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Trump adopts wrong response to China's tech threat

The U.S. should work with allies in challenging Beijing's high-tech trade abuses

| China
China's techno-nationalism dates back to Mao Zedong's times.   © Reuters

As U.S. threats have now morphed into a full-blown trade war with China, the confused objectives of President Donald Trump's trade policies make it easy to lose track of the enormity of the stakes at a critical moment of a technology revolution.

Trump's economics-defying obsession with trade deficits, obscures this and complicates redressing the far more troubling problem of China's predatory mercantilism in technology.

The outcome of the current U.S.-China trade clash will be a defining issue for both Sino-American relations and the evolving Asia-Pacific regional architecture. Indeed, the trend of economic nationalism in China and the U.S. casts a shadow over the future of the institutions, rules and norms of a global trading system facing an uncertain future.

The challenges are to global standards, and they impact all tech industries and all countries, including U.S. allies and partners such as the EU, Japan, South Korea and Southeast Asian nations.

To effectively counter China, the U.S. needs a coalition of like-minded actors. By firing in all directions at once, Trump complicates efforts to forge a common approach and creates openings for Beijing to divide allies.

At its core, the multiplicity of U.S. grievances against China are focused on technology tools (e.g., intellectual property theft, coercive transfer of technology, cyber-theft and curbs on investment in key sectors) that China employs as it seeks, by hook or by crook, to dominate the economy of the future. As President Xi Jinping has said: "Innovation is the primary force driving development."

Technologies are converging, with the fusion of the digital and the real economy, in a synergy of artificial intelligence, big data (the cloud), robotics, biotech, advanced manufacturing, the internet of things, nano-engineering, and nano-manufacturing. This tech revolution, much more disruptive than the internet revolution of the 1990s, will drive economic growth, defense capabilities, and geopolitical status in the two decades.

It is in this context which China's policies -- and the U.S. and global responses to them -- must be viewed. Chinese techno-nationalism is a longstanding propensity reaching back to Mao Zedong's China whose current expression is the "Made in China 2025" (MIC2025) plan, which targeted 10 strategic technologies, including semiconductors, robotics/smart manufacturing, autonomous vehicles, new materials, aerospace and biotech.

MIC2025 seeks to achieve 70% Chinese local production in these priority technologies by 2025 powered by government funding, which, in total, adds up to more than $300 billion in government money.

As became evident in the recent trade flap over ZTE, a major Chinese phone producer, China is highly dependent on global supply chain inputs from the U.S. and Asia, importing more than $200 billion annually. If Beijing succeeds in localizing its supply chain, it could disrupt the East Asian economy, as Japan, South Korea and ASEAN members are key parts of that supply chain.

China now accounts for 42% of global e-commerce, up from 1% just a decade ago. It is close to achieving a cashless society. China boasts one third of the world's unicorns (startups with $1 billion or more in valuation). The country's venture capital and private equity have exploded over the past decade and are close to rivaling those of Silicon Valley. One U.S. business source estimates that China has more than one thousand venture capital companies, each with more than $100 million. Government tech funding is often combined with money from major state-run banks and tech companies.

The trade confrontation is not about industrial policy per se. Many nations have industrial policies of one sort or another, prioritize government research and development funding, and/or incentivize private-sector investment in key tech industries. Indeed, Germany has its "Industrie 4.0," to which MIC2025 bears some resemblance.

The problem is primarily about means, not ends: what rules and norm of competition, reciprocal market access on trade and investment are accepted. It is about how China acquires technology: cyber-theft of intellectual property and proprietary business information; imposing de facto coercive transfer of technology as the price of market access; forcing investors into joint ventures and/or limiting ownership to 49%; and using an opaque regulatory and legal system and other informal barriers, while providing excessive subsidies to targeted Chinese companies.

A recent U.S. Chamber of Commerce report says, "China's industrial policies, Internet and data legal and regulatory frameworks, and inward foreign direct investment regime (the most restrictive of all Group of 20 economies) suggest limited support for globalization and competitive markets."

The danger is that, even if China is only partially successful in realizing its aspirations to create largely internal value chains in targeted tech sectors, it could pose structural challenges to the global economy. Consider e-commerce, where China is already a leading global player. China's "Great Firewall," its call for oxymoronic "internet sovereignty," and its efforts to localize where commercial data are stored may impede global data flows and hence, e-commerce.

Still, China's socio-economic system has its own shortcomings -- from corruption and misallocation of resources to ageing demographics. It is too early to predict whether China will outpace the U.S. in economic terms anytime soon. In fact, China's predatory industrial policies, shielding coddled 'national champions' from competition could end up degrading its global competitiveness.

The U.S. response, as ill-considered and unfocused as it is, reflects a wider global backlash against Beijing. However, by hitting U.S. allies, including the EU, Japan and Canada, with tariffs on dubious national security grounds, Trump makes achieving the goal of pressuring China to align its policies more with international norms more problematic.

Success in persuading China to revise its policies, so that they are more in line with market forces and international rules, requires a common approach, with the U.S. and its allies pooling their efforts. Some of this has occurred with trilateral (U.S.-EU-Japan) complaints and policy positions in the World Trade Organization. Similarly, as the U.S. has recently tightened foreign investment restrictions on critical technologies and rejected key acquisitions in Silicon Valley by Chinese Big Tech, the EU is also drafting legislation to restrict such investment, and Germany and other EU states have rejected Chinese takeover efforts on some tech companies.

The hope is that when the damage to both sides from tariff wars reaches a tipping point leading to negotiations, Washington will use its leverage to rebalance the U.S.-China trade relationship -- not only with tailored bilateral arrangements, but with Chinese policy revisions that would provide more reciprocal market access for all.

Robert A. Manning is a senior fellow of the Brent Scowcroft Center on International Security at the Atlantic Council and its Foresight, Strategy and Risks Initiative. He served as a senior counselor to the undersecretary of state for global affairs from 2001 to 2004, as a member of the U.S. Department of State Policy Planning Staff from 2004 to 2008, and on the National Intelligence Council Strategic Futures Group from 2008 to 2012.

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