In the midst of trade war threats between the US and China, Trump’s latest trade tariffs emerge as the new American strategy to weaken Xi Jinping’s plans to transform China into a major high-tech player.
Trump’s recent multi-billion tariffs, allegedly designed to protect the American economy from trade deficit, made global headlines. If at the beginning such tariffs involved most of the United States’ international economic partners, now it is increasingly clear that Trump’s main target are the rising Chinese strategic sectors, which pose a threat to the American technological leadership.
Launched in 2015, the plan “Made in China 2025” is to be considered Chinese President Xi Jinping’s economic pillar to grant the country a leading role in the so-called Fourth Industrial Revolution, as well as to achieve self-sufficiency in terms of technology and development in strategic sectors. The disruptive technologies represented by artificial intelligence (AI), virtual reality and robotics, along with the concepts of data and connectivity, are now at the centre of a new global competition for power in which China is set to emerge as major player. With this blueprint, Xi aims at making China globally competitive in ten industries by 2025: next generation information technology, high-end numerical control tools and robotics, aerospace equipment, ocean engineering equipment and hi-tech ships, advanced railway equipment, power equipment, agricultural machinery, new materials (e.g. nano materials), biomedicine and high-performance medical devices.
Since China’s latest legislative amendment, which abolished the two-year mandate terms for Chinese leaders, Xi Jinping is now set to remain the leader of a country with a unique combination of elements powerful enough to dominate the high-tech race. The incredible amount of data available, the use of which is facilitated by the loosened privacy regulations and blurred lines between government and businesses in addition to the highly fragmented retail market, make of China a tremendous hub for technological innovation and development.
Starting from last January, Trump’s America First rapidly emerged as a pretext to impose new tariffs, part of a protectionist wave that rapidly involved most of the world economies. Relying on the urgency to reduce the US bilateral trade deficit, which amounted to $375 billions in 2017, Trump’s determination is threatening to spread into a dangerous and unpredictable war trade with China.
On one side, a number of economists focus on the short-term cost of an eventual trade war. For example, Wei Li, senior China economist at Standard Chartered in Shanghai, estimatesthat a broad-based trade war between the US and China would cost China 1.3 per cent to 3.2 per cent of GDP, with the latter estimate representing an extreme scenario in which the US bans all Chinese imports. The US, in comparison, would lose 0.2 per cent to 0.9 per cent, thus supporting the theory according to which deficit countries (US) hold an advantage over those with trade surpluses (China).
However, by paying closer attention to the specific sectors and companies hit by Trump’s tariffs, it emerges that what triggered the US strategy is not the bilateral trade deficit with China, but rather the long-term Chinese threat in terms of high-tech rapid development. In fact, the Chinese market went from being considered complementary to becoming more directly competitive to the United States thanks to companies like Huawei, Tencent and Baidu, to name a few. If it is true that Trump can rely on intensive capital control that could damage the Chinese leverage against the US, China is a huge domestic market that the US can’t do without, as well as being the leading Asian high-tech exporter since overtaking Japan in 2014.
Despite Beijing’s noteworthy technological development, the country still depends on foreign technology transfers to push forward its “Made in China 2025” agenda. Pressured by an aging population – with rising wages that are resulting in the relocation of low-tech factories to other countries – along with the goal of achieving 70% technological self-sufficiency by 2025 and of becoming a global leader in Artificial Intelligence research and development by 2030, Beijing is not sitting on its hands.
The Trump administration and the other European and Asian economies potentially involved in China’s high-tech rise (especially Germany and South Korea) are concerned by the unfair trade practices implemented by the Communist country, such as intellectual property theft, massive Chinese government subsidies and forced technology transfer agreements. China’s restrictive market practices have in fact often forced foreign companies to transfer valuable intellectual property to Chinese partners in exchange for market access, thus exploiting the asymmetries in market access between China and the rest of the world.
Chinese President Xi Jinping, in reaction to these international condemnations, used the platform offered by the Boao Forum for Asia last April to pledge further measures to protect the intellectual property of foreign companies and a further opening of China’s economy. In addition, in an attempt to address and de-escalate Trump’s trade war threats, Xi finally affirmed that China is not seeking trade surplus and that a “Cold War zero sum game” is increasingly obsolete.
“We encourage normal technological exchanges and cooperation between Chinese and foreign enterprises, and protect the lawful IPR owned by foreign enterprises in China.”
With over 730 million internet users (double the US population) and a clear plan that sees China rivalling the current high-tech strongholds, it is foreseeable that Beijing won’t stop the building up of its technological capabilities and resources. In the short-term, Xi Jinping is empowered by the lack of vision demonstrated by Trump, who has been incapable of seizing this opportunity to build around him a consensus based on international law. However, in the long-term, if China wants a prominent role recognized by the other international powers, new measures complying with fair trade practices, along with the further opening of its economy are non-negotiable.
This article first appeared on Global Risk Insights, and was written by Gaia Rizza.
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