Commentary | 09 May 2019

Why US-China talks should focus on technology as the greater threat, instead of trade

Originally published in South China Morning Post.

Originally published in South China Morning Post.

US President Donald Trump’s renewed threats of tariff escalation have rocked global markets. Yet, unlike Trump’s trade conflicts with other nations, the battle with China also has a good number of mainstream American cheerleaders.

For them, the current trade battle is part of a broader confrontation with China they see as the beginning of some kind of new cold war.

Thus, as Trump reignites the spectre of further tariff escalation by threatening to impose 25 per cent tariffs on all imports from China, there are some still cheering him on. 

Yet, if the world is indeed facing a new cold war, the trade fight is not a useful component of this. It is a harmful sideshow to the real battle which lies in technology and will not be meaningfully addressed in any trade deal.

Meanwhile, it is imposing real economic costs and poisoning economic relations that might otherwise have served as a ballast in an increasingly fraught relationship between the two superpowers.

The trade war will never substantively achieve any fundamental objective that American trade and security hawks might be looking for, regardless of how hard Trump negotiates.

China is not going to dismantle its state-led system and industrial policies in any substantial way. Certainly not because of a belligerent United States.

It might be willing to make some important incremental changes, in particular to strengthen its intellectual property and commercial law regime and give American firms better access to the Chinese market.

That would help rebalance some of the economic benefits within the bilateral relationship and provides a justification for some degree of American pressure.

But such an outcome is not going to stop ever more Chinese firms from emerging as industrial and technological titans.

In fact, increased involvement by American firms in China is likely to indirectly aid this process, as knowledge and technology inevitably spill over to other firms within and across industries.

Importantly, some of those Chinese firms will more than likely have benefited from state support of some kind (displeasing trade hawks) and all will remain beholden to the Communist Party (worrying national security agencies).

American firms may also become more beholden to the party’s influence the more invested they are in China.

Neither will Trump’s tariffs materially slow China’s economic rise nor shift the balance in relative economic weight in America’s favour.

Even 25 per cent tariffs on all Chinese exports to the US might only shave off about 0.55 per cent from China’s GDP, according to the International Monetary Fund – meaningful in the short term but still peanuts in the bigger picture.

The damage to the United States would only be slightly smaller, meaning America would gain almost nothing in relative terms.

Conversely, to the extent that China undertakes market-oriented reforms to resolve the trade conflict at America’s behest, this is likely to boost China’s long-term growth prospects more than it does that of the US.

Such reforms are, after all, along the lines of what many Western economists suggest China should be doing anyway to maintain rapid growth.

Finally, it still needs to be said that Trump’s tariffs will do little to bring back manufacturing jobs to the United States. Rather, it will largely just redirect trade via other economies with a similar comparative advantage to China, such as Vietnam.

Conversely, a deal would only increase integration between the Chinese and American economies, possibly worsening distributional issues within the US.

The true geoeconomic battle is in technology, not trade. Here, there are real trade-offs to be had between growth-enhancing openness and the potential security costs this could entail.

Getting the balance right is going to be a key policy challenge for some time to come.

In any case, America is erecting unilateral restrictions aimed at curtailing China’s access to advanced and emerging technologies.

This is important. It won’t derail China’s economic rise but it could put a sizeable dent in its growth prospects. China is still at a catch-up phase in its economic development. It needs access to the global technology frontier to keep advancing rapidly.

China might be interested in doing a more substantive deal if the US could also agree to ease recent technology-related restrictions.

But that is unlikely to be on the table. Beyond that, there’s little link between a “trade war” of limited importance and the “tech war” where more substantive issues lie. Trump is now ratcheting up the pressure on Beijing in the hope of getting a better deal than what China is apparently willing to offer.

At some point, the cheerleaders for this approach must weigh whether the concessions from China that might ever realistically be achieved are really worth the escalating cost.