The trade rift between the U.S. and China is taking on new dimensions with Washington scrutinizing the flow of technology to Chinese industries. Analysts said China might be in for both economic and political problems if the U.S. cuts off the supply of technologies that are essential for the survival of major Chinese companies.

Such a move would affect the performance and industrial competitiveness of Chinese industry, said Scott Kennedy, Deputy Director of the Freeman Chair in China Studies at the Center for Strategic & International Studies. Beijing may be forced to overhaul its industrial policy to meet with the emerging situation.

“It will put a lot of pressure on China to increase domestic consumption and domestic investments to replace the loss of opportunities with the United States and that could put pressure on Xi Jinping,” Kennedy said, referring to the Chinese President.

Washington’s measures, like imposing heavy duties on a wide range of Chinese exports, is already having a serious impact on China’s fixed asset investments (FAI) in areas like infrastructure projects and manufacturing plants. The FAI grew six percent in the first half of the year, down from previous periods. 

Blocking tech flows

The Trump administration has suggested it is trying to block the rampant theft of American technology in China as part of efforts to level the playing field in which China enjoys a big surplus over the U.S. But others see it as an attempt to hurt the Made in China 2025 technology development plan.

Past U.S. administrations focused on dual-use technologies, which are those that have both civilian and military value. But the Trump administration has indicated a willingness to curb the outflow of all kinds of American technology to China because of its ability to quickly adapt them and compete with U.S. companies.

The year 2017 ended with a trade deficit of $375 billion for the U.S.

There are signs Washington is considering a dual track approach regarding China. One of them involves restraining China’s industrial policy including its technology development plan. “And, another goal where they see China as a strategic rival and limit technology flows to China, and isolate it, and move supply chains out of China,” Kennedy said.

“It is unclear, which of these two goals is the dominant position within the Trump administration now,” the CSIS scholar said.

Beijing’s fear

Beijing’s main fear is over its supply of crucial semi-conductor technology from U.S.-based Intel and Qualcomm. China’s massive electronic industry relies heavily on U.S. made semiconductors.

“China still buys a lot of semi-conductors from U.S.,” said Lourdes Casanova, director of the Emerging Markets Institute at Cornell University’s SC Johnson School of Management. However, she explained, “China is investing a lot of money to make its own semi-conductors and be less dependent on Intel.”

China’s traditional strength in manufacturing has been its low labor costs. But new technologies like artificial intelligence, robotics, 3D printing and the “internet of things,” are replacing the need for labor-intensive manufacturing. That has made technology a key part of China’s long-term economic strategy. 

“The issues of technology transfers, intellectual property theft, and China’s industrial upgrading strategy, Made in China 2025, are not going to go away. On the contrary, the U.S. is likely to pump up the pressure even further and may step up efforts to work with European countries to try to isolate China in these areas,” said an editorial in Caixing, China’s prominent business magazine. 

Bad timing

Chinese technology companies have been suffering in recent weeks for unrelated causes, like a major stock market slide. The problem is about timing; bad news coming at a time when Chinese technology companies are exposed to Washington’s pressures. Tencent, world’s eight biggest company by stock valuation, recently lost $45 billion in stock value after it failed to obtain Beijing’s approval for some of its gaming products.

Earlier, the U.S. administration hit out at Chinese telecommunications equipment maker ZTE imposing a hefty fine and restricting its access to the lucrative American market. The decision came after U.S. regulators found the Chinese firm was violating UN sanctions to sell products to North Korea. Though the move is not related to the U.S.-China trade rift, it served as a wake-up call for Chinese companies seeking to expand into the western market.

“China has always pushed for as much independence from the rest of the world as possible, and ZTE was a wake-up call that they are still dependent for basic technological goods,” said John Artman, editor-in-chief of a web-based technology magazine, Technode.
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