are rolled out across the globe.
The Trade Deal That Wasn’t
Before the latest round of talks in Washington, both sides seemed close to an agreement and were even arranging for a signing ceremony. But the deal started to unravel shortly before talks began, with the U.S. accusing China of reneging on earlier commitments surrounding technology transfer and intellectual property protection. Another sticking point occurred when the U.S. refused to rescind the tariffs already in place, as the Chinese delegation reportedly had expected.
Tensions escalated after U.S. President Trump tweeted a threat to increase tariffs on $200 billion of Chinese goods from 10 percent to 25 percent unless China stopped backtracking on its prior agreements — a threat that was carried out on May 10. Trump also said the U.S. is considering new tariffs on an additional $325 billion of Chinese goods.
Within days, China said it will impose tariffs of its own, ranging from 5 to 25 percent, on $60 billion worth of U.S. goods.
The Washington talks followed a December meeting of Trump and Chinese Premier Xi Jinping in Buenos Aires, in which Trump offered to suspend last year’s tariffs if American business concerns were met. When that didn’t happen, all bets were off.
Trump has said he is in no rush to make a deal and the additional tariffs will bring billions of dollars in revenue to the Treasury Department.
But the additional revenue, if it materializes, will come from the pockets of American businesses that import Chinese goods and parts. They may pay the tariffs initially to keep up with existing production cycles, but could delay further import plans as they wait to see how the trade war shakes out. If the tariffs stay in place, some may decide to shift manufacturing to Vietnam or Malaysia, where labor costs have become lower than they are in China.
The tariffs will undoubtedly hurt China’s exports. But they will also have negative effects in the U.S. Apple blamed a first-quarter revenue decline in part on the trade war, and Caterpillar has said Chinese tariffs cost it more than $100 million in 2018. The effect is multiplied when businesses pass the cost of tariffs to consumers. An analysis by Goldman Sachs economists shows that is already happening.
On the surface, America’s adamant stance may seem incongruous, especially coming from a pro-business president. But behind it is a broader effort to strengthen the position of U.S. technology companies at a critical moment.
The Technology Arms Race
U.S. companies have long complained about forced technology transfers and a lack of respect for intellectual property laws in China. They also face limitations that are particularly onerous for companies dealing in big data analytics and cloud computing.
While Chinese companies such as Alibaba can operate freely in the U.S., their counterparts in China are required to form joint ventures with local companies. Their ownership is capped at 50 percent. They are barred from setting up their own data storage, networking and other infrastructure and are not allowed to move the data they collect overseas.
For technology companies, analyzing data about how products are used is key to developing innovations. It is also critical to machine learning, which requires massive data sets to “teach” algorithms to respond in ways that mimic the human brain. China’s enormous population and its lack of data privacy constraints could give it an outsize advantage in machine learning, especially if it continues to prohibit foreign data transfers.
American companies say the Chinese restrictions raise their costs and make them vulnerable to monitoring, censorship and cybertheft. The U.S. has also accused Chinese companies such as Huawei of stealing technology and spying on American businesses.
Problems could intensify as Chinese and American companies lock horns in an effort to achieve global dominance in 5G mobility and the artificial intelligence, IoT and robotics solutions that depend on it. If trade talks fail to resolve differences between the two nations, it could accelerate a “splinternet” trend in which the flow of information and ideas is impeded by myriad national government controls.
The longer the tariffs stay in place, the more their adverse effects will accumulate for both sides, especially if the U.S. follows through on its threats to impose new tariffs. Rhetoric in both countries has been strong, yet both have also hinted at a possible near-term resolution.
Trump and Xi plan to meet next at a G20 summit in Japan late in June. “I have a feeling it’s going to be very successful,” the American president said.