Trade War or

Tech War between America and

China?

Since his presidential campaign in 2016, President Donald Trump had been targeting at China and its massive trade surplus with the United States (US). Both the US Department of Commerce and the US Trade Representative were instructed to conduct their respective investigations on the various US trade partners, particularly China.

 

During his various overseas trips in 2017, Trump also reminded and warned the various US trade partners that actions would be taken to rectify the trade situation. Starting this year in 2018, various trade actions have been taken with tariffs implemented on solar panels, washing machines, steel, aluminium and others.

 

However with various Chinese merger and acquisition (M&A) deals blocked by the Trump administration and the sanctions taken on the Chinese company ZTE Corporation, it looks like Trump's trade war is also implicitly a technology war against Chinese companies as well as the various economic policies by the Chinese government.

 

Trade War or Tech War with China

According to the US Census Bureau, in 2017, the goods traded between the US and China has reached about $636.3 billion (total exports from US and China), generating a massive trade deficit of $375.2 billion for the US. This represents about 47.1 percent of the total $796.2 billion trade deficit in 2017. Trump has been focusing on this massive trade deficit, pressing for action against China.

 

However, while some actions have been taken on the goods trade with various tariffs imposed, the trade hawks within the Trump administration have also been focusing on the "Made in China 2025" (中国制造2025) plan, that was launched by the Chinese Premier Li Keqiang in 2015. "Made in China 2025" is a strategic plan drafted by Chinese Ministry of Industry and Information Technology (MIIT) with the main aim to upgrade, modernise and transform its manufacturing sector.

Currently, manufacturing in China is not only facing the low-cost pressures from other developing countries, but also, it does not have the necessary competitive advantage against the cutting edge innovation and high technology from advanced countries. With this plan, by 2025, the Chinese government aims to upgrade and upscale manufacturing across various targeted industries and reach the market sophistication of the advanced economies.   

The Trump administration is concerned that with the "Made in China 2025" policies, the US companies will eventually lose their competitive edge against the Chinese companies, especially in the technology sector. With the rise of some high profile Chinese technology giants like Baidu, Alibaba and Tencent, American companies are facing increasing competition, especially in future disruptive technologies like artificial intelligence, smart robotics, electric and autonomous vehicles. 

"The Trump administration is concerned that with the "Made in China 2025" policies, the US companies will eventually lose their competitive edge against the Chinese companies, especially in the technology sector."

Last April, the severe sanctions against the Chinese company ZTE Corporation imposed by the US Commerce Department exposed the extreme vulnerability and dependency of Chinese companies on foreign technologies. The seven year ban on ZTE to access US technology and components literally crippled the whole organisation within weeks with the shut down of its main operations.

 

While the Chinese government have not directly retaliated against any American tech companies, this major incident brought to light that even if China is a major exporter of electronic products, it is still excessively dependent on critical foreign technologies. As a result, this may provide further impetus to the Chinese government to reduce this dependency by identifying and developing its own indigenous and essential technologies.

 

Blocked M&A tech deals by CFIUS

 

The Committee on Foreign Investment in the United States (CFIUS) was established in 1975 with the main objective of reviewing the impact of foreign investments on the US national security. Although CFIUS encompasses various US agencies, it is chaired by the Treasury Secretary Steven Mnuchin. With massive investments from Chinese companies over the past few years, President Trump is looking at expanding and reinforcing the CFIUS powers to review and block potential deals.

 

CFIUS has been increasing its scrutiny of the various overseas deals, particularly those coming from China, and it has also blocked some very high profile deals, especially in the technology sector. In September 2017, Trump blocked the $1.3 billion acquisition of Lattice Semiconductor by Canyon Bridge Capital Partners because of its links to Chinese investors.

Another high-profile deal that was blocked by CFIUS at the beginning of 2018, is the $1.2 billion acquisition of MoneyGram by the Chinese company Ant Financial, an affiliate company of the Alibaba group. Despite all the efforts by Jack Ma, the executive chairman of Alibaba, to build personal relationship with President Trump, and despite all the assurances provided by Ant Financial to CFIUS about its concerns over the use of MoneyGram's data, the deal could not go ahead.

Moreover the potential mega deal that was also stalled by the Trump administration last March, is the unsolicited $117 billion bid for Qualcomm by Broadcom. Apparently, Qualcomm voluntarily and secretly requested CFIUS last January to review this potential deal and according to Broadcom, this was to prevent the merger from happening. However, not only it was very strange that CFIUS set a precedent by intervening in a deal that was not even agreed upon yet, but also, some of the reasons for rejecting this bid seemed questionable and speculative on potential future actions, that may or may not be taken by Broadcom. 

Even if there are many other Chinese M&A deals that have been stalled or rejected by CFIUS requirements, there are still many smaller deals that are going ahead. However, it should be expected that with an enhanced CFIUS, there will be more and more scrutiny in the near future, especially for deals that involve high technology and Chinese entities.

Future US-China relations

The Trump administration seems to adopt a belligerent and combative mode in dealing with China head-on. Whether this approach can significantly reduce China's trade surplus or change its economic policy in the near term is highly questionable. The reason is that China has the political, economic and military might to face the US, even if it has to endure significant repercussions in the short term.

 

The prospect of finding win-win solutions for both the US and China does not look bright. The Trump administration seems adamant to hold on its position to win over China. Not only this will have an impact on the US economy in the medium to long run, but also, the global environment, that American companies will have to operate in the future, will become more hostile.

 

And even if there is a change in the US administration in the future, it seems that the American perception towards China will not really change. Whether it is about trade or technology, the clash and competition between the US and China will continue on in the years to come.

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