Tech rivalry between the US and China risks an extensive decoupling, writes Te Herenga Waka—Victoria University of Wellington

The US-China ‘trade war’ of tit-for-tat tariffs is only one element of the competition between the two countries. Although economically perverse, it does not suggest an enduring economic rupture: on the US side, it is predicated on a neo-mercantilist desire to sell more to China, not to separate the two interdependent economies.

The ‘tech war’, in contrast, suggests a different dynamic at work. There is a strong current in policy circles – one likely to outlive the presidency of Donald Trump – that aims at some form of ‘decoupling’ of the two countries. This could be narrow, with limited restrictions on trade and investment relating to sensitive technologies, but there is potential for more extensive unwinding of supply chains and inter-firm linkages.

This would substantially erode the complex interdependence that has characterised global trade and production networks for the past two decades.

Chinese economic policy seeks to make China a leading technological nation. This threatens the leading position of existing multinational tech companies and creates the structural conditions for tech rivalry between China and the US.

China has publicly championed multilateral commitments to globalisation, but is also expanding its vision of national security and reassessing the risks of interdependence. The resultant policy pushes the two economies towards decoupling.

China’s innovation drive covers three areas: first, domestic policy, which seeks to build up and protect nascent companies through subsidies, preferential investment and protection from foreign competition; second, guidance of China’s tech companies to go abroad and invest in leading technology firms to reduce strategic vulnerabilities and acquire leading technology; third, efforts to develop and capture market share in developing markets.

Strategy has run its course

Chinese policymakers are keenly aware of the limits of the strategy that drove growth from the 1980s. This strategy involved relaxing restrictive labour migration regulations, attracting foreign investment through preferential policies, and huge investment in infrastructure.

As China became the ‘factory of the world’, multinational companies, including tech companies, were attracted by the promise of lower production costs. Their investment and activities helped build China’s industrial capacity, upskill its workforce and facilitate the development of large-scale production. But the dividend from this strategy has run its course.

As a ‘catch-up’ economy, China faces an ‘innovation imperative’: “the need to acquire and develop new technologies in order to overcome the structural challenges facing middle-income states and continue its international ascent” (Andrew Kennedy and Darren Lim, 2018).

In order to confront this challenge, China has invested in domestic innovation, science and technology and research and development, and implemented policy to develop high-tech industries to claw its way up the value chain and avoid the so-called ‘middle-income trap’.

The ‘pursuit of innovation’ threatens the position of existing multinational tech companies and creates the structural conditions for tech rivalry between China and the US. How China pursues innovation and tech catch-up exacerbates these concerns.

China’s earlier focus on economic reform and marketisation has been steadily replaced with “stronger state intervention to shape the ongoing structural transformation of the economy” (Barry Naughton, 2011). In the technology area, policymaking is driven by “a strong belief that innovation can be ‘decreed’ or steered by the government” (Sylvia Serger and Magnus Breidne, 2007).

Such beliefs have led to industrial policies like Made in China 2025 that “signal an evolution and intensification of China’s state-led approach” and put the US and China “on a path of separation rather than integration in critical commercial areas” (US Chamber of Commerce, 2017).

Central to Xi Jinping’s vision

China’s regulatory and legal practices are improving in some areas, giving the impression of the type of regulatory system expected of a market economy. However, it is naïve to assume a Leninist party state would withdraw from control and guidance of such an important sector.

Science and technological innovation are central to President Xi Jinping’s vision for China to become a “strong country” and to military modernisation and national security. China’s tech ambitions are also closely linked to its relations with the global economy.

The opening up in the 1980s attracted multinational companies to the Chinese market, sought to bind them to Chinese economic interests, and sought to hedge against overdependence on the US market through foreign acquisitions.

China then made efforts to pivot toward domestic innovation and leverage economic engagements to acquire leading tech and internationalise Chinese companies. This has been a remarkably successful strategy, which has spurred the rise of leading tech companies like Huawei, ZTE, Tencent and Alibaba.

At the same time, however, China has not provided reciprocal conditions for leading tech companies such as Google and Facebook to operate in the Chinese market, putting them at a global disadvantage due to China’s growing market power. With the pushback on investment in and partnership with American technology companies, there has been a strong reaction in China to double down on domestic innovation and reduce their over-reliance on the US.

Chinese commentators argue that the trade war and “relentless assault” on Huawei and “Chinese high-tech companies in AI, robotics and quantum computing” has “taught this country a good lesson” (Wen Sheng, 2020).

Chinese tech companies have made an impressive push into developing markets in the Middle East, Africa, Asia, the Pacific and Latin America.

The ‘lesson’, as articulated by Cai Fang, a leading Chinese economist and vice president of the Chinese Academy of Social Sciences, is China can no longer rely on cooperation with leading US tech companies and will therefore need to focus even more on domestic innovation and diversification.

Capturing market share in developing economies and other non-US economies has become central to developing China into a leading technology nation.

Scholars have been arguing that China should implement a diversified export strategy and actively expand exports to emerging markets and developing countries for many years. Chinese tech companies have made an impressive push into developing markets in the Middle East, Africa, Asia, the Pacific and Latin America.

In these markets, companies like Huawei have two major advantages over international competitors. First, while production and labour costs are increasing in China, Chinese companies remain highly competitive on price. Second, because tech innovation is a national strategy, their activities have the diplomatic backing of the state as well as domestic support for innovation and technology development.

Overall, there is a disjuncture in Chinese understandings of the ‘decoupling’ debate. Chinese academic writing and media use the term mostly in a pejorative sense, to describe the trade war and US tightening of entry requirements for Chinese tech companies, and very seldom to describe Chinese actions. State commentaries even describe decoupling arguments as “fools dreaming”.

China has employed industrial policy and sought to leverage relationships with US companies while also pursing an aggressive policy to decrease dependence on US tech companies and break into new markets. Such policies have not only created major pushback from the US, but are in themselves effectively a policy of Chinese economic decoupling.

This is the first of two edited extracts from ‘Decoupling Dilemmas: The Economics-Security Nexus in the US-China Trade Conflict’, an article in the latest issue of Policy Quarterly, published by the Institute for Governance and Policy Studies at Te Herenga Waka—Victoria University of Wellington. The issue focuses on New Zealand and the Asia–Pacific and is guest edited by Alan Bollard, the University’s Professor of Pacific Region Business.

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