The US-China trade and technology war effectively began in 2018. On July 6, 2018, US President Donald Trump unilaterally imposed a 25 percent tariff on Chinese imports of about $ 34 billion and additional tariffs in 2018 and 2019 – claiming that trade between the United States and China had become unfairly skewed in China’s favor and needed to be rebalanced. The apparent reason put forward was the persistence of what was called “unfair trade practices” and “technology theft” by China.
After that, the trade war continued into President Joe Biden’s administration and turned into a technology war, which has probably always been about. The United States has taken aggressive steps to deny China both the knowledge and input required to produce some cross-border goods and services, as well as access to markets – most of all, affecting semiconductor production and 5G technology, with Chinese company Huawei was becoming a global market leader.
The broader context of the trade war was the growing US trade deficit, which was $ 735 billion in 2016, just before Trump took office. Figure 1 shows that despite the more protectionist stance, the overall US deficit actually continued to rise thereafter, to as much as $ 911 billion by 2020.
China was seen as the biggest problem and the biggest source of the trade deficit, which was “blamed” on China rather than on macroeconomic processes in the US that were likely to generate trade deficits.
It is certainly true that the bilateral US trade deficit with China had increased markedly since 2000, and especially in the periods 2004-08 and 2011-18, as shown in Figure 2.
In fact, after the global financial crisis, China began to absorb a large part of the composition of the trade deficit for goods and peaked at almost half in 2015 (Figure 3).
Nevertheless, China’s contribution fell sharply after 2018, to around a third in 2020, although its share of US imports fell only marginally. This was mainly due to the fact that the US trade deficit with other countries grew larger due to declining exports during the pandemic.
One of the more obvious concerns about U.S. trade policy with respect to China has been not only the total imports from China, but the growing importance of high-tech imports.
China has managed to diversify and upgrade its own export basket significantly over the past two decades through an active political emphasis on domestic technology development, aided by rules that required foreign investors to set up joint ventures with Chinese counterparts where the technology would be shared.
This was done voluntarily and even voluntarily by US multinational companies eager to enter the fastest growing market in the world and also use China as a base for further exports. Yet it is this strategy that is now seen as having created a threat to the United States in the form of rapid technological advances in China.
Figure 4 shows how, over the two decades since 2000, even in terms of exports of manufactured goods, China has moved away from relying on exports of more traditional developing countries such as textiles, clothing and leather to electrical and non-electrical machinery and miscellaneous goods. (as a toy), which became the dominant manufactured export in 2009.
In the 2010s, export growth was mainly concentrated on electrical machines, including electronic products such as smartphones and tablets, which have established such a significant market presence worldwide.
Interestingly, U.S. dependence on Chinese imports during the pandemic appears to have grown rather than declined (Figure 5). Imports to the US from China in the first half of 2021 were on average 46 percent higher than in the first half of 2020. Supply chain problems due to the pandemic that hit Wuhan and other provinces in China in the first months of 2020 were, of course, addressed relatively quickly, for to enable renewed production and exports to the rest of the world at a time when other countries were still facing renewed waves of the pandemic affecting economic activity and production in particular.
US fears of ‘security’
It is also possible that many of these recent US imports from China are in the form of high-tech products, which the US now openly sees as a competitive threat. The dangers of China, previously described in terms of a different, more protectionist economic model, are now being downplayed by a US administration, which is once again discovering the joys of trade defense linked to industrial policy. So the focus has shifted to using national security concerns to prevent China from accessing crucial inputs needed for high-tech production.
This explains recent measures to restrict China’s access to semiconductor chips, which are crucial for new 5G-enabled smartphones. This is an area where China’s ability to develop its own domestic suppliers has been limited.
Currently, China imports chips for about $ 300 billion a year, more than half of which are then re-exported into finished electronic products. The most advanced Chinese company that makes these chips, Semiconductor Manufacturing International Corporation (SMIC), uses imported technology and inputs to make the chips.
But now all U.S. equipment suppliers must apply for a license from the U.S. government before they can sell to SMIC, which effectively puts a brake on such sales and significantly hampers its production.
Similarly, the giant Chinese telecom giant ZTE has been fined and sanctioned, allegedly for covering up its role in selling US technology to Iran.
The problems and sanctions that Huawei faces for alleged espionage and ties to the Chinese state’s “techno-authoritarianism” are now too well-known to require further elaboration.
The argument for such an aggressive strategy from the United States is typically formulated in relation to “national security”, but it is clearly about claiming the economic territory of the future, whether it is in the form of communication technologies such as 5G or renewable energy solutions. It remains to be seen what it will look like over the next few years.