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 further tariffs in 2018 and 2019 — alleged that trade between the US and China had been unfairly skewed in China’s favor and needed to be rebalanced. The apparent reason put forward was the persistence of what China called “unfair business practices” and “technology theft”.
Since then, the trade war has continued in the administration of President Joe Biden and turned into a technology war, which it has probably always been about. The US has taken aggressive steps to deny China both the knowledge and inputs needed to produce a number of frontier goods and services, as well as access to markets – especially affecting semiconductor manufacturing and the 5G technology it uses. Chinese company Huawei a world market leader.
The broader context of the trade war has been the growing US trade deficit, which hit $735 billion in 2016, just before Trump took office. Figure 1 indicates that despite the more protectionist stance, the overall US deficit continued to increase thereafter, reaching $911 billion in 2020.
China was seen as the biggest problem and the bigger source of the trade deficit, which was ‘dedicated’ to China rather than to US macroeconomic processes likely to create trade deficits.
It is certainly true that the US bilateral trade deficit with China had increased significantly since 2000, and especially in the periods 2004-2008 and 2011-18, as shown in Figure 2.
Indeed, after the global financial crisis, China began to occupy much of the trade deficit composition, peaking at nearly half in 2015 (Figure 3).
Still, China’s contribution declined sharply after 2018, to about a third in 2020, although China’s share of US imports declined only marginally. This was mainly because the US trade deficit with other countries widened as a result of declining exports during the pandemic.
One of the more obvious concerns of US trade policy towards China is not only total imports from China, but also the growing importance of advanced technology imports.
China has managed to significantly diversify and upgrade its own export package over the past two decades, through an active policy emphasis on domestic technology development, aided by rules requiring foreign investors to set up joint ventures with Chinese counterparts, in which the technology would be shared.
This was done voluntarily and even voluntarily by American multinationals eager to enter the fastest growing market in the world and also use China as a base for further exports. Yet this strategy is now seen as a threat to the US in the form of rapid technological progress 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 more traditional exports from developing countries such as textiles, clothing and leather to electrical and non-electrical machinery and various items (such as toys) which became the dominant industrial export in 2009.
In the 2010s, the growth in exports was mainly concentrated in electrical machines, including electronic products such as the smartphones and tablets that have gained such an important market presence worldwide.
Interestingly, during the pandemic, US reliance on Chinese imports appears to have increased rather than decreased (Figure 5). US imports from China were on average 46 percent higher in the first half of 2021 than in the first half of 2020. The supply chain problems caused by the pandemic that hit Wuhan and other provinces of China in the first months of 2020 , were obviously addressed relatively quickly, to allow for re-production and exports to the rest of the world at a time when other countries were still dealing with renewed waves of the pandemic that mainly affected economic activity and production.
Fear of ‘security’ in the US
It’s also possible that much of these recent imports from China have come from the US in the form of high-tech products that the US now openly sees as a threat to competition. The dangers from China, previously described in terms of a different, more protectionist, economic model, are now being downplayed by a US administration that is rediscovering the joys of trade defense related to industrial policy. So the focus has shifted to using national security concerns to prevent China from accessing crucial inputs needed for high-tech manufacturing.
This explains recent moves to restrict China’s access to semiconductor chips, which are essential for new 5G smartphones. This is an area where China’s ability to develop its own domestic suppliers has been limited.
Currently, China imports about $300 billion worth of chips in a year, more than half of which is then re-exported in finished electronic products. Semiconductor Manufacturing International Corporation (SMIC), the most advanced Chinese company making these chips, uses imported technology and inputs to make the chips.
But now all US equipment suppliers must obtain a license from the US government before they can sell to SMIC, effectively curbing such sales and significantly hindering its production.
Likewise, fines and sanctions have been imposed on giant Chinese telecom giant ZTE, ostensibly for covering up its role in selling US technology to Iran.
The problems and sanctions facing Huawei for alleged espionage and ties to the Chinese state’s “techno-authoritarianism” are now too well known to be elaborated on.
The argument for such an aggressive strategy by the US is usually framed in terms of “national security” considerations, but it is clearly about claiming the economic area of the future, whether in the form of communication technologies such as 5G or renewable energy is solutions. It remains to be seen how this will play out in the coming years.