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Made In China? America First? The Tech Arms Race Is On

At November's SR SHOW 2017 in Shanghai.
At November's SR SHOW 2017 in Shanghai.

In the age of Trump, there are innumerable issues and arguments that go unnoticed or underreported because this president is sucking up the oxygen of the entire American media universe, with his indecisive tweets and resulting indecisive policies. This is one of those topics that escaped the public eye. It centers around Trump's announcement to charge China with new tariffs on a long list of products. It seems easy, banal even, but the problem is deep. Part of America is becoming aware of it, and this administration is even attempting to react. But is President Trump on the same page?

WASHINGTON — One month ago, when President Trump announced that he intended to challenge China with trade tariffs, little was known about the dimensions of his move or its consequences. Considering his typically bombastic style of communicating, Trump delivered his message in a fragmented, but still Trumpian, way. "We have a trade deficit of $504 billion, or $375 billion, depends how you look at it," said the president from the White House, surrounded by a group of his close, petrified collaborators. Trump added that the biggest part of the deficit comes from China, and therefore, "You know, I talked to the high Chinese officials, including President Xi Jinping, and I asked them to cut down the deficit immediately for $100 billion. But that would be a lot so we decided to go for the tariffs worth $60 billion."

After the president finished his message, the White House promptly corrected him, saying the tariffs against China will be worth $50, not $60, billion. Peanuts. The media, without having much idea as to what was happening, improvised commentary on the President's message and speculated that the tariffs will backfire, affecting the American auto industry and a wide range of products, including high-tech gadgets, food, furniture and beverages, beer and bourbon.

Very few noticed, however, that on the same day that Trump mistakenly announced $60 billion in tariffs against China, the Office of the United States Trade Representative (USTR) made public the results of its Section 301 investigation into China's unfair trade practices. The 200-page document is probably one of the most serious attempts of this administration to develop a strategy that goes beyond this president's erratic communication, grounding itself more firmly in the field of the global politics. The document, 301, is the result of a few months work and tends to outline a plan of how to deal with China's disregard for intellectual property, its discrimination against foreign firms, and the use of preferential industrial policies to unfairly bolster homeland firms.

Making sense of it all

When, a few days later, the 200 pages were digested, we finally understood that the mixed messages sent by Trump, who has railed against the bilateral trade deficit, tarnishing and distracting from the real objective of the tariffs. It became clear that they do not represent a simple trade war, but may become the tool for a substantial realignment of the current geopolitical trend toward protectionism, and therefore isolationism, or "America First." The tariffs against 1,300 Chinese products is the first defense line of the declining American empire in the face of China's expansionism. It's called the trade war because it matches the combative language favored by this president, and underlines the real and main target of the imposed tariffs is Chinese industrial policy, which aims at upgrading its technological infrastructure. Specifically, the American move seeks to combat what is being viewed as Beijing's concerted and coordinated efforts to acquire American technology in support of China's "Made in China 2025" plan.

According to the Council on Foreign Relations: Made in China 2025 is a blueprint for Beijing's plan to transform the country into a hi-tech powerhouse that dominates advanced industries like robotics, advanced information technology, aviation, and new energy vehicles. The ambition makes sense within the context of China's development trajectory: countries typically aim to transition away from labor-intensive industries and climb the value-added chain as wages rise, lest they fall into the so-called "middle-income trap." Chinese policymakers have diligently studied the German concept "Industry 4.0," which shows how advanced technology like wireless sensors and robotics, when combined with the internet, can yield significant gains in productivity, efficiency, and precision.

However, China's intention through Made in China 2025 is not so much to join the ranks of hi-tech economies like Germany, the United States, South Korea, and Japan, as much as replace them altogether. Made in China 2025 calls for achieving "self-sufficiency" through technology substitution while becoming a "manufacturing superpower" that dominates the global market in critical high-tech industries. That could be a problem for countries that rely on exporting high-tech products or the global supply chain for high-tech components.

But another, more aggressive interpretation of the Chinese plan illustrates the breadth of its ambition, as well as the tactics employed to achieve its goals. If "Made in China 2025" were to generally succeed, the country would do for high-tech manufacturing what it did for low-cost manufacturing in the preceding two decades: vacuuming up a huge portion of global production and concentrating it in mainland China, as writes MacroPolo.org. China further strengthens its hegemonic power.

"Made in China 2025" was approved by the Chinese State Council (the government) in 2015. After flying under U.S. policymakers' radar the first couple of years post-release, the plan is now emerging as a focal point of bilateral economic tensions. There are three things that have triggered the U.S. reaction on Chinese industrial policy-making, writes MacroPolo: "(1) China now has the money to simply buy up cutting-edge American firms; (2) "Made in China 2025" aims for Chinese firms to dominate not just domestic markets, but also global markets that America counts on; and (3) after decades of doubting China's innovation potential, the United States now fears the rapid pace of China's technological catch-up, and sees Chinese technology as a major (perhaps even existential) threat to U.S. economic competitiveness."

The publication then details the American plan to contain "Made in China 2025" by targeting policies of forced technology transfers, discriminatory licensing requirements, overseas acquisitions, and illegal commercial hacking. And while the Trump administration has threatened various actions to address issues raised in the report–tariffs on $50 to $60 billion worth of Chinese goods, restrictions on Chinese investment in the United States–the public focus on tariffs has led many to mistakenly view this scuffle as centering on the trade deficit.

Google HQ — Photo: Håkan Dahlström

As a closer examination shows, these moves largely target the four categories of unfair technology acquisition. China's licensing practices are on the agenda of the World Trade Organization, which specifically challenges the Chinese law that grants Chinese entities the right to use foreign technology in perpetuity after a ten-year licensing contract expires. Chinese acquisition of U.S. technology firms, by contrast, are addressed by President Trump's order for the Treasury Department to propose measures restricting Chinese investments. As far as forced technology transfers and commercial hacking are concerned, there are no formal government policies, as the demands for technology transfers are often made between companies, while commercial espionage is not something that can be blocked by executive order.

Instead, the administration has opted for tariffs, a punitive measure designed to exact an economic cost for Chinese behaviors that it deems predatory, writes MacroPolo:

But the tariffs are an imperfect response for several reasons. It sends the wrong message ("trade war"), and also opens the United States up to a legal challenge at the WTO for taking unilateral action. If the administration loses that challenge, it risks allowing China to position itself as a defender of free trade and existing norms, while the United States comes across as the bull in the China shop of international agreements. Or, if things really come to blows on the trade front, China may simply be able to exert enough targeted pressure on U.S. agriculture to require a favorable settlement. China's recent imposition of tariffs of up to 25 percent on 128 categories of American goods and the subsequent damage to stock prices for American manufacturers gave a first taste of what may lie ahead.

The rest is history

It's bizarre how fast things are moving. While Nixon's knock-knock on China's door in the early seventies helped America exit Vietnam, the long-desired American control of mainland China represents a kind of black hole, into which American supremacy will ultimately disappear. Upon opening its borders, China did not direct itself toward the democracy that many Washington administrations predicted and desired. Nor has China become a substantial market for Western consumer goods. Instead, with almost $70 billion of foreign investment per year, China has become the biggest manufacturer in the world.

For many years, a big part of the Chinese GDP was based on massive exports that grew enormously the national wealth in terms of currency reserves, financial power and the economic influence of an emerging, soon-prospering nation. It was not easy at the beginning, though, as the West, in the first decade of Chinese economic reforms, was willing to trade the transfer of obsolete technologies only. That was a time when the Americans, Germans, and others thought of China as a follower of the gradual network development controlled by the West. But with the outsourcing of production, due to the cheaper cost of Chinese labor, modern technologies started to flood China. In return, a much cheaper product with substantially higher profit margins was guaranteed. And so we sold our soul to China making them a leader.

The West got caught up in competing with China's ever-growing economy, their greed causing them to lose sight of their goal, in turn allowing China to expand exponentially. The rest is the history; China benefited from such short-sightedness and now dominates the global economic market.

Perhaps the most evident documents that mark this historic change are the tariff lists provided by both sides that are about to ignite the trade war. Have a look at the 128 American products that China has listed in response to Trump's decision, and then compare it to the list of 1,300 Chinese products that are being targeted by American tariffs. You may note that the U.S. appears as a predominantly agrarian country, exporting soy, sorghum, and pork, while three decades ago an underdeveloped China waved the flag of an industrial power. Now, look. China is here, lifetimes from where was it at the time of Nixon. And where is America?

We live in very interesting times, marked by transition. President Trump's reactions to the changing situation are ludicrous, conservative, and blind. One of his apparent priorities is the rationalization of American consumption and, therefore, the reorganization of its economy. Another is closing all the doors, dismantling the progressive changes that came with Lyndon Johnson (yes, Johnson, not Kennedy or Clinton) and, in a smaller measure, with Obama. To challenge certain aspect of the Chinese industrial policy is fine since the Chinese were concealing themselves under a brand of underdevelopment for too long. But attacking a complex range of economic and political policies, and mistakes, which have been enacted and morphed over decades is impulsive and shortsighted.

Who remembers the war in Yugoslavia and the expansion of NATO that followed? It scared the Russians and Chinese to death. That was the first alarm, followed by the escalation of an arms race, both in Moscow and Beijing. China, especially, has become a completely different military power compared to ten years ago. The new-tech and AI armies of China create a lot of worries for the Pentagon. In the field of AI, China made a giant's leap in the last few years. In 2016, the defeat of Lee Se-dol, the South Korean board-game master of Go, Google's AlphaGo product, had a profound impact on Chinese politicians. Then in May, Google brought AlphaGo to China, where it defeated the world's top-ranked player, Ke Jie, of China. Live video coverage of the event was blocked at the last minute in China. As a sort of Chinese equivalent to the Sputnik moment, the demonstration of Google's achievements paved the way for a huge flow of funds into the field of AI research.

Nationalist syndrome

One can sense a fear and its resulting nationalist syndrome in these reactions. But the same happens also on this side, where Trump is slamming the door on everything, trying to return America to a middle age it never experienced. And while China has ready $300 billion to invest in AI and high-tech for her "Made in China 2025," the Trump Administration's proposed 2018 budget, as reported by Evan Osnos, would cut scientific research by fifteen percent, or $11.1 billion. That includes a ten-per-cent decrease in the National Science Foundation's spending on "intelligent systems."

In November, Eric Schmidt, then the chairman of Alphabet, told the Artificial Intelligence & Global Security Summit, in Washington, that reductions in the funding of basic-science research will help China overtake the U.S. in artificial intelligence within a decade. "By 2020, they will have caught up. By 2025, they will be better than us. By 2030, they will dominate the industries of A.I.," he said. Schmidt, who chairs the Defense Innovation Advisory Board, added that the ban on visitors from Iran was an obstacle to technology development. "Iran produces some of the top computer scientists in the world. I want them here. I want them working for Alphabet and Google. It's crazy not to let these people in."

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