Knowledge is king: China and the US are not in a trade war, but a race to the next stage of technology

It’s not a trade war, stupid! In today’s world, when everything hinges on technology, competition and conflict between states is really about who gets to Industry 4.0 faster than the others. Hence, trade disputes are only one of many channels to disrupt your competitor before they become stronger and more competitive in technological capability. 

Goodbye to equality between states.

We live not in a digital age, but a knowledge revolution using the digitisation of knowledge and technology. Competition in the age before digitisation was all about land, labour and capital. In the agricultural age, those who had more land and labour had the upper hand.

But after the Industrial Revolution, those who had science and technology gained hegemony over land-based powers, because steam-driven gunboats and later aircraft gave Western powers command over land, sea and air. After the second world war, the United States gained decisive technological advantage also over space and, today, cyberspace.

The rise of digital computing and the internet was a game changer, because the knowledge economy enabled latecomers to catch up with the advanced economies.

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First, the digitisation of knowledge meant that information can be copied and replicated at almost zero marginal cost, which meant that anyone who has access to knowledge and was willing to learn by doing could transform knowledge to technology (or know-how) to gain competitive advantage. The internet allowed knowledge to spread at low cost to many who previously had no access to it.

Second, knowledge benefits from agglomeration, which means people who are clustered together with knowledge can increase know-how faster than those working in isolation. This explains why knowledge developed faster in cities than in the countryside. Development is all about clustering know-how and “learn by doing” skills to develop. China was one of the fastest learners and, therefore, fastest developers.

Third, clusters of knowledge centres alone are not enough. Having an ecosystem that encourages innovation, entrepreneurial risk-taking, and research and development, is critical to development. Contrast the cluster of knowledge universities and companies along Boston’s Technology Corridor with San Francisco’s Silicon Valley. Silicon Valley beat Boston’s Route 128 in terms of innovation and growth companies because of West Coast openness to diversity, culture and information sharing.

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Fourth, government support for research and development is a given, because within knowledge economies, markets often fail to provide basic needs, such as sound education, public health and fundamental social security, including the rule of law. The US lead in research and development came largely from government spending on defence, space technology, health and education. For example, Boeing gets government support through defence contracts, whereas Airbus gets direct grants from the European Union. It’s all subsidies by different names.

Fifth, knowledge and technology enjoy economies of scale. Solar energy prices would not have fallen so fast but for the scale of the Chinese market for solar energy and state policies to find alternative energy sources. It is no coincidence that the largest tech companies are in the US and China, even though Japan and Europe are very advanced in many ways. Despite their common market, European research and development and market access are constrained at national levels.

Sixth, value in knowledge has a hierarchy, whereby raw unprocessed data has little value, whereas after classification and analysis, information becomes valuable knowledge and ultimately high-value wisdom. Value comes from meaning, which is relative. An isolated individual cannot judge what has value, because value comes from exchange with others, so values are essentially social by nature.

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Seventh, no society starts from a clean piece of paper, because every society is endowed with different geography and historical experience that defines its culture. Each individual or society is influenced by new ideas or knowledge, but they will not interpret such ideas or knowledge identically.

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Eighth, value and meaning are sticky, because once individuals or groups accept certain values from experience or acceptance, they are less likely to change. Indeed, each society uses new knowledge to create competitive advantage or power over others.

Ninth, knowledge is binary, in that it gives power, but the creation of uncertainty for others gives power to those who know. Perfect information creates perfect equality, which ironically reduces power for everyone. US President Donald Trump is powerful because he generates uncertainty.

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The binary nature of knowledge also means that you can only gain knowledge by trial and error, inevitably making mistakes. Knowledge success comes from willingness to tolerate mistakes. Perfect knowledge means no mistakes and no success, which means no progress. Perfect markets are mindless theory not founded in reality.

In sum, the imperfection of knowledge and its distribution creates inequality, which is inherent in all societies. Totally equal societies are goals, not reality. Indeed, because information works through networks, networks have winner-take-all characteristics, which explains why in every network industry – banking, media, tech platforms – the top five or six leaders account for the bulk of the business. Knowledge concentrates.

Trade conflicts are only manifestations or tools by which the main players change the game, no different from how terrorist activities disrupt established stability. My wise business friend made the remark that this trade war is actually an oligopolistic price war, using tariffs to price each other out. It is more a game of psychology, figuring out who will fold first.

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Today’s trade war is therefore a contest of paradigms, as different societies use different modes of thinking to shape how we think and act under change. The Western paradigm was that free markets create stability, but we now know that it created more inequality.

To accuse another economy of greater state intervention to acquire more knowledge and know-how to narrow inequality between different countries denies the fact that, within every nation, intra-state inequality is increasing. The real question is how the state should operate to narrow inequality for a more stable society, at both national and global levels.

No one can stop the tide of knowledge acquisition and innovation. The more the competition, the more the innovation for change. We have little to fear from trade wars; more our own fears of change.

Andrew Sheng writes on global issues from an Asian perspective