For years, the Chinese government has helped its companies take the lead in key technology sectors, but with the US-imposed trade war causing an economic pinch, it remains to be seen if Beijing will change its policy.

In an article published in the Harvard Business Review in 2010, two economists predicted the ongoing trade war between the United States and China.

That year China surpassed Japan and became the world’s second largest economy right behind the United States, a spot it still maintains. 

Thomas Hout and Pankaj Ghemawat, the authors, saw China helping steer its companies into the high-tech era, something they said would create friction with the US and European governments. 

Beijing was forcing multinational companies to share their technology and designs with local Chinese partners in sectors such as high speed rail and renewable energy, says Hout. 

“So we figured that this race will continue and Western governments will make attempts to contain it and that’s exactly what’s happened,” he told TRT World in a recent interview. 

Since last year, the US and China have targeted each other’s exports with tariffs. Washington accuses Beijing of devaluing Chinese currency, the renminbi, to make its exports cheaper and stealing technology from American firms. 

The US trade deficit - the difference between exports and imports - with China hit record high of more than $323 billion in 2018. 

The two sides are now in talks to diffuse tensions and officials expect some sort of an outcome later this month. 

US Treasury Secretary Steven Mnuchin led his side in latest round of talks held in Beijing last week to end trade dispute with China.
US Treasury Secretary Steven Mnuchin led his side in latest round of talks held in Beijing last week to end trade dispute with China. (AP)

But the trade war has cast a shadow on the global economic outlook. 

Experts have raised doubts if it will convince Chinese leaders to implement much-needed reforms such as reducing the size of its dominant public companies. 

It also highlights the shortcomings of American businesses.  

Morita’s warning 

In the 1980s, the US was embroiled in a similar trade dispute with one of its closest allies - Japan. 

Japanese cars, stereos and TVs flooded the US market and American lawmakers weren’t happy about frequent layoffs at local factories. 

They accused Tokyo of deliberately devaluing its currency and not opening the market for US-based telecommunication equipment makers. 

But the late Akio Morita, the co-founder of Japan’s electronic giant Sony, at the time said that American executives were prioritising quick profits over long-term stability by moving production overseas to low-cost centres. 

“This phenomenon is leading to what I call hollowing out of American industry. America’s industrial establishment is being reduced to a mere shell, and the same is happening all over Europe,” he wrote in his book Made in Japan. 

There was also dispute over Japanese telecoms companies outpacing their American counterparts. Morita said that was because of better quality of Japanese products. 

Any claim to the contrary wouldn’t hold since products such as switchboards were bought by experts who specialised in the sector and not the general public, he said. 

Sony's co-founder Akio Morita saw the coming decline of US industrial might because he said American executives were too keen to cut costs by offshoring production.
Sony's co-founder Akio Morita saw the coming decline of US industrial might because he said American executives were too keen to cut costs by offshoring production. (AP)

But Japan didn’t pose diplomatic challenges to the US, says Hout. 

Japan depends on US security and often toes Washington’s line on international affairs, he says. “China on the other hand is a geopolitical rival of the United States.” 

A question of trust

The US-China trade war has coincided with Washington-led attempts to ban Chinese tech giant Huawei from participating in the upcoming 5G network rollout. 

Despite cybersecurity concerns and facing a boycott by the US market, Huawei has become the world’s largest telecommunications company, making and selling fibre optic cables, base stations and internet routers. 

The US and its allies such as Australia and New Zealand fear that the Chinese government could use Huawei equipment for espionage.

Up until now no one has been able to provide any evidence of so-called backdoors in the Huawei equipment that can be used to spy on people or institutions. 

Experts say the issue has become politicised since the arrest of Huawei’s Chief Financial Officer Meng Wanzhou, in Canada, on Washington’s extradition request. 

The fact that Western companies, such as Cisco, source components for their products from China, goes against the argument that steps against Huawei are purely based on cybersecurity concerns. 

Modern electronics contain tiny components, which companies source from different countries, says Olav Lysne, a Norwegian professor of technology and author of the book The Huawei and Snowden Question. 

“I believe most equipment would have components made in China,” he says, adding that it is exceptionally hard to have a “full provenance of an equipment down to the tiniest component”. 

China has invested heavily in emerging businesses such as renewable energy by backing its state-run companies.
China has invested heavily in emerging businesses such as renewable energy by backing its state-run companies. (Getty Images)

But the American and European companies would be under increasing pressure to make much of their products in-house, he says. 

China has not helped itself by using opaque ways to force foreign companies to share trade secrets with their Chinese joint-venture partners. 

“One of the features of that policy is that it’s not written anywhere,” says Hout. “The Chinese don’t write procedures. They simply carry them out at  both the national and provincial level.” 

The World Trade Organisation (WTO) prohibits rules that require forced technology transfers as a trade off for granting access to market. But in the absence of any hard evidence, it’s difficult to penalise Beijing. 

Western companies desperate to sell their goods in the fastest-growing market for everything from electric cars to solar panels didn’t complain. 

In their article, Hout and Ghemawat said that the US-China trade dispute was basically about “connecting two big, very different economic systems”. 

For the US, it’s important that China opens up its market and the government plays a smaller role in commercial activities. But that’s not what Trump is aiming for. 

According to reports, the settlement of the trade dispute revolves around China agreeing to buy hundreds of billions of dollars worth of agricultural and industrial products from the US. 

Whatever the final outcome, a quick resolution of the trade dispute is important. Otherwise, Zhou Xiochuan, China’s former central bank governor, warns: “[It will] create lots of problems for Chinese economy, for US economy, and for the global economy.” 

Source: TRT World