The US is waging war on Chinese hi-tech, but it can’t thwart Beijing’s ambitions on its own

Joergen Oerstroem Moeller says the global rules-based trading system is under threat as Washington seeks to conscript other countries to its economic war on Chinese technology

Joergen Oerstroem Moeller

Published: 1:00am, 1 Feb, 2019

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The United States is shifting the battleground for global power from money, finance and trade to technology. This approach poses serious risks for global trade and investment.

It involves three steps. First, China is seeking to skip the initial and often risky development phase of new technology, where failures are common and costly. Instead, Beijing has demanded technology transfers as a condition for foreign investment. If foreign companies do not comply, a number of obstacles complicate investment, even making it near impossible.

The US and other Western countries have previously acquiesced to this demand, if for no other reason than because it was seen as mutually beneficial. But with the ongoing trade war, the US has changed tack, now seeing China’s approach as a determined attempt to get technology on the cheap, expropriating what American research institutes and companies have paid for.

The second step is to scrutinise Chinese investments in US hi-tech companies. There is a good deal of apprehension that many investment targets have been chosen not for business motives, but to acquire hi-tech that can then be dispersed to Chinese companies, and to state-owned enterprises under the full control of China’s Communist Party.

Despite anecdotal evidence, not many US companies have been bought for this reason and, in the case of hi-tech companies, it is an open question whether they were in possession of the newest technology. The fear, however, of a foreign country such as China buying hard-won and expensive technological knowledge is widespread.

The third step is to show vigilance when buying equipment made in China, especially in the information and communication sector. Several countries have now blocked Huawei from supplying 5G networks.

The objective is to stop China from selling equipment abroad, through which it may gain money to be channelled back into research and development. The US knows from its own experience how hi-tech exports help boost the financial capabilities of companies that can then augment funds for R&D.

These three policy steps all aim to increase the costs for China to turn itself into a hi-tech nation. In reality, this is economic warfare, and it comes at a time when the US is doing its best to dismantle a global order anchored in rule of the law, particularly through the World Trade Organisation.

If Washington harbours grievances, they should be brought to global institutions for investigation. Abandoning global rules and institutions, and choosing instead to act unilaterally, indicates an isolationist approach that disregards treaties and obligations undertaken by both parties.

The US is strong enough to launch this policy, vexing China and making its transformation into a hi-tech nation more costly. However, it is not strong enough to force fundamental changes in Beijing’s ambitions. To achieve that, it needs the cooperation of a large number of other countries.

The global supply chain implies that components from the US are used in other countries’ exports to China. They must therefore be enrolled in the endeavour to protect American hi-tech. Otherwise, China can indirectly, through trade and investment with them, acquire a good deal of what the US does not want it to have.

Xi Jinping is right to push for advances in technology

These countries’ positions vis-à-vis China’s technology policy are not that different from the US’ stance and they might have been willing to join Washington in taking these problems to the WTO.

Having ruled that out, the US has the option of cajoling them or forcing them to toe the American policy line. This will almost certainly be done by demanding that they do not export hi-tech with American components to China unless US permission is sought and granted.

With the US still leading in hi-tech, there will be no choice but to agree and accept some form of American control. This amounts to a quantum leap in US control over global trade and investment in hi-tech.

The European consortium Airbus ran into a similar problem when trying to sell aircraft to Iran; the deal could not be completed because US components were used in the making of the aircraft.

This is not the first time the US has adopted a unilateral approach, imposing its will on other countries. Other examples include the Proliferation Security Initiative (PSI), launched by the US in 2003 to stop trafficking of weapons of mass destruction, and threats to the Swift global payment network if it continues to deal with Iran.

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Introducing a kind of extraterritorial jurisdiction for global trade and investment in hi-tech might stoke protectionism and turn rules governing trade and investment upside down.

The current rules-based system ensures that the playing field is level. Extraterritorial jurisdiction, in whatever form the US pushes it, recalls the saying of Greek historian Thucydides: “The strong do what they can, the weak suffer what they must.”

Joergen Oerstroem Moeller is an associate senior fellow at the ISEAS Yusof Ishak Institute, Singapore, an adjunct professor at Singapore Management University & Copenhagen Business School and an honorary alumnus at the University of Copenhagen

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