The tariff war between China and the US is in full throttle; each side is putting pressure on the other to blink first. The technology sector, including the leading Chinese technology companies, are the focus of this trade dispute.
Chinese state-owned company ZTE last year was temporarily put on death row when President Donald Trump’s administration blocked US-based suppliers from providing parts to the company. However, the company got a reprieve after it admitted selling telecom equipment to Iran, which is under US sanctions.
The year 2018 ended with the Trump administration going after another Chinese telecom giant, Huawei. The company is the poster boy of China’s arrival at the global telecom high table. The opening salvo fired by the US in the Huawei saga was the detention of its chief financial officer, Meng Wanzhou, in Canada, who is still waiting to be extradited the US. Recently, the US banned Huawei from accessing both software and hardware. The crème de la crème of the US technology sector have announced the cessation of sale of their products to Huawei at the behest of the US government.
One can wonder why the Chinese telecom companies are the targets of US sanctions, and whether the Huawei and ZTE sanctions are discrete exercises or part of an emerging trend.
Judging by all the yardsticks, the current Huawei saga indicates the beginning of a technology cold war with no similar historical precedence. The ongoing trade friction encompasses all forms of dual-use technologies between China and the US, unlike the focus on military-use technology and ideology during the Cold War.
Hence it is relevant to ask if there is a framework to understand and analyze this unfolding friction between the US and China.
A book by Jeremy Rifkin published in 2011, The Third Industrial Revolution: How Lateral Power Is Transforming Energy, the Economy, and the World, could provide a clue to assessing the scope and scale of the trade friction between China and the US.
Rifkin has been a jet-setting consultant for the European Commission and heads of the governments of Germany, France and Spain. In Asia, Rifkin has a massive fan following, particularly in the Middle Kingdom. The international press reported that this book figures on the list of reading materials for the senior Chinese leadership.
So what made this book so special for the Chinese?
The book is a vision of what the global economy could potentially look like in the future. Hence the theoretical construct presented in the book – the Third Industrial Revolution – is a plausible framework to assess and explain the ongoing tariff and technology saga between China and the US.
The world is currently at the cusp of the Third Industrial Revolution, according to Rifkin’s interpretation of the stages of economic development. Every phase of industrial revolution has three distinct subcategories for Rifkin: sources of energy, the means of communication, and the ways of mobility.
The power of coal as the source of energy, the steam engine, and the steam-powered printing press as the means of transport and communication respectively drove the First Industrial Revolution. Great Britain cornered the lion’s share of the benefits, and this revolution was at the heart of promoting and consolidating British hegemony across the world.
The mass use of petroleum products as an energy source, the combustion engine, and the telephone as the means of communication were the hallmarks of the Second Industrial Revolution. The commercial use of the Internet in the 1990s was one of the significant developments in this phase. The US replaced Britain as the leader of this revolution. This phase also closely aligns with the rise of US hegemony and the spread of US exceptionalism as its soft power.
Rifkin’s Third Industrial Revolution rests on five pillars: renewable energy, micro-power plants to collect renewable energies on-site, storage of renewable energy (hydrogen and other storage technologies), the Internet to transform the power grids to make them smart, and plug-in and fuel-cell vehicles as means of transportation.
The US and China have locked horns to dominate the industrial patents about the design, application, and deployment of technologies to propel the Third Industrial Revolution
No single country has mastered all five aspects of the framework Rifkin has proposed. At this stage, it is like solving a jigsaw puzzle by putting together several technological advancements made in different countries to develop and deploy the full-phase application of the Third Industrial Revolution. The core of this revolution is decentralized communication based on ultra-fast Internet systems, giving rise to the Internet of Things, based on 5G or newer generations. The environmentally sustainable circular economy that the Third Industrial Revolution potentially supports is a perfect mantra for the Chinese, who are trying to move away from export-oriented growth.
Therefore, the US and China have locked horns to dominate the industrial patents about the design, application, and deployment of technologies to propel the Third Industrial Revolution.
It is little wonder that in 2018 it was ZTE, and now it is Huawei – the world’s leading patent holder for 5G networking gear – what is at the receiving end of the Trump administration’s wrath.
The Chinese have also done a serious introspection on where they stand in terms of preparedness for deployment of the Third Industrial Revolution. The core of the communication system undoubtedly is wafer-thin integrated circuits (ICs) or semiconductors. Western firms dominate the design, fabrication, testing, and packaging of ICs. The volume of Chinese imports of semiconductors is far higher than its imports of petroleum products.
The Chinese central leadership has taken note of these shortcomings in the form of industrial policy as well as access to financing for the relevant enterprise. Until 2017, Chinese companies adopted both greenfield expansion at home and brownfield acquisition of strategic IC assets overseas before a wave of restrictions in both the US and Europe.
The “Made in China 2025” strategy is primarily a policy version of the Third Industrial Revolution proposed by Rifkin. The strategy calls for massive value addition and improvement across 10 strategic industries by 2025. For China, this strategy has high significance, since it is a way to escape the “middle-income trap” to enhance overall productivity.
China had very little say in setting industry standards and applications for the first two industrial revolutions. Hence it is natural for China to try to leapfrog to the Third Industrial Revolution. The US and its allies, on the other hand, will adopt all the measures at their disposal to ensure their preparedness first, since they are determined to dominate the Third Industrial Revolution as well.
The banning of US high-tech exports to China could prompt decoupling of the technology supply chain between the two, which is akin to a technology cold war. The time might come very soon when the rest of the world is forced to choose either the US or the Chinese supply chain, and to declare their enmity toward the other supply chain.
Going by all the available pieces of evidence, the technology showdown between the US and China is a long-term trend. It is unlikely to be resolved very soon.