The Huawei stand at the Mobile Expo in Bangkok on May 31. The US has had mixed results in getting partner countries to blacklist Huawei, as this would leave them without the 5G technology the Chinese company offers. Photo: Reuters
by Aidan Yao
by Aidan Yao

Trade war? No, the US and China are vying for technological supremacy, and the markets are catching on

  • The US implemented tariffs because it sees China as its long-term rival for technological supremacy. This not only means ongoing restrictions on companies like Huawei, but a stark global realignment
With no sign of trade tensions easing, the markets appear to be hunkering down for a protracted conflict between the world’s two largest economies. After some initial resistance, the US equity markets have lost 6 to 8 per cent, while the Hang Seng Index has shed over 10 per cent since Donald Trump’s tweet in early May on raising tariffs on Chinese imports.
Sentiment has grown decidedly gloomier in the fixed income and foreign exchange markets, with US 10-year Treasury yields retesting the lows of 2017 and the renminbi breaking 6.90 per dollar in the offshore market.

These moves suggest that more investors have become pessimistic about the prospect of a grand solution to the dispute and are increasingly factoring in the impact of a prolonged trade war.

Adding to the market malaise, trade is no longer the only battleground where the two superpowers grapple for world dominance. Recent developments surrounding Huawei and other Chinese tech companies suggest the Sino-US trade conflict has broadened rapidly into other fields.
Fundamentally, the escalation in US-China tensions over technology is not surprising. I expressed the view, as early as last August, that the trade war disguised a deeper rivalry in technology and innovation between the world’s two pre-eminent powers as they fight for global leadership.
Remember that the US started the trade war based on its Section 301 investigation targeting China’s hi-tech industries. As a result, over half of the US$250 billion in goods currently subject to punitive tariffs have some hi-tech and high-end manufacturing elements to them, according to our research. Hence, the “trade war” is really a tech war in substance.
Besides the tech-centric dispute in trade, in recent years, the US has imposed restrictions on China’s investment in its hi-tech sectors, refused visas to Chinese scholars and students studying in US hi-tech areas, and demanded that Beijing alter its intellectual property law and industrial policies – such as Made in China 2025 – designed to further advance China in technology and innovation.

And Chinese tech firms are not safe from the intensifying tech rivalry. Last year’s sanctions against ZTE by the US government were a clear warning, while the banning of Huawei products in the US and the constant lobbying by US officials to boycott Huawei technology in other nations are ominous signs of more troubles to come.

This is not to deny that Trump could be using Huawei as a bargaining chip in future trade talks with China. But that narrative is misleading because it puts trade at the core of the Sino-US conflict and technology at the periphery.

We think the opposite is true: it is the technology leadership that matters more for US world dominance, while the trade war is merely a tool to contain China and ensure that the US maintains tech supremacy for decades to come.

A simple thought experiment: if a trade deal were struck tomorrow, would the US immediately remove all the sanctions against Huawei, embrace its 5G technology and encourage its allies to do the same?

The answer, very likely, is no. This is why we think that the struggle between the world’s two superpowers for global leadership in technology is likely to be much more intense, broad-based and significantly longer-lasting than the trade conflict.

How Trump is killing the free market with his war on Huawei

Sadly, no one is likely to win from this tech war.

For China, the rapid rise of Huawei and other tech companies like BAT – Baidu, Alibaba and Tencent – is a testament to its rapid convergence with the global technological frontier.

But even with that progress, China is still reliant on US technologies in many areas (the reverse is also increasingly true). Hence, the US government’s current sanctions, should they become protracted, will be detrimental to Huawei, 5G and China’s overall tech development.

On the flip side, the US and its partners who decide to side with them also stand to lose from blocking some of the best technologies in the world, such as Huawei’s 5G.

Why is US dollar access so restrained in China as trade war rages on?

By imposing trade tariffs and sanctions on technology, the US is forcefully reshaping the global supply chain for manufacturing goods and innovation.

The former will lead to a suboptimal allocation of resources, causing harm to the global economy in the near term. But the latter could severely hinder the speed of global technological progress, and potentially reset the world order for the coming decades.

Aidan Yao is senior emerging Asia economist at AXA Investment Managers