Trade talks might not crack the final frontier

Technology was always going to be the final frontier during marathon trade talks between the United States and China.

Backed by enormous state subsidies, Beijing made it clear in 2015 that the high-tech sector in the world’s second-largest economy would continue to expand the boundaries of innovation.

For President Xi Jinping’s government, the message was simple: This is non-negotiable.

“Facilitating the high-quality growth of China’s manufacturing sector is a must to upgrade [to] transform the Chinese economy,” Huang Shouhong, the director of the research office of the influential State Council and a National People’s Congress delegate, said last month.

At the heart of this technological drive is billions of dollars in government cash, sprinkled around vital industries as part of the “Made in China 2025” program, which has since been rebranded into the Intelligent Plus initiative.

State subsidies have been a key sticking point in discussions between Beijing and Washington.

Progress has been made in areas such as intellectual property rights and the theft by stealth of US technology by Chinese companies.

Xi’s administration has also promised to open up a raft of sectors to foreign companies and speed up its reform timetable.

Yet, significantly, there has been no mention of the business model favoring state-owned companies and ring-fenced industries until now.

“It’s not that there won’t be some language on it, but it is not going to be very detailed or specific,” one source familiar with the talks told Reuters regarding the thorny problem of subsidies.

“If US negotiators define success as changing the way China’s economy operates, that will never happen. A deal that makes Xi look weak is not a worthwhile deal for Xi.

“Whatever deal we get, it’s going to be better than what we’ve had, and it’s not going to be sufficient for some people. But that’s politics,” another source added.

Poster child

Still, high-tech has become the new battlefield in the rivalry between the world’s two largest economies after Huawei was caught in the US crossfire as the poster child of “Made in China 2025.”

The telecom giant has become associated with the dangers of Beijing’s state-backed policy when it comes to 5G with Australia, New Zealand and the US blocking it from their planned super-fast networks.

In December, the US Justice Department announced sweeping charges against the group, including bank fraud, obstruction of justice and technology theft.

Accusations revolved around violations of US sanctions on Iran, an allegation which has been leveled against Chief Financial Officer Meng Wenzhou, the daughter of the company’s billionaire founder Ren Zhengfei.

She was arrested in Vancouver more than four months ago and could still face extradition to the US.

Meng and Huawei have categorically denied the charges. But the saga continues within a broader tech conflict with no ceasefire in sight.

To underline this battle of wills, the US Trade Representative’s Office has constantly complained about the situation, as well as pointing out that China is in breach of World Trade Organisation rules.

“China continues to shield massive sub-central government subsidies from the scrutiny of WTO members,” the USTR stated earlier this year in a detailed report to the US Congress.

In response, Beijing refuses to be drawn on the issue or compromise its stated goal of becoming a technological superpower.

Total spending on R&D in 2017 was 1.76 trillion yuan (US$279 billion), a 14% jump compared to the same period 12 months ago, according to Wan Gang, the Chinese Minister of Science and Technology.

While comparisons vary, this puts the country just behind the US and Japan in research and development funding.

Moreover, just before last month’s National People’s Congress, a government report revealed that Beijing will increase science and technology spending by 13% to 354.31 billion yuan ($52.88 billion) this year, despite the economy showing signs of stress.

‘Industrial strategies’

“A new trend in the world economy is emerging, as national industrial strategies are mapped out,” a commentary entitled, ‘China can’t ditch state-led drive for high technology,’ stated in the government-run Global Times last week.

“While China is trying to develop strength in advanced technologies that have until now been the domains of the US and European countries, they also view China as a major competitor. China should not reduce support for state-led projects under pressure from the West,” it continued.

“In contrast, more effort is needed to push forward China’s national industrial goals to further invest in state-led research projects, especially in strategic industries such as 5G networks, aerospace, advanced numerical control tools [or AI], and energy-efficient and new-energy vehicles,” the media group added.

To be scrupulously fair, Beijing has never denied its global tech ambitions.

The name might have changed to Intelligent Plus, but its target remains the same and encompasses an array of industries from chips, computers and the cloud to smart cars and smart cookers.

Renewables, railways and robotics are other crucial areas earmarked, along with the Internet of Things, and interconnected smart technology linked through artificial intelligence, or AI.

But this is just part of what was the “Made in China 2025” blueprint, which has called for at least 70% of related technology materials and products, such as semiconductors, to be made domestically by 2030.

“The current trade war between the United States and China is not about trade,” Yukon Huang, a senior fellow at the Carnegie Endowment and author of Cracking the China Conundrum: Why Conventional Economic Wisdom Is Wrong, wrote in an opinion piece for Caixin.

“This war is about protecting the technological edge that has made the United States the world’s dominant economic power.”

Indeed, it is this final frontier that China’s ruling Communist Party has vowed to breach. No matter how much it costs.