Arrest Sets High Stakes In High-tech Trade War

December 10, 2018 GMT

If you only scan the headlines, you could be forgiven for thinking that the U.S.-China trade war is mainly about tariffs. After all, the president and trade-warrior-in-chief has called himself “Tariff Man.” And the tentative trade deal between U.S. President Donald Trump and Chinese President Xi Jinping was mainly about tariffs, especially on items like automobiles. But the arrest in Canada of a Chinese telecom company executive should wake people to the fact that there’s a second U.S.-China trade war going on — a much more stealthy conflict, fought with weapons much subtler and more devastating than tariffs. And the prize in that other struggle is domination of the information-technology industry. The arrested executive, Meng Wanzhou, is the chief financial officer of telecom-equipment manufacturer Huawei Technologies Co. (and its founder’s daughter). Huawei is suspected of selling technology to Iran in violation of U.S. sanctions. It’s the second big Chinese tech company to be accused of breaching those sanctions. The first was ZTE Corp. in 2017. The U.S. punished ZTE by forbidding it from buying American telecom chips. Those purchasing restrictions eventually were lifted after ZTE agreed to pay a fine, and it seems certain that Huawei also eventually will escape severe punishment. But these episodes highlight Chinese companies’ dependence on U.S. technology. The U.S. makes — or at least, designs — the best computer chips in the world. Without those inputs of U.S. technology, products made by companies such as Huawei would be of much lower quality. Export restrictions are about making life harder for competitors of U.S. tech companies. Huawei just passed Apple Inc. to become the world’s second-largest smartphone maker (Samsung is first). This marks a change for China, whose companies have been stuck doing low-value assembly. U.S. moves against Huawei and ZTE may be intended to force China to remain a cheap supplier. This approach suggests that the impetus for the high-tech trade war goes far beyond what Trump would think of. It seems likely that U.S. tech companies, and the military intelligence communities, are influencing policy. More systematic efforts to block Chinese access to U.S. components are in the works. The Export Control Reform Act, passed this summer, increased regulatory oversight of U.S. exports of “emerging” and “foundational” technologies. A second weapon in the high-tech trade war is investment restrictions. The Trump administration has greatly expanded its power to block Chinese investments in U.S. technology companies, through the Committee on Foreign Investment in the United States. CFIUS already has canceled a bunch of Chinese deals. The goal of investment restrictions is to prevent Chinese companies from copying or stealing American ideas and technologies. Chinese companies can buy American companies and transfer their intellectual property overseas. Even minority stakes can allow a Chinese investor access to industrial secrets. By blocking these investors, the Trump administration hopes to preserve U.S. technological dominance, at least for a little while longer. Notably, the European Union also is moving to restrict Chinese investments. The fact that Europe, which has opposed Trump’s tariffs, is copying American investment restrictions, should be a signal that the less-publicized high-tech trade war is actually the important one. The high-tech trade war shows that for all the hoopla over manufacturing jobs, steel, autos and tariffs, the real competition is in the tech sector. Losing the lead in the global technology race means lower profits and a disappearing military advantage. But it also means losing the powerful knowledge-industry clustering effects that have been an engine of U.S. economic growth. The U.S. can afford to lose its lead in furniture manufacturing; it can’t afford to lose its dominance in the tech sector. China long has wanted to catch up in semiconductor manufacturing, but export controls will make that goal a necessity rather than an aspiration. Investment restrictions may spur China to upgrade its homegrown research and development. In other words, in the age when China and the U.S. were economically co-dependent, China might have been content to accept lower profit margins and keep copying American technology instead of developing its own. But with the coming of the high-tech trade war, that co-dependency is coming to an end. Perhaps that was always inevitable, as China pressed forward on the technological frontier. In any case, the Trump administration’s recent moves against Chinese tech — and some similar moves by the EU —should be seen as the first shots in a long war. NOAH SMITH is a columnist for Bloomberg News.