US cannot stop China’s innovation advancements

It would appear that the US is seriously worried about China’s technological advancements. Fearing the loss of the last comparative advantage over the Asian superpower has caused a genuine concern over national defense and competitiveness among America’s ruling elite.

The US using every possible means to curb Asia’s technological rise, including the banning of sales of essential chips to ZTE for seven years, invoking Section 301 of the Trade Act to investigate China’s “unfair trade practices” and barring investment in the information-technology sector. The Donald Trump administration’s target might be the Asian power’s “Made in China 2025”, a strategy meant to make China self-sufficient in an array of technologies.

The 301 investigation was meant to slow down China’s technological advancements by imposing stiff tariffs on a host of Chinese imports and barring the sales of US technology to Chinese firms. In addition, the anti-China faction of the US Congress and the Trump administration have barred Chinese investment in technology sectors.

US charges against China

US Trade Representative Robert Lighthizer completed a 182-page report on Chinese “unfair trade” practices on March 22. The report was particularly vexed in denouncing China of “forcing” US firms to surrender technology to Chinese joint venture partners.

However, former Morgan Stanley Asia chairman Stephen Roach wrote in the South China Morning Post that US firms were willingly transferring technologies to the joint ventures because it improved production efficiency and profitability. What’s more, technology transfer is a condition for investing in China. US firms had the choice of not doing business with China.

Indeed, transfer of technologies could be argued as a “win-win” for the US and China. Executives of Boeing and other US companies, for example, have maximized investors’ return to investment or minimize cost production. That culminated in achieving enormous economies of scale, increasing US competitiveness. The lower-priced goods have kept inflation and therefore interests low and stable, creating a favorable investment climate. For China, it has gained advanced technology, accelerating economic growth.

On the charge of intellectual-property theft, Roach noted in the above-cited SCMP article that China did hack into the computers of US firms, stealing their secrets. But he also indicated that China had voluntarily reduced cyber hacking of US commercial interests after former president Barack Obama informed Chinese President Xi Jinping of the problems in 2013.

Still, the US insists that the Lighthizer report presented a solid case against China, prompting the Trump administration to propose harsh tariffs of up to US$150 billion worth of Chinese “imports.”

China, for its part, has retaliated in kind, imposing tariffs on $50 billion US imports. Immediately after the US banned sales of chips to ZTE, China slapped a 176% tariff on US feed. The “tit-for-tat” would suggest that China is not backing down from Trump’s trade-war threat.

West ignores its policy flaws and China’s efforts

Neither the US nor the European Union has given credit to China for its massive spending on research and development activities to restructure the economy from low to value-added production. According to a February 26 report by US-based CNBC, China spent $279 billion on R&D in 2017, up by almost 71% from 2012.

It is also ironic that a major reason behind China’s leapfrogging the technology gap is the West’s efforts to restrict Chinese participation in its technology sectors. In April 2010, the Young European Federalists’ magazine The New Federalist reported that the EU had accepted Chinese money but barred China from active participation in the Galileo project, the EU’s global navigation satellite system (GNSS),  perhaps for security reasons.

Not surprisingly, China withdrew its financial support and hastened the development of  its own satellite navigation system, BeiDou, which the country envisaged in 1983 but lacked the technology to implement, perhaps the reason prompting it to invest in Galileo. Today, BeiDou is recognized as one of the “big four” GNSSs.

Similarly, the US Congress banned Chinese IT heavyweights Huawei and ZTE from gaining a foothold on the US market, which will likely intensify China’s efforts to accelerate development in computer operating systems and chip manufacturing.

For example, Chinese media such as China Daily are urging the government to “start a new round of innovation.” Indeed, China has earmarked $300 billion to fund activities that would make it self-sufficient for a range of technologies by 2025, The New York Times reported last year. They include the development and production of operating systems and semiconductors.

The New York Times report was also telling in that it revealed the concern of the US security establishment that China could one day equal if not surpass American military strategy.

It could be argued that it is paranoid US policies that have pushed China’s remarkable scientific advancements. For example, the late Chinese-American rocket scientist Qian Xuesen was accused of being a Communist during the McCarthy era. His crime was said to be accompanying a friend to a US Communist Party meeting.

Iris Chang has suggested in her book Thread of the Silkworm that China’s missile technology would not have advanced so rapidly had it not been for Qian.

Judging from news reports coming out of China, the government appears determined to speed ahead with its innovation drive. Indeed, the US-based National Science Foundation predicted in this year’s “Science and Engineering Indicators” report said China would become a global innovator very soon if present trends on R&D funding continue.

US policy dilemma

The US seems to be torn between economic reality and political dominance, creating a policy dilemma with respect to China: whether to contain or engage with the country. The US needs China more than it is willing to admit. The Seattle Times reported last November that Boeing had shipped one-third of its 737 airliners to China. Meanwhile US consumers remain mired in personal debt, racking up a debt-to-income ratio of almost 100%, the US Federal Reserve reported in January, requiring low-priced consumer-good imports to sustain economic growth.

Asking businesses and consumers to incur short-term pains to enjoy long-term gains may be an uphill battle. Trump’s tax cuts raised the value of the US dollar, eroding export opportunities. Moreover, businesses and consumers need to survive the short run in order to attain long-term gains. Besides, no one knows how long the long run will be.

US will fail to curb China’s innovation drive

America’s attempts to curb China’s innovation drive will likely fail for a number of reasons.

First, the Chinese government views innovation as the key to sustain the country’s long-term economic and military development. Indeed, Xi Jinping called on China to spare no efforts in making China technology self-sufficient or powerhouse in a speech at the 19th Communist Party Congress last year.

The US encirclement of China with military bases and policy of recruiting nations to help it “contain” the country might be another reason behind China’s spending on military technology to enable it deter military adventurism by the US and its allies.

Second, the charges of “unfair trade” practices against China might be exaggerated at best. Besides, it is difficult to fathom that any country could have achieved what China did by just stealing from other nations.

Third, not many nations believe the West’s “China threat” narrative. According to a 2017 Pew Poll, most nations feel the US is the biggest threat in the world. Indeed, even Canada and Mexico, close US allies and neighbors, opined that the United States was far more threatening than China.

The foreign minister of Djibouti, Mahamoud Ali Youssouf, publicly resented former US secretary of state Rex Tillerson’s insinuation that Djibouti did not know what it was doing when it signed trade and investment agreements with China. Peru’s trade minister, Eduardo Ferreyros, in February echoed Youssouf regarding Chinese trade and investment. They are not alone in rebuking and resenting America’s demonizing of China.

India and China appear to be heading for rapprochement, suggesting a new cooperative relationship that could derail Trump’s Ind0-Pacific ambition.

Stakeholders in the South China Sea might be similarly suspicious of US intentions, explaining why the Association of Southeast Asian Nations (ASEAN) is negotiating a code of conduct with China. Myanmar, Thailand and other Southeast Asian nations are also holding military exercises with and buying arms from China.

There is no reason to believe that staunch allies like Australia, Japan and South Korea are willingly joining the US in containing China, because that would amount to cutting off the hand that feeds them. China is these  countries’ biggest export market, according to the International Monetary Fund.

For these reasons, the US might encounter difficulties in recruiting or coercing other nations to join it in curbing China’s innovation ambitions.

US efforts to thwart China’s innovation ambitions might slow down the pace of advancement, but cannot stop the country from becoming an innovation powerhouse equaling America.

Since neither country wants a trade or military war, cooperating might be the only way of going forward.