United States (US) and China are locked into a trade war, wherein actions and counter-actions being taken at bilateral level, bypassing the established international trade rules. Although the immediate reason cited for US’ trade restrictions on China is the trade imbalance between the two countries, it is increasingly becoming clear that technology is the real driver of the dispute.
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 transfer US technologies and intellectual property to China. It also alleges that state supported investors from China are investing in US, including greenfield investments in venture-backed startups, for the purposes of acquiring US technologies. A report of ‘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 US in research in Artificial Intelligence (AI), the technology that is going to drive the future economy. A 2016 report of US National Science and Technology Council shows that China had 360 scientific publications in AI areas whereas 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 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 US. What is also more important is that China is innovating more efficiently. The Global Innovation Index, published 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, 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 3 in 2018 whereas US ranked only 22.
All these make the US to consider China as an adversary, although it has not officially declared so. It is taking all efforts to prevent spillover of technology to China. US President’s ‘Executive Order on Securing the Information and Communications Technology and Services Supply Chain’ on 15 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? US had similar dispute with Japan in late 1980s. 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 US. As Japan yielded in, the dispute got settled peacefully. As Japan was part of 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. US actions may slow down Chinese ambitions in the short-run, but China will not yield the way Japan had done. China is already championing the cause of globalisation, when 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 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.
