Expect the US-China trade war to come to a showy end, but the tech war to continue

As the international media speculate breathlessly about whether the US and China will reach a trade agreement to resolve their deepening tariff war before the March 1 deadline, I have news for you: first, quite likely a trade deal will be agreed; and second, this should offer meagre comfort to anyone seriously concerned about improving trade relations.

In my brutally cynical view, the tariff war is more theatre than substance: most of the China exporters targeted and suffering are American, Hong Kong and Taiwanese companies based on the mainland; the ultimate casualties are American consumers who are paying higher prices for a wide range of products; and the main harm is being done to suppliers across Asia who are embedded in global supply chains.

For Trump, there is no political downside. There is a cross-party consensus on the need to get tough on China. In so far as there is pain among consumers at home, little blame is falling on Trump’s shoulders. Even Trump’s beloved soybean farmers agree that if some pain is needed to fix the China trade problem, then it is pain worth suffering.

If and when Trump declares victory, he will have delivered on a fundamental campaign promise to his core supporters. The fact that irreversible harm has been done, and that the core US-China problems remain unsolved, will be ignored or glossed over.

Why would the end to the tariff war not deliver peace? Because while trade in physical goods is highly visible from a political point of view, it is a sideshow compared to trade in services , investment access to the China market, and China’s technology ambitions.

Because around Trump is a group of anti-China zealots who believe that the problem with China is that it is an increasingly technologically sophisticated competitor, getting dangerously close to generating innovations that can match and better the best in the world – including the US.

There can be no better example than 5G and Huawei. This Shenzhen upstart is rolling out a beta version of fifth generation wireless technology ahead of a full-scale roll-out – not just across China but with operators across the world, and about five years sooner than in Japan and the US.

As the attack on Huawei plays out, where are China’s friends?

This does not simply mean that Chinese will be able to download favourite films onto their smartphones in seconds, run virtual reality apps or play more realistic war video games.

It means a five-year head start on the competition to develop thousands of big data applications for anything from energy and transport management to buildings management and health care.

It means thousands of companies getting used to the 5G platform, enhancing efficiency and productivity using artificial intelligence and the internet of things.

The recent blizzard of accusations of intellectual property theft or industrial espionage are a response more to this clear technological challenge from China, to to any real surge in Chinese mischief. Intellectual property theft court cases are as old as the hills, and are a two-way street at the heart of the fierce competition in the technology industries.

So, too, are allegations of industrial espionage: how could the US intelligence services talk with confidence about alleged Chinese espionage if they were not up to their necks in an identical activity?

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The reality is that companies like Huawei were until recently dismissed by the US big boys like Lucent, Cisco and Motorola as offering unreliable, derivative products that might suit developing countries fine but could not deliver cutting-edge reliability to US networks. And that has changed.

What we see now is Chinese companies right at the cutting edge, feared for reliability and sophistication.

With Huawei spending 10 per cent of its revenue (about 90 billion yuan or US$13 billion in 2017) and deploying 80,000 staff on research, its capacity to innovate can only grow.

In the US, as the likes of Huawei have made inroads into so many markets around the world, so anxiety has risen about US ability to remain the world’s tech leader. Fear sits not just in US tech companies, but also in the US intelligence community and defence industries.

How the Huawei case may launch the great China-US technology decoupling

We should remember these anxieties are not new. Way back in July 2011, Fortune magazine ran a substantial feature on the Chinese upstart, noting: “Huawei still can’t conquer the US. The reason? Widespread fear that it’s here to spy for Beijing.”

But as Huawei has progressed, so US paranoia has intensified. Huawei was 352nd in Fortune’s list of 500 top companies back in 2011. Today it is 72nd and climbing, with 2018 sales expected at US$108 billion, up 21 per cent on 2017.

It is challenging Samsung as the world’s largest supplier of smartphones. It has signed 26 commercial 5G contracts worldwide, and is building infrastructure for 160 cities. It is a tech supplier to 211 of those Fortune 500 companies, according to Guo Ping, rotating chairman of Huawei in his 2019 New Year’s message.

His confidence is boosted by the fact that the company relies hardly at all on the US market, where it has been systematically blackballed.

While 51 per cent of sales in 2017 were inside China, 27 per cent were attributable to Europe, the Middle East and Africa, and 12 per cent to the Asia-Pacific. Just over 6 per cent were in the Americas – including Canada, Mexico and South America.

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Guo’s 2019 message is fascinating: “If we can develop the simplest possible network architecture, make our transaction models as simple as possible, ensure the highest level of cybersecurity and privacy protection, produce the best products, and provide the best services, no market can keep us away …

“ We will remain calm and composed in the face of adversity, and use the certainty of legal compliance to deal with the uncertainty of international politics.”

As China’s Vice-Premier Liu He flies to Washington for trade talks next week, and we spectate upon the political theatre of the tariff war, Guo’s emphasis on legal compliance is encouraging. Technology’s future is in play and as the tariff war draws to a close, so the technology war has only just begun.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view