Some suggest China and the U.S. are fighting a “Tech Cold War.” But there is no Cold War—yet. Here’s why.
Is the world is witnessing a “Technological Cold War” between the United States and China that will harm the global economy and markets?
Certainly, the contest between the United States and China for technological dominance has intensified in recent years. The world’s two biggest economies have grown increasingly protective of their own leading-edge industries and mistrustful of the other’s.
This geopolitical struggle over technology has spilled into global trade. It threatens to divide the world’s two technological blocs, because each country is seeking autonomy and self-sufficiency, while striving to limit the other’s access to its advanced know-how.
The language of Cold War is in the air. When former Secretary of State Henry Paulson described U.S.-China trade disagreements at the end of 2018, he said: “I now see the prospect of an economic Iron Curtain, one that throws up new walls on each side and unmakes the global economy as we know it.”
But, currently, there is no Cold War—at least no “Cold War” as we’ve come to know it.
Science and technology in the former Union of Soviet Socialist Republics (USSR) and the United States largely developed and operated on two independent tracks.
In sharp contrast, the Chinese and U.S. economies are heavily integrated. China relies on the U.S. consumer and the U.S. market. In turn, U.S. companies rely on the Chinese market for sales. There are a lot of sales, trade and profits generated between the two countries, which should be enough to prevent worst-case scenarios.
It would be challenging for the United States and China to divorce now, and separating could get even harder as technology advances. Tech has become part of the critical infrastructure, much like energy and oil supplies are. Some may be surprised to learn how integrated the Chinese and U.S. economies are—and what each country needs from the other. Take semiconductors as an example. China imports more semiconductors than it does oil, and it is buying them from the United States, Taiwan and Korea.
Another good example is 5G. Right now, China is generally leading the world rollout of 5G. A lot of countries, if they want to roll out 5G cheaply, will probably have to rely on Chinese firms to do it. However, the 5G network in China relies on critical components from the United States.
Still, China and the United States do see each other as adversaries, and their lack of trust has them looking to reduce their reliance on each other.
The “made in China 2025” industrial policy that the Chinese government launched in 2015 seeks to make China dominant in global high-tech manufacturing and replace imports with domestic production. The plan, which explicitly lays out goals for dominating global market share, is effectively saying to its current suppliers: “We want to put you out of business.”
How bad might the tech tensions get? We can envision a day when the United States might block Chinese companies from establishing bases in Silicon Valley. Even more damaging, China and the United States might restrict market access to each other’s tech firms—as is now happening with regard to Huawei in the United States.
President Trump in May banned U.S. companies from doing business with Huawei, a giant Chinese telecommunications company that makes smartphones and critical 5G networking equipment for wireless companies. Allegations were that Huawei worked on behalf of the Chinese government and posed a threat to U.S. security. The Trump administration sued the company for allegedly stealing trade secrets from T-Mobile. The administration also filed criminal charges, claiming Huawei schemed to circumvent U.S. sanctions on Iran. As part of the criminal case, Canada has been detained Huawei CFO Meng Wanzhou; she faces possible extradition to the United States.
Regardless of how this dispute is settled, the trend is now clear: Chinese firms know they have to limit their reliance on U.S. components; U.S. firms know they should limit their reliance on Chinese customers. This trend will continue regardless of how the current dispute is settled.
Still, it’s important to maintain perspective.
First, while the headlines and escalation are new, the situation with Huawei is not new—nor is it targeted solely at U.S. companies. China has been strategically reducing foreign components in its tech infrastructure for a number of years; Huawei has been de facto blocked from the United States since 2012. Secondly, competition is not necessarily a bad thing. The term “Cold War” makes the current situation sound overwhelmingly negative.
In the actual Cold War, we saw a period of rapid innovation because of the competition between the United States and the USSR.
The fact that China is suddenly competing in semiconductors (and other industries it hasn’t previously compete in) is forcing more investment in both countries. Investment can boost innovation and growth. And investment is good for consumers.
China also could view the current pressure from the United States as an opportunity to engage in more research and development, build capacity, and move toward a more market-driven system. There are significant incentives to do so. The country’s sheer size could lead to Chinese firms dominating industries such as semiconductors and electronic vehicles.
If the two countries can engage in fair competition, and avoid decoupling, their economies’ integrated trade, multinationals and manufacturing can continue to be very successful—and profitable for all.
Alexander Wolf, a U.S. citizen, has extensive experience in the financial services industry and in the U.S. government. He served 10 years in the U.S. State and Defense departments, working across a range of U.S.-China bilateral issues.
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