Resolving the China-US Competition and the Greater Global Challenge

Given the sensitivities of the times – the spreading of the Covid-19 pandemic and the coming US presidential election in which China will be a major issue – it is no surprise that Washington is expanding sanctions against Chinese technology companies. From ZTE and Huawei to Hikvision and Megvii, Chinese tech firms have taken leading positions in crucial fields such as telecommunications, artificial intelligence (AI) and data services. The US has cast the tech sector as the prime battlefield in its strategic competition with China, taking steps to circumscribe these companies, severing their relationships with American firms or impeding them from participating in the US market and beyond. Washington’s aim: to accelerate the return to the US of overseas tech manufacturing – and slow down China’s technological development (its “Made in China 2025” plan to become a global tech power) and, now, its post-Covid-19 economic recovery.

“China’s current technological thrusts pose an unprecedented challenge to the United States,” US Attorney General William Barr declared at a conference in Washington in February. He reiterated longstanding accusations that Chinese firms force the transfer of American technology.

Washington’s concerns have led to policy action. The US recently published a series of policy strictures on Chinese firms aimed at disrupting China’s pole position in the global race to roll out 5G communications. These include Federal Communications Commission (FCC) rules that make it impossible for telecommunications carriers in the US to buy or receive services and devices from Huawei and ZTE. The Bureau of Industry and Security in the Department of Commerce revised the Export Administration Regulations (EAR) to add new export-control classifications, warning exporters that applications for licenses are likely to be rejected. Even a university and research institutes in China were put on the list of organizations engaging in activities contrary to the national security or foreign-policy interests of the United States. The US has also pressured chip suppliers including Samsung, Hynix, Toshiba, Murata and TSMC to cut their supplies to China. TSMC of Taiwan, the world’s biggest contract semiconductor manufacturer, is reported to have stopped taking new orders from Huawei following the changes in the rules.

The imposition of sanctions and other measures is having the Trump administration’s desired effect – disrupting China’s supply chains, slowing the recovery of the Chinese economy, and impeding China’s ability to eclipse US technology prowess. The US tech-war footing of course has a decidedly domestic purpose: It bolsters Donald Trump’s image among his voter base as a can-do strongman leader who is doing what no previous president dared to do – get tough on China. With the Covid-19 pandemic roiling the US and casting doubts about Trump’s handling of the crisis, the president and his political allies are using the questions raised about the origin of the coronavirus and China’s initial response to the outbreak to open another front in Washington’s war of words with Beijing.

China has countered all the attacks. Last year, Beijing announced plans to set up a US$29 billion fund to boost its domestic semiconductor production. It has also put forward policies to open the domestic market and improve the business environment. Huawei, meanwhile, is producing smartphones without American chips by collaborating with local providers Unigroup.

Meanwhile, the recent back-and-forth between the two countries on conspiracy theories about the origins of the pandemic has raised the ire of the public in both countries, giving impetus to the decoupling narrative and the idea that the US and China are destined to enter into a new Cold War.

Three reasons for optimism 

Global investors have been startled by what appear to be heightened prospects of a US-China decoupling. But such pessimism is unwarranted for at least three reasons:

First, what is evolving is a “new normal” in the way the two powers interact. While there might be some bifurcation of the relations, there cannot be a thorough decoupling of China and the US. Consider the pressing global challenges that require their albeit begrudging collaboration – pandemics and other public-health concerns, climate change, cyber security, data regulation, terrorism, the international trading system, and the recovery of the global economy, among other issues.

“China is a strategic challenge for us and we need to get ahead of that,” US Defense Secretary Mark Esper said in an interview with Reuters on the sidelines of a North Atlantic Treaty Organization (NATO) summit in December. “That doesn’t mean that China right now is an enemy.”

To be sure, the US casts its relationship with China as a “strategic competition”, something akin to engagement supplemented by robust deterrence. President Trump’s tariff war with Beijing, even as he builds a relationship with counterpart President Xi Jinping, is a case in point.  Wrapped up in his brand of blunt nationalism, such a policy can be a potent political weapon on which a leader can ride to re-election. US history is rife with instances of external tensions or crises (a world war or terrorist attacks, for example) stirring enough fear and anxiety that rivals in Congress, workers and industry chiefs, indeed the whole nation comes together to take on the dire threat.  

This escalating quarrel with China is no exception. The tempo at which China-US technology (or trade, culture and finance) bifurcates will be set not by Beijing but by the domestic political and economic goals of the White House. To pin down China and pull in more votes for Trump and fellow Republicans, the US will impose stricter and broader controls over the licensing and export of new technology to China and run more interference and apply more pressure on Beijing on issues of bipartisan consensus such as Hong Kong, Taiwan and Xinjiang.

Second, although it seems that the US-China geo-tech competition has intensified, it is too early to judge the extent of the negative impact on US suppliers in sectors such as automobiles, tech, agriculture, entertainment, aircraft and retailing due to the drop in exports to China or supply-chain disruptions. Although criticism of China always makes headlines, the reality is that China’s relatively open industrial and technological policies, as well as its willingness to protect intellectual property, continue to create opportunities for overseas investors.

Rather than getting pulled towards a decoupling by the geopolitical inertia of the times, there is more logic in integrating the Chinese market with US technology. Qualcomm, the leading US chip provider, is a model. In 2019, the company’s total revenue was approximately US$24.2 billion, of which China accounted for 47.8 percent (about US$11.6 billion). If Qualcomm were to retreat from China, it would be significantly less profitable and would have to spend much less on R&D. Now, take Huawei, Qualcomm’s partner and competitor. According to its founder, its imports of US components increased from US$11 billion in 2018 to US$18.7 billion in 2019.

Does it make sense to disrupt this mutually beneficial supply chain? Is it right to argue that the principle of comparative advantage is outdated and should be abandoned? Or is what we really need stronger global governance that ensures that international trade is fair and mutually beneficial?

Third, the real concerns for both China and the US are not what each is doing that generates fear and loathing in the other. The problems are domestic: the dysfunctions of politics and society in the United States, China and practically every country, all the more so now that Covid-19 pandemic has ravaged economies, exposed inequalities and torn up social contracts. Social protests, from Chile to Hong Kong, are not driven by the poor and downtrodden but by the educated middle classes, especially young digital natives who are empowered by social media as well as susceptible to its ills, i.e. fake news, disinformation and misinformation.

Where will the new economic prosperity come from once the Covid-19 pandemic is over? Will it come from the richness of 5G, from the magic of the Internet of Things, AI, and other Fourth Industrial Revolution wonders? The next wave of good times might have to wait until the commercialization of 6G, edge computing, L4 autonomous driving, and digitized transportation systems? This would mean sometime after 2025. Getting from here to there will be a challenge not just for China and the US but for all major economies and certainly the smaller players now deeper in debt, vulnerable to the pandemic, and possibly the last in line for the vaccine.

Both democracy and authoritarianism have their dysfunctions

What the world needs now is not decoupling but global collaboration and a stable supply chain. To achieve post-Covid-19 prosperity will require the promotion of free trade, more global collaboration and integration, and innovation. But the world is moving in the opposite direction as citizens have lost faith in globalization, opening the way for a backlash of nativism, protectionism and populist politics where facts do not matter.

Yet most decision-makers may still have enough wisdom to accept the logic of collaboration. China must insist on this path rather than be distracted by trade, technology or finance competition with the US, especially when Chinese jobs will be at risk due to a significantly slower economic growth rate and higher inflation, amid a global recession. In the midst of the mess left by the coronavirus, multilateral collaboration will be essential to bring back order, sense and indeed fairness to the world.

That is where the politics comes in. The lines between democracy and authoritarianism are blurring. Democracy does not necessarily bring equality, while a centralized or authoritarian system is not always cruel. Both types of governance need reform. Yes, democracy has been good for innovation, but centralization has had its advantages too. Consider the epidemic. China has managed effectively to control the coronavirus domestically and has even been able to send aid to Italy, Spain, Serbia, Iran and other countries.

 It is, however, useless to argue right or wrong between China and the US. Instead, the focus should be on finding practical solutions to the real global challenge after the Covid-19 pandemic: to restore economic prosperity by investing in ICT infrastructure construction, technological innovation, the cultivation of talent, and the promotion of free trade globally. If after this tragic encounter with the alien virus, countries continue to behave ideologically by, say, creating a “NATO for trade” rather than adopting a collaborative spirit in managing the economy and harnessing science, there will be no stopping war, whether it be cold or hot.