Why US-China conflict has taken a high-tech turn

The US-China trade war has a new frontier: the struggle to dominate the trade in high-technology items. The US appears to be succeeding in persuading several allies to ban Huawei from supplying next generation telecom equipment amid allegations that the Chinese tech giant is involved in spying in the West.

This follows the arrest of Huawei’s chief financial officer (CFO) Meng Wanzhou who was arrested in November last year in Canada, at the US’s behest, over the alleged violation of American sanctions on Iran.

Evidently, the trade war between the US and China now has taken a high-tech turn. And unlike the first round involving tariff escalations, this time, most advanced economies seem to be firmly backing the US.

The seemingly-coordinated campaign against Huawei suggests an unfolding geopolitical struggle for technological dominance at a time when China has been trying, with some success, to transition from a low-cost manufacturing hub to a leader in innovation and high-tech manufacturing.

China has long surpassed the US in exports of high-technology items such as telecommunication equipment, TV receivers, electrical machinery, optical instruments, etc., an analysis of United Nations Conference on Trade and Development (UNCTAD) data shows, and China now threatens American dominance in emerging technologies.

To be sure, part of Chinese high-tech exports can be attributed to the “processing trade”, wherein China acts as an assembly point for various items manufactured by multinational companies. Thus, China is not the only country in the Asia-Pacific region with a high share of high-tech items in its export basket. The share of high-tech items in the export baskets of the Philippines (56%) and Malaysia (38%) is higher than that of China (33%).

However, the things that make China different from other Asian economies are its size and the scale of its ambitions, which worries the US and her allies. US’ “pivot to Asia” policy under President Obama demonstrated that the US viewed China as its main geopolitical rival. With Trump’s ‘America First’ policy, the threat perception of China has perhaps only gone up in the popular imagination.

Technology has become the latest frontier of conflict since that’s where both economies seem to be racing to acquire supremacy.

China’s intent on moving up the technology ladder has been apparent in initiatives such as “Made in China 2025” and the project to develop Greater Bay Area—comprising of Hong Kong, Macau and nine other cities—into a major innovation area rivalling Silicon Valley in the US.

China already has a larger share in the world’s top supercomputers compared to the US. China is also catching up in exports of services related to telecommunication, computer and information technology, although China still lags behind the US in overall services exports.

The US and China are likely to increasingly find themselves locked in a struggle to lead the fourth industrial revolution—a term meant to encompass technologies such as artificial intelligence, quantum computing, 3D printing and the internet of things.

To counter China’s progress, the Trump administration has already focussed its trade war on Chinese industries that are critical to the “Made in China 2025” policy, according to analysis by Akhil Deo, researcher at the Observer Research Foundation.

The campaign against Huwaei is thus a continuation of that struggle for superpower dominance.

The battle between US and China for high-tech exports is likely to play in both emerging and developed markets. China has already dislodged US as the biggest exporter of high-tech items to India. It is also a big exporter to Europe.

As of now, India has shied away from blocking Huawei’s participation in the roll-out of fifth-generation telecom services with the Cellular Operators Association of India (COAI) defending Huawei and warning against any hasty action.

But just as India has become an important battle-ground for internet-driven firms backed by American and Chinese giants, it is also likely to be embroiled in the Sino-American tussle over emerging technologies in the months to come.