US-China trade war: The dangers of disruption

A central factor in the escalation of US-China tensions relates to technology. The issues on the table go well beyond conventional trade disputes; tariffs get most of the press attention, but they are only part of a much bigger picture. Both the United States and China are already imposing, or considering imposing, restrictions on imports from each other of advanced high-technology products. In the process, they would be aiming at making their economies and companies less dependent on the other’s supplies of such technologies.

On the other side of the coin, curbs on the sale of critical technology have also been introduced. A couple of weeks ago, the US government ordered that the Chinese telecommunications firm Huawei be included on the “entity list”—a list of companies and other entities that the US government asserts pose risks to the country’s national security or foreign policy interests. On June 21, it added five more Chinese entities to the list, including a leading manufacturer of supercomputers, three companies in the microchip sector, and an institution engaged in high-performance computing. This means US exporters require special US government permission to sell designated components and technologies to such entities, in effect preventing or sharply curbing their sales. Additions to the list appear likely.

In turn, Beijing has announced that it will soon publish an “unreliable entities” list of foreign companies, individuals, and organizations that “do not follow market rules, violate the spirit of contracts, blockade and stop supplying Chinese companies for non-commercial reasons… and severely damage the legitimate rights and interests of Chinese companies.” China has not yet described the specific actions it would take vis-a-vis companies on the list, e.g., whether subsidiaries of listed US companies operating in China would be adversely affected, how it would affect exports from “listed US entities” to China, or how it would impact their subsidiaries in other countries doing business with China.

One risk for US companies is that they will be caught in a squeeze; if they restrict sales to Chinese companies in order to comply with US law they could be placed on the Chinese unreliable entities list and could, therefore, be penalized under Chinese law.

The dangers of disruption for both sides of this technology-related escalation—part of a process that many in Washington see as “decoupling”—are substantial. If the United States further broadens and deepens its “entity list” to restrict sales to more Chinese companies, especially if it includes items such as semiconductors on which Chinese companies are highly dependent, the disruptions to the Chinese economy would be substantial. Reducing foreign dependence in this sector now appears to be a Chinese high priority, even though experts estimate that it would take China several years to catch up and for the moment it needs them.  In addition, major US technology exporters, many of which depend heavily on the Chinese market, will suffer damage as well from lost sales and perhaps in time permanent cutoffs of their links with growing Chinese companies which have been big buyers of their products. And what then will be the implications for US companies operating in China that require these semiconductors—or other US-originated products—for their own production?

Moreover, other countries could see the escalation of such export restrictions by Washington as  omens of the future—potential punishment for them in the event that their government, or a given company, ever had a dispute with the United States. Might Washington then choose to use similar export restrictions as leverage? Such fears could cause foreign companies to diversify away from dependence on US suppliers.

Reducing sensitive high-technology exports to China and curbing US dependence on critical Chinese components is a growing theme in US policy already. Senior US officials frequently emphasize the need for accelerating “decoupling” for strategic as well as economic reasons. Some also argue that tougher export controls on advanced US technology products would curb or slow China’s rise as a high-technology power and competitor,  especially in areas such as 5G, AI, supercomputers, or other kinds of information and computer technology.

Senior Chinese leaders also have spoken with determination of “mastering crucial core technologies with our own hands” and increased “self-reliance” in critical technologies.

Even if in the improbable case that all tariffs and many of the more visible US-China trade issues are eliminated in the near future, the odds are high that many of these non-traditional, technology-centered issues would remain as a source of growing contention. So, ways must be found to manage and avoid disruptive confrontations around these as well. That will, almost certainly, require a longer negotiation.

Robert Hormats is an Atlantic Council board member, vice chairman of Kissinger Associates Inc., and a former US undersecretary of state for economic, energy and environmental affairs.

This is part of a series of blog posts on the US-China trade relationship in the runup to the meeting between US President Donald J. Trump and Chinese President Xi Jinping later this month at the G-20 Summit in Japan.

Image: A researcher planted a semiconductor on an interface board during research work to design and develop a semiconductor product at Tsinghua Unigroup research center in Beijing, China, on February 29, 2016. (Reuters/Kim Kyung-Hoon)