The United States (US) and China are locked into a trade war, wherein actions and counter-actions are being taken at a bilateral level, bypassing the established international trade rules. Although the immediate trigger of the US trade restrictions on imports from China was the trade deficit of the US, it is increasingly becoming clear that technology is the real driver of the tensions.

The US alleges that China is pursuing strategies such as restrictions on ownership to foreign investors, insistence on below-market royalty rate for licensing deals, security reviews to disclose sensitive details, data localisation requirements, R&D localisation and indigenous technology standards to (forcefully) transfer US technologies and intellectual property assets to China. It also alleges that state supported investors from China are investing in the US, including greenfield investments in venture-backed startups, for the purposes of acquiring US technologies. A report from the ‘White House Office of Trade and Manufacturing Policy’ points out that “the technologies China is investing in are the same ones that we expect will be foundational to future innovation in the U.S.: artificial intelligence, autonomous vehicles, augmented/virtual reality, robotics and block chain technology”. Some of these technologies are critical for the US to maintain its economic power and technological superiority of its military.  

China, on the other hand, is moving ahead in fast pace to have a major share in the new technologies. It is already ahead of the US in research in Artificial Intelligence (AI), the technology that is going to drive the growth of the future economy. A 2016 report of ‘US National Science and Technology Council’ shows that China had 360 scientific publications in AI areas whereas the US had only about 270. China has well famed policy to be the leader in AI technology by 2030 and to create a $150 billion AI industry by 2030. According to a PWC estimate, AI will add $15.7 trillion to global GDP by 2030, of which China will take almost half ($7 trillion) and North America will take only less than a quarter ($3.7 trillion).

The gross expenditure on R&D (GERD), a widely used indicator to represent the innovation efforts of a country, of China has increased from $(PPP) 232 billion in 2012 to $(PPP) 486 billion in 2018, at CAGR 11%. Whereas the GERD of US increased from $(PPP) 447 billion to $(PPP) 566 billion during the same period, at a CAGR of 3%. In a few years, Chinese investments in R&D will surpass that of the US. What is also more important is that China is innovating more efficiently. The Global Innovation Index, published recently by WIPO, computes the efficiency at which countries convert innovation inputs into innovation outputs. Efficiency ratio would be 1 for highly efficient countries. In 2018, the innovation efficiency ratio of China was 0.96 as compared to 0.76 of United States. In terms of ranking in innovation efficiency, China ranked 3rd in 2018 whereas the US ranked only 22nd.

All these make the US consider China as an adversary, although it has not publicly declared so. It is taking all efforts to prevent spillover of technology to China. The US President’s ‘Executive Order on Securing the Information and Communications Technology and Services Supply Chain’ on 15th May is aimed at preventing all kinds of spillovers – through trade and investment, to Chinese entities.  The Executive Order restricts all kinds of transactions, including investment and trade, in information and communication technology with persons who are subjected to the jurisdiction of foreign adversary. 

Where will this dispute take the world? The US had a similar dispute with Japan in late 1980s. The US had accused Japan of stealing American jobs and technology. Hitachi executives were arrested by FBI on charges of industrial espionage and Fujitsu was restricted from investing in the US. As Japan yielded in, the dispute got settled peacefully. As Japan was part of the US led alliance in a period of intense cold war, it did not have other options either. 

The same is not the case with China. The US actions may slow down Chinese ambitions in the short run, but China may have a different strategy. China is already championing the cause of globalisation, while the US is increasingly turning inward-looking. China has also built up technology capability, which other countries cannot ignore. The fact that Huawei secured more than 45 contracts for the implementation of 5-G networks in 30 countries, including some prominent European countries, despite the US ban on the company is just an illustration of how Chinese tech firms have become important to the world. China will use this as an opportunity to enhance its sphere of influence in global affairs, by aligning with those counties like Russia, which do not agree to US polices.  

An earlier version of this commentary was published on June 19th 2019, on Global South Colloquy, Available at: http://globalsouthcolloquy.com/is-technology-driving-the-us-china-trade-war/.