Impact of the Increasingly Contentious U.S.-China Relationship on Technological Development and Innovation
Adam Segal | January 7, 2019
The Trump administration states it began a trade war with China to defend U.S. technology in the face of China’s industrial policies. Half a year into the trade war, however, the ways in which U.S. companies and industries have responded reveal the complex interdependence of American and Chinese high tech sectors. Importantly, the trade war leaves unresolved China’s market practices in favor of Chinese technological development, which began the trade war in the first place.
To date, the Trump administration has imposed tariffs worth $200 billion on Chinese imports. The idea is to bolster American producers that manufacture goods similar to Chinese imports hit with the tariffs. Among the affected high-tech imports on the final list of 5,745 product categories are man-made nonwoven fabrics and hardware inputs for telecommunications, aircrafts, and semiconductor production.
Excluded from the tariffs, however, are 297 products removed from the original list released in July after lobbying efforts by Apple and other U.S. high-tech companies. Off the list are high-tech consumer electronics, such as smartwatches and bluetooth devices, and critical industrial inputs, such as chemicals used for manufacturing technical textiles.
Powerful tech companies resisted because tariffs on Chinese imports could affect the bottom line of U.S. companies as costs go up. Nowadays many Chinese companies are plugged into global supply chains and production networks, manufacturing the technical inputs of consumer and industrial products tied to American brands. Moreover, many U.S. companies operate in China to take advantage of lower costs as well as to tap into Chinese markets. For example, Apple’s smart phones are assembled in China with many of the inputs produced there.
Since the start of the trade war, market conditions for U.S. companies doing business in China have not witnessed a sea change. Measures announced by the Chinese government in September to attract foreign direct investment continue China’s deliberate calibration of market access with economic policies designed to enhance the national technology base and bolster the competitiveness of domestic industry.
Unlike its East Asian neighbors during a similar stage of development, China has liberalized foreign direct investment on the macro-level. But it has reregulated at the sectoral level to achieve state imperatives, as my first book shows. In high-tech, value-added sectors, FDI are typically required to form joint ventures, often with domestic competitors, and to transfer technology to domestic suppliers to meet domestic content requirements. Moreover, China exercises regulatory authority in favor of domestic industry.
Apple is obligated to partner with China Mobile, the largest state-owned telecommunications service provider, to sell its devices. Verizon cannot participate directly in the Chinese market despite China’s commitment in its World Trade Organization accession protocol to allow up to 49% entry in basic services.
China’s antitrust regulator has investigated what it says are price-fixing and other anticompetitive practices by foreign automakers and high-tech equipment makers operating in China. It has also delayed approval of mergers and acquisitions between foreign companies, such as U.S.’s Qualcomm and the Netherland’s NXP Semiconductors, which do significant business in China.
With the Chinese currency at its weakest in twenty-one months, Chinese exports to the United States are at an advantage. This means any gains of import-competing companies from U.S. tariffs on Chinese imports are wiped away by the current exchange rate. This is despite the Chinese government recently shoring the Chinese currency, to encourage domestic consumption, stem capital flight, and maintain the renminbi’s value amid rising costs and a slowing economy.
Shortly after China countered with retaliatory tariffscancelled planned trade talks in September, a multi-sector alliance of U.S. business associations urged Trump to consider their plight. The U.S. midterm elections in early November present another opportunity to evaluate the future of the U.S.-China trade war. After the elections, perhaps the Trump administration would end the trade war and seriously consider strategies that more sophistically address the multidimensional concerns of American business. This may include more funding for education and high-tech innovation and cooperation on new global rules on investment, technology transfers, and regulatory governance.
Roselyn Hsueh is an associate professor of political science at Temple University and the author of “China’s Regulatory State: A New Strategy for Globalization.” A member of the Initiative for U.S.-China Dialogue Research Group on Business and Trade, her next book, under contract with Cambridge University Press, examines national and sectoral variation in market governance in the globalization and development of China, India and Russia.
Adam Segal | January 7, 2019
Yeling Tan | December 10, 2018