Full-tilt trade war will have unintended and serious consequences

President Donald Trump’s order to deny ZTE access to essential US-made electronic components for telecommunication equipment and mobile phones will certainly stymie the Chinese company. But just as certainly, the move will lead to a tit-for-tat response from China.

One obvious reaction would be for China to stop supplying rare-earth compounds to the US. Rare-earth components are essential for all kinds of high-tech applications, including electronic warfare. However, while a dominant world supplier, China is not the only source of these compounds, and therefore the retaliation would not be as dire for the US as the opening shot in the war is for ZTE.

That said, as the confrontation raises the ante, unintended consequences will inevitably follow. Being “unintended,” of course, means not all outcomes can be anticipated.

One can reasonably expect China to intensify its effort to develop its own semiconductor technology and become totally independent of US-supplied devices and components.

It would be a mistake for US policymakers to assume that China’s technical and scientific development will always rely on inputs from America.

It would be a mistake for US policymakers to assume that China’s technical and scientific development will always rely on inputs from America

China developed its own atomic bomb in the mid-1960s and followed that accomplishment with a hydrogen bomb in quick order, a rate of progress more rapid than any other members of the nuclear club, including the US.

In that era, China was very much isolated from the West, including the Soviet Union, and the only Western influence came from the PhD graduates who were trained overseas and returned to China to lead the development of nuclear weapons.

In the 1990s, China began a concerted effort to grow its internal semiconductor technology. A major part of the strategy was to enter a joint venture with a foreign semiconductor company. Japanese information-technology company NEC was the partner that signed on.

This effort largely failed because bureaucrats with no technical training were put in charge of China’s effort. These leaders did not understand that one couldn’t leap to becoming the latest and greatest without learning to walk and grasping the technical fundamentals in as complex a field as semiconductors. They pressed on until the partnership broke down.

The situation is vastly different now. There are many more returnees to China who are seasoned technologists, having worked at senior levels in the West. They are already engaged in developing basic technologies and devices that would free Chinese products from the US stranglehold.

The latest trade-war development will add pressure and incentives for them to succeed.

It is hard to know when China will have its own competitive technology, but it surely will. The Chinese are fully aware that licensed technology, or even purloined technology, will never get them to a level equal to or ahead of the West.

By way of confirmation, China has already broken through in many technical fields based on its own development. Examples include mobile phones and applications, facial recognition using artificial intelligence, robotics in manufacturing, advances in drone design and so on.

With the world’s largest domestic market at hand in which to test and verify its advances, the day will come when China announces its own proprietary chipsets and licensing terms, confident of its competitive advantages relative to US sources.

China’s appetite for semiconductor components that go into all kinds of electronics far exceeds that of the US. The competition developed to serve this hunger will be formidable, and American manufacturers may rue that day sooner than they think.

Whether Hainan becomes a competing tourist attraction or not, Beijing can always put the squeeze on the American casino operators in Macau, specifically MGM, Wynn and Las Vegas Sands

Another possible unintended consequence is seen in the rumor that the southern island province of Hainan may be permitted to develop casinos in the “Hawaii” of China.

A major blow in the trade war would be for China to allow Hainan to become a gambling destination and divert visitors who would otherwise be visiting Macau; most of the visitors to Macau are from mainland China. Whether Hainan becomes a competing tourist attraction or not, Beijing can always put the squeeze on the American casino operators in Macau, specifically MGM, Wynn and Las Vegas Sands (LVS).

The hurt to LVS would be particularly painful, since slightly more than 60% of the New York-listed company’s revenue comes from Macau. So far since early this year, Macau has been doing nicely, but I wouldn’t want to make book on the future.

LVS is majority-owned by Sheldon Adelson and his family. More than US$30 billion of his net worth is tied to his holding in LVS. As one of Trump’s principal supporters, it’s undoubtedly a good time for Mr Adelson to have a private conversation with the president.

He could be wholly above board and speak for the greater good of both countries to counsel President Trump that anti-China action will only have a short-term effect and won’t stop China’s rise. The president should be thinking of the benefits of long-term collaboration as opposed to inflicting mutual losses in the near term.

The author was a member of the board of Las Vegas Sands from 2008 to 2014.