The political relationship between the US and China has become very tenuous. While the US continues to place additional restrictions and pressure on China, the response from China has been muted to date, at least from an external perspective.
The situation, however, will change in the first quarter of 2021. China will push back and attempt to force a settlement in some areas it considers to be non-negotiable. As a result of the pushback from China, the US will likely increase the pressure on China because the new US president, Joe Biden, will not want to appear weak. Chinese President Xi Jinping also does not want to appear weak and does not want to damage the reputation of China.
The expectation is that the political situation between the US and China will initially deteriorate in 2021. The hope is that by Q4/2021, the two countries will resolve some of their key differences based on rational actions.
There are some basic differences in the political structures between the US and China, and the reality is that neither country has the capabilities to persuade the other to make significant changes in how they manage their economies. It is, consequently, important to focus on the areas where cooperation can be established, and where both countries can achieve growth in prosperity in the longer term.
The US has the following position on the US-China trade dispute:
- Trade imbalance: China is not buying enough products from the US, which is causing a large trade imbalance, and that imbalance will increase in Q3/2021. Goods from China are also low-cost because Chinese government agencies subsidize its industries, which is in violation of trade agreements.
- Rate of technology enhancements: Chinese government agencies are subsidizing new areas of technology, which gives Chinese companies unfair competitive advantages. The US will try to continue forcing China to slow down its advancements in key areas of technology by restricting the supply of semiconductors and other products to China that have US technology content.
- Data protection: The US is building its own data-protection ecosystem and trying to get other countries to adopt it. Any data transmitted within Chinese companies and technologies may be accessed and used by the Chinese government, which may be detrimental to US corporation and consumers.
- IP protection: China has stolen and continues to steal intellectual property from the US and other countries to build up its own technology capabilities. A significant amount of success by many Chinese companies is from acquiring IP from outside of China without providing adequate compensation for it.
China has the following position on the US-China trade dispute:
- Trade imbalance: China will buy what the US sells, which is primarily agricultural products, oil and gas. While China has invested in building efficient manufacturing capacity, the US has not made this commitment. Consequently, the US has limited supply-chain capabilities to produce goods that are produced in China.
- Rate of technology enhancements: China has developed fifth-generation (5G) technology from making large investments in leadership capabilities, and its core technologies were developed in China. China has also made large investments in other areas of technology such as high-speed trains, financial tech, health monitoring, and robots. The US needs to invest more in technology development and manufacturing capacity to track the technology roadmaps of the companies in China rather than trying to slow down the activities in China.
- Data protection: China is building its own data-protection ecosystem and trying to get other countries to adopt it. Additionally, China is accelerating the development of quantum communications technology and new encryption capabilities as capabilities that protect data. Furthermore, the US is protecting key data, so China also has the right to protect its data.
- IP protection: China is already ahead of the US in some areas such as 5G and is willing to collaborate with the US and other countries on IP protection. Many companies in California’s Silicon Valley and other areas have been formed or have grown by acquiring IP from potential competitors. China is taking actions to protect its IP in strategic areas.
Both the US and China have positions that need to be defined in a number of areas. However, a key factor for resolving the trade dispute is to take a rational approach to each area, with realistic solutions in negotiations.
One issue that should be given very high priority by the US is the significantly faster rate of technology enhancements in China compared with the past. China is moving ahead of the US in several areas of technology.
An example of China’s rapid rate of progress is in 5G infrastructure installation and technology. A perspective on the planned schedule for installation of 5G base stations in China is shown in the following figure.
The expectation is that China will install almost a million 5G base stations by the end of 2020, with a plan to install almost 6 million by the end of 2024. The US is two years behind China in the installation of 5G, which provides high bandwidth and low latency.
Establishing a large number of 5G base stations is a critical part of the new China because of the ability to support the delivery of high-definition video and other data with high bandwidth and low latency. Emerging applications such as telemedicine, autonomous transportation, autonomous logistics, factory automation, and other areas will be supported by 5G communication.
China has also started a 10-year program to develop and commercialize 6G communications and the evaluation of multiple options, including quantum communications.
China has recently launched a satellite to test 6G in space, which indicates the country’s strong emphasis on high-bandwidth communication.
A key problem for China is that Huawei Technologies is the main vendor for the installation of 5G base stations and supporting backbone infrastructure. While other companies in China participate in 5G such as ZTE, the clear leader in capabilities is Huawei. The US has blocked the supply of semiconductors to Huawei by almost every semiconductor company globally, including US companies, in 2020.
China, however, will not allow this supply restriction to continue. It is this matter that will be one of the key areas where China will initiate strong pushback against the US, and the likely timing is Q1/2021 or Q2/2021 at the latest.
The US continues to impose 7.5-25% tariffs on approximately $370 billion worth of Chinese goods and restricts Semiconductor Manufacturing International Corporation (SMIC) from buying wafer-processing equipment. These and other trade restrictions on China are irritants but do not represent challenges where there are no other options.
Similarly, banning TikTok and WeChat from the US market is an irritant to the Chinese government but is not fundamental to the growth of high-technology industries in China.
Stopping the installation of 5G infrastructure, however, is a step too far by the US, and China will respond aggressively. Some possible responses from China include:
- Use the patent portfolios of Chinese companies in 5G to block the activities of Ericsson, Nokia, and Samsung Electronics in establishing 5G infrastructures in the US and other countries.
- Block the establishment of 5G systems, subsystems, and components in China for foreign companies. This may impact the activities of Ericsson and Nokia.
- Block 5G smartphone sales in China that use technology that is not approved by China. This option could impact Apple and the sales of many US and European semiconductor vendors into China.
- Ban electronics equipment of foreign companies that do not meet Chinese standards in data protection and security into the China market. This option may allow China to be selective in which companies have access to the China market.
The above examples are some steps that China can take and are focused on 5G-related electronics. China also has a wide range of other options that can put pressure on the US in many industries, including those related to pharmaceuticals.
Any action by China will likely be met by the US with additional restrictions on China. The ongoing retaliation by both countries will result in additional losses for companies and consumers in both countries. It is, consequently, important for the areas of dispute to be clearly defined in order to provide adequate solutions to resolve these disputes.
Another issue is that the US is concerned with the subsidies provided by the Chinese government to Chinese companies and research institutes. The approach of trying to get China not to subsidize new industries is not going to be successful because it is critical for China to build new industries that can provide high levels of employment to its 7 million to 8 million university graduates every year.
There is also the need to provide employment to people who lose their jobs because of new technology such as factory automation using robots instead of people and autonomous transportation making human drivers obsolete.
China understands that new industries need to be built to provide employment in the future. Investments need to be made for many years in developing and commercializing technologies before employment becomes large.
There are arguments that state-owned enterprises and research institutions may not be efficient, and too many companies emerge in many areas such as electric vehicles (one of the latest areas). The reality is that building employment is a core capability in China.
The support by government agencies in China to build new industries is another area that is not negotiable. The best option for the US is to outperform China in many new technologies, which can also result in new employment opportunities in the US in the future.
The US uses national security as a reason for imposing restrictions on certain Chinese companies, and national security is an important concern for the US and other countries. An area of importance in national security is data. While data has been called the new oil, a better description is a new currency. The US protects the dollar, China protects the yuan, Europe protects the euro, and a similar perspective needs to be taken to data.
There are exchange mechanisms for currencies. A similar perspective can be taken to data, which includes encryption keys for data, where artificial intelligence (AI) can extract value from data. China is testing its digital yuan, and this is both visionary and practical. China wants to have control over digital currency rather than having corporations such as Ant Group and Tencent having the control, but this perspective has mixed benefits.
The US, Europe, and other countries should emulate some activities of China in digital currency and other areas, with the goal of being superior to China. A winning perspective needs to be developed rather than being a victim of China’s activities. The US needs positive leadership, with the emulation of many approaches that made the US successful in the past.
Trying to slow down China in 5G and some other areas is a lose-lose situation because the world needs 5G (and 6G will be needed in the future). The perspective is that many industries and services can obtain high productivity from having high-bandwidth and low-latency connectivity.
The factors that have caused the trade dispute between the US and China need to be resolved. It is, however, critical to be rational in various problem areas and to provide win-win solutions. Trying to make China change some of its operation methods will not be effective because of their importance in the country’s longer-range strategies. The perspective is that China is making many astute decisions in transforming into a high-technology country.
The US and China are in a race, and the key factor is how to win by going faster than the opponent. Trying to place handicaps on the opponent is not effective in global competition unless there are well-defined counterstrategies on how to win.
The US and Europe were leaders in 2G, 3G and 4G but are lagging in 5G. This is the fault of the US and Europe – not China. The US and Europe did not make appropriate investments in leadership technologies while China made large investments in developing leadership technologies.
An essential area to have leadership technology is 5G. There will be many others in the next five to 10 years, but the ultimate technology is AI. There is, consequently, an opportunity for the new Biden administration in Washington, DC, to develop winning strategies rather than complaining that China has unfair competitive advantages.
Winning is required, and appropriate strategies must be developed and implemented in leadership technologies that have high levels of strategic importance.