[SCMP Column] What Trade War

January 26, 2019

As international media speculate breathlessly over whether the US and China will reach a trade deal to resolve their deepening tariff war before the March 1 deadline set in November by Donald Trump, I have news for you: first, quite likely a trade deal will be agreed; and second, this should give meagre comfort to anyone seriously concerned about improved trade relations.

My own brutally cynical view of the tariff war is that it is more about theatre than substance: most of the China exporters targeted and suffering are American, Hong Kong and Taiwanese companies based in the Mainland; the ultimate casualties are US consumers who are paying higher prices for a wide range of products; and the main harm is being done to suppliers spread across Asia who are embedded in global supply chains.

For Trump, there is no political downside There is cross-party consensus on the need to “get tough” on China. In so far as there is pain among consumers at home, little blame is falling on Trump’s shoulders. Even Trump’s beloved soya farmers agree that if some pain is needed to “fix” the China trade problem, then it is pain worth suffering.

As and when Trump “declares victory”, he will have delivered to his core a fundamental campaign promise. The fact that irreversible harm has been done, and that the core US-China problems remain unresolved, will be ignored or glossed over.

Why would the end to the tariff war not deliver peace? Because while physical goods trade is highly visible from a political point of view, it is a sideshow compared to trade in services, investment access to the China market, and China’s technology ambitions.

Because around Trump is a group of anti-China zealots who believe the “problem” with China has much more to do with an increasingly technologically sophisticated competitor that is getting dangerously close to generating innovations that can match and better the best in the world – including the US.

There can be no better example than 5G and Huawei. As this Shenzhen upstart begins to roll out beta-platforms for 5G ahead of full-scale roll-out – not just across China but with client economies across the world – it is around five years ahead of full-scale roll out in Japan or the US.

That does not simply mean Chinese will be able to download favourite films to their smartphones in seconds, play with virtual reality, or play even more realistic war games. It means five years of competitive head start on thousands of “big data” applications ranging from energy and transport management, to buildings management and health care. It means thousands of companies getting used to using the 5G platform, enhancing efficiency and productivity using artificial intelligence and the “internet of things”.

The recent blizzard of accusations of IP theft or industrial espionage are driven much more by this clear technological challenge than by any real surge in mischievous Chinese behaviour. Court cases around IP theft are as old as the hills, and a two-way street at the heart of the fierce competition in the technology industries. So too allegations of industrial espionage: how could US intelligence services talk with confidence about alleged Chinese espionage if they were not up to their necks in identical activity?

The reality is that companies like Huawei were until recently dismissed by the US “big boys” like Lucent or Cisco or Motorola as producing unreliable derivative products that might be fine for poor, developing countries, but incapable of providing cutting-edge reliability to US networks. And now that has changed. What we see now is Chinese companies right at the cutting edge, feared for reliability and sophistication that matches the best in the world.

While Huawei spends 10 per cent of its revenues (about RMB90bn in 2018), and deploys 40,000 staff on research, its capacity to innovate at the frontiers can only grow. In the US, as companies like Huawei have become more sophisticated and built business in so many markets across the world, so anxiety has risen about US ability to remain the world’s tech leader. Fear sits not just with US tech companies, but also in the US intelligence community and defence industries.

We should remember that these anxieties are not new. Way back in July 2011, Fortune magazine ran a substantial feature on the Chinese upstart: “Huawei still can’t conquer the US. The reason? Widespread fear that it’s here to spy for China.”

But as Huawei has progressed, so US paranoia has intensified. Huawei was 352 in Fortune’s list of 500 top companies back in 2011. Today it is 72nd and climbing, with 2018 sales expected at US$108bn, up 21 per cent on 2017. It is challenging Samsung as the world’s largest supplier of smartphones. It has 26 commercial 5G contracts worldwide, building infrastructure for 160 cities. It is a key tech supplier to 211 of those Fortune 500 companies, according to Guo Ping, rotating chairman of Huawei in his 2019 New Year message.

His confidence into 2019 is in part based on the fact that his company relies hardly at all on the US market – where it has been systematically “blackballed”. While 51 per cent of sales in 2018 were inside China, 27 per cent was attributable to Europe, the Middle East and Africa, and a further 12 per cent to the Asia-Pacific. Just over 10 per cent of business is in the Americas – including Canada, Mexico and South America.

Guo Ping’s 2019 message is fascinating: “If we can develop the simplest possible network architecture, make our transaction models as simple as possible, ensure the highest level of cybersecurity and privacy protection, produce the best products and provide the best services, then no market can keep us away.

“We will remain calm and composed in the face of adversity, and use the certainty of legal compliance to deal with the uncertainty of international politics.”

As China’s Vice Premier Liu He flies to Washington for trade talks next week, and we spectate on the political theatre of the Tariff War, Guo Ping’s reliance instead on legal compliance might be an encouraging mantra. Our technology future is in play, and as the Tariff War comes to a close, so the technology war has only just begun.
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own.

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