Democracy Dies in Darkness

Monkey Cage | Analysis

How this trade war could backfire — in China’s favor

June 25, 2018 at 6:00 AM

An industrial robot is displayed with a car at the booth of a Chinese automaker during the Auto China 2018 show in Beijing in April. (AP)

The U.S.-China trade war is ramping up, with threatened tariffs and counter-tariffs. Major U.S. targets have included Chinese tech companies ZTE and Huawei, putting a spotlight on China’s plan to become a technology powerhouse.

What key lessons has China learned thus far? Most likely, the Chinese leadership recognized the vulnerability of the country’s development approach. The paradox is that the current trade war might propel China to come up with more ambitious industrial strategies. Here are three things to consider.

1) This is a wake-up call on China’s focus on advanced manufacturing

As my new book shows, China had good reasons to focus on advanced manufacturing in the global supply chain. To catch up on industrial technology in the 1970s, countries such as South Korea protected infant industries through import tariffs until these companies were competitive enough on the international markets.

Related: [China’s ZTE has long been on Washington’s radar, for quite a few reasons. Here’s the story.]

But tariff manipulation isn’t practical in the current context, especially after China’s entrance into the World Trade Organization. And China, like other countries, finds it increasingly difficult to keep up with the speed of technology change.

The failure of the multibillion yuan semiconductor chip projects in the 1990s was illustrative: When production lines were finally in place, the technology had already quickly advanced to the next generation, leaving Chinese firms behind.

So China has tried to avoid head-on competition in tough tech components such as mobile phone chips in recent years. Instead of constantly running behind established industries, it looks to use manufacturing to break into emerging areas where China still has the possibility to be a leader, such as new materials, green energy and robots. Some of these sectors are included in the Made in China 2025 plan, which aims to establish China as a major global competitor in advanced manufacturing.

Related: [What is ‘Made in China 2025’ — and why is it a threat to Trump’s trade goals?]

The big ZTE kerfuffle this spring raised the alarm for China’s approach. In April, the Commerce Department banned U.S. chip exports to ZTE, claiming the Chinese communications company had violated a 2017 settlement on illegal ZTE exports to Iran and North Korea. President Trump then walked the ban back, promising to help protect ZTE jobs, but the Senate voted last week to reinstate the ban.

For China, here’s the problem: Without reliable sources for chips, would Chinese firms survive? After all, what else could Chinese firms do with all their peripheral components, manufacturing skills and related services, even if they are first-rate, without chips, which are produced in the United States? For much of the Chinese population, this was also the first realization that even the country’s best and brightest firms, such as Huawei and ZTE, are dependent on foreign inputs.

2) Does core technology still matter under globalization?

China’s focus on advanced manufacturing in the global production system rests on the crucial assumption of a smooth trading process along the entire supply chain. Trump’s tariff wars woke Chinese leaders to the dangers of this assumption. The main issue is not whether a ban like the ZTE event actually takes place. Rather, it is about the recurring possibility that the country could be subject to such an unpredictable event.

Related: [Trump takes aim at China’s tech sector. That could hurt U.S. innovation.]

For China, the issue of the lack of control over core technology suddenly re-emerged in public discussion. Chips in a cellphone are an example of core technology components, just like engines in a plane — or the ball in a ballpoint pen. Premier Li Keqiang once quipped that despite its billions of pens produced each year, China still cannot make the ball in a ballpoint pen.

But few people in China now joke about chips in electronics and IT products. These are not only expensive components in terms of value added; they are also associated with industries that are strategic to the economy. Without core components such as chips, China’s industrial plan suddenly became more vulnerable.

3) What will China’s industrial strategy look like now?

Paradoxically, while Made in China 2025 was not as aggressive as the White House portrayed, the tariff war launched by Trump will almost certainly propel China to come up with a more ambitious industrial strategy. Commentators in China had already begun to discuss how to design new strategies to avoid vulnerability.

Granted, the world is an increasingly interdependent place. Even while depending on each other, however, countries still hedge their bets. Some analysts have asked whether there are similarly irreplaceable assets on the Chinese side – such as rare earth elements exported to the United States – to be used as reciprocal leverage. But it is doubtful that these materials are important enough to the U.S. economy.

Techno-nationalism is clearly on the rise in China. And Beijing will revive an emphasis on indigenous innovation in core technology, proposed by former president Hu Jintao and mentioned in several recent speeches by President Xi Jinping. There has also been renewed talk this spring about self-reliance and national interest, echoing back to the Maoist period.

Related: [Trump’s tariffs aren’t the biggest trade problem. Will China step up to protect the WTO?]

But developing core technology is not easy, even for large firms. Huawei and ZTE, for instance, have invested a large percentage of their revenue in research and development. Internally, Huawei endorsed a “wolf culture” of the survival of the fittest, and some of its employees moved mattresses on which to sleep into their offices to provide fast solutions for problems. ZTE is a close second in competitiveness. Yet even these top-echelon firms are not able to completely control core technology.

The knowledge of these past challenges suggests that China is likely to combine the broader Made in China 2025 advanced manufacturing goals with indigenous innovation in cutting-edge technology – here’s a good comparison of these approaches.

Anti-globalization isn’t on the table – in fact, Chinese officials have been trying to maintain a friendly image toward global opportunities by attracting foreign investors in their free-trade zones.

For China and other countries, though, the current trade provocations do give reason to rethink the neoliberal picture of mutually beneficial trade. After all, the ZTE example just demonstrated countries can still be “Trumped” if they adhere too much to global interdependence.

Ling Chen is assistant professor at the School of Advanced International Studies at Johns Hopkins University and the author of “Manipulating Globalization: The Influence of Bureaucrats on Business in China.”

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