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Opportunity Cost of China-US Technological Competition
The US-China trade dispute is much more than a battle over a US$420 billion deficit, as calculated by Washington. It goes beyond the longstanding accusations against China of intellectual property theft. What the tensions are really about is a race for “geo-technological” superiority.
Simply put, the US wants to stay ahead, while China reckons that it must succeed to secure its economic growth and national unity. But although the rivalry appears to be driving a tech decoupling, the high-stakes competition need not result in conflict as, in the long run, both countries have more to gain by working together to drive innovation and address pressing global challenges.
ICT – the core arena
Before the trade dispute erupted, the major US firms in the high-end information, communication and technology (ICT) upstream market worked with downstream Chinese companies, creating a stable supply chain. The US leads the global server CPU (central processing unit, the brains of a computer) market. American makers of industry-leading microprocessors such as Intel and AMD provided licenses to Chinese firms including Hygon and Zhaoxin. The patents tell the story: US companies eclipse their Chinese competitors, with Huawei the sole possible exception.
China, meanwhile, has been using its domestic market to upgrade its own ICT sector and attract global companies. It would be highly costly to give up domestic market, which has contributed significantly to the annual revenues of US companies. Chinese ICT companies are now competitive, particularly in wired and wireless communication, server, cloud computing, and artificial intelligence.
For its part, the US has attacked the Chinese supply chain of core components as well as business networks. It aims to force the Chinese to retreat partly from the strategic industries and pay extra political and economic costs, and to use its dominant supply position as leverage. More Chinese companies will likely be put on the Entity List, banning them from accessing American suppliers. The global ICT supply chain will be balkanized, shifting from China to other countries.
China’s response has been to deepen its domestic market and open it further and to promote free trade arrangements such as the Regional Comprehensive Economic Partnership (RCEP), the ASEAN-led Asia-Pacific accord set to be concluded in early 2020. Beijing may even move to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the trade arrangement among 11 economies in the Asia-Pacific region, from which President Donald Trump withdrew the US when he took office in 2017.
Chinese companies, meanwhile, have pursued three strategies: global mergers, global talent recruitment, and partnerships in third-party markets.
Facilitating global mergers
Partly to secure its supply chain for CPUs, China has found it more feasible in the current climate to pursue M&As with non-US SMEs or start-ups to partly secure the supply chain. US funds and other investors are significant shareholders in the leading microprocessor producers, as well as in the biggest providers of flash memory chips. The American government and its allies have acted in concert using tools such as the US Foreign Investment Risk Review Modernization Act to build a “moat” around China.
Expect more merger reviews as happened with Tsinghua Unigroup’s bids for Micron Technology in 2015 and for Western Digital the following year. China could respond by prompting its venture capital and private equity firms to invest in SMEs and startups around the world that possess key technologies such as the next wave of the ICT revolution including 6G, robotics and quantum computing.
Bolstering education and global recruitment
According to Shanghai Ranking’s Academic Ranking of World Universities in 2019, the United States dominates in leading theoretical research, which is critical to the development of future ICT. In mathematics, for example, the US has five universities ranked in the top 10, while China has none. In physics and chemistry, the US has seven among the top 10; China none.
Chinese universities are leading in telecommunication engineering, while US universities are ahead in electrical and electronic engineering, materials, and computer automation and controls. China has more top-quality engineers in the basic layer of ICT, whereas the US has more highly trained developers in design or manufacturing of chips and software. In the traditional disciplines, such as electrical engineering and computer science, the areas that will drive the development of potential markets for ICT applications, the cutting-edge knowledge base is about even.
The US administration strictly controls visas for Chinese students and scholars and is thus able to hinder China’s progress by limiting knowledge transfer. Beijing’s long-term strategy in reaction is to bolster education. But in the short term, Chinese companies and research institutes are setting up more programs to attract international talent and collaborate with leading non-US institutes in countries such as the United Kingdom, Singapore, Switzerland and the Netherlands.
Co-developing third markets
With the period ending of fast global growth, driven by capital, labor and exports, a new development model is needed, especially to allocate resources into traditional and digital infrastructure construction in areas such as healthcare, education and smart city technologies. China is competitive in hardware and US in software. This makes it logical for them to collaborate on bids for projects in third-party countries, such smart as smart- city initiatives in Southeast Asia or the Balkan corridor.
If the US proves reluctant, its allies could find the ways to support its role or take its place. For example, Morita Chemical Industries has exported high-purity hydrogen fluoride from China to South Korea.
A mechanism for multilateral collaboration mechanism could decrease the political risk of a protracted rivalry in the era of geo-technological, trade and a finance competition. Regional integration and cooperation initiatives are potential channels through which global companies can survive, especially in the case of SMEs that lack a competitive edge and could go bankrupt or be acquired during a slowdown.
The opportunity costs of competition
It is hard to predict the winner of the ongoing and future ICT competitions. Chinese ICT companies are competitive in fibre optics and wireless communications, while the US is more competitive in satellite technology, especially given its mature and highly cost-effective supply chain. The competitive landscape for the development of 6G, slated for 2025 to 2030, is still uncertain. No one party will gain full advantage in this long-term competition.
Geopolitics is not a question about “right” or “wrong” but about the reallocation of national interests. In the digital age, however, economies will prosper or wither depending on their capacity to adapt to the next ICT revolution against the complicated geopolitical backdrop. Inevitably, in a world of an intensifying US-China geo-technological rivalry, small and medium-sized economies will be forced to choose sides. This will make it more difficult for them to tackle the substantial global challenges such as climate change, poverty reduction, terrorism and digital governance.
A far better result would be for the two major powers to find ways to work together to maximize mutual benefits for themselves and their partners and minimize zero-sum competition that will only lead to market inefficiency and heightened enmity.
Chen Xi is a Fellow at the S Rajaratnam School of International Stusiws, Nanyang Institute of Technology in Singapore.