No Winners in US–China Technology Divide

09/13/2020

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Jonathan D Pollack | East Asia Forum

TikTok and WeChat, two hugely successful Chinese social media applications that have gained global popularity, abruptly find their access to the US consumer market at risk. In August, US President Donald Trump ordered TikTok’s parent company ByteDance to sell its product to a US company within 90 days. He simultaneously banned Tencent, the owner of WeChat, from most of its operations in the United States.

The administration has targeted these two apps, but with somewhat different purposes in mind. TikTok has a global following that already numbers 800 million users, and has ample allure to potential American bidders, including Microsoft and Oracle, with an estimated market value of US$20-30 billion. WeChat is an all-purpose app within China and abroad, encompassing gossip, sanctioned and unsanctioned news reporting, online payment systems, and contact between Chinese living abroad and their families and friends at home.

The Trump administration sees malicious uses underlying dependence on both apps. According to Secretary of State Mike Pompeo, utilising Chinese social media tools leaves massive amounts of personal data vulnerable to exploitation by Chinese intelligence, though both parent companies deny these allegations. The US claims that dangers to US national security justify efforts to disconnect Chinese carriers from America’s telecommunications networks. Few non-government analysts can properly evaluate these allegations, and the government has disclosed little information to substantiate its claims.

Chinese officials view these pending restraints as part of a larger effort to deny Chinese firms access to the US market, thereby impeding their continued advance and circumscribing future commercial opportunities. In response, Beijing is threatening to block the sale of TikTok’s assets by withholding approval of Chinese export licenses for sale of China’s commercial technologies to US firms. China’s Ministry of Commerce has also announced new restrictions on the export of technologies that can be used for analysing personal information. In the competitive world of social media and e-commerce, Chinese companies grasp that turnabout is fair play, and that they are not without leverage.

These moves reveal an intensifying US-China technological divide, with both countries proposing separate models of global digital governance. The Trump administration has enunciated plans for a ‘clean network’, and all measures exclusively target China. In response, China has unveiled its own proposal for data security standards, based on ‘cyber sovereignty’. This would enable individual countries to regulate and control their uses of the internet.

The US’s threat-driven narrative of China now goes well beyond Trump’s long-standing obsession with trade imbalances, though these remain a core part of his message. After protracted negotiations, the two countries signed a phase one trade agreement in January 2020, obligating China to make large-scale purchases of US agricultural products and manufactured goods. Trump saw the agreement as vindicating his belief in managed trade, but — partly because of the COVID-19 pandemic — the accord has done little to narrow the trade imbalance.  Moreover, his unilateral imposition of new tariffs, initiated in  2018, failed to recognise that China would impose retaliatory tariffs of its own. Trump remains unwilling or unable to grasp that tariffs are a tax on US consumers and US companies, representing a dual liability to the United States.

The investment outlook is even more sobering. Chinese outbound investment to the United States surged to record highs in 2016, but has since plummeted to 2010 levels. The expectation that increasing integration between the world’s two largest economies would provide much needed ballast for the bilateral relationship does not apply in an administration dominated by economic nationalists hostile to interdependence.

In the longer run, the administration seems intent on strategic separation and economic decoupling from China, especially in high technology areas. This includes Huawei, a leader in telecommunications gear and already well advanced in its 5G ambitions. The United States is pressuring its closest allies to sever or at least sharply curtail their links with Huawei, which it deems a major national security threat and commercial challenger. New US regulations prohibiting the sale of US chips to Huawei for smartphone manufacturing will deny Huawei the ability to compete once its existing inventory of chips is exhausted. But it provides a powerful impetus for China to devote major resources to the indigenous development of advanced chips.

Punitive sanctions are an additional weapon in the administration’s arsenal. These are aimed at senior Chinese officials held responsible for policies that the United States deems objectionable or illegal, at commercial entities accused of technology theft, and at firms with substantial assets in the United States. Such measures are expected to inflict pain on China, though it seems likely to spur Beijing to pursue closer ties with major trade partners other than the United States.

It is also unclear how the administration expects these actions to induce longer-term Chinese behaviour that would address US grievances. Trump and his advisers seem to believe that punitive policies will slow China’s advance, and that characterising China as the preeminent threat to the United States will benefit Trump’s re-election prospects. But the administration has given minimal consideration to the implications of an adversarial relationship with Beijing, or to the consequences of an increasingly fractionated global economy as China increasingly goes its own way.

China’s experiences with the Trump administration have been deeply sobering to leaders in Beijing. No matter who is elected in November, China will seek to reduce its dependence on the United States and accelerate the development of indigenous technologies to protect the country from US unpredictability and hostility. The next administration will need to ponder carefully whether a lasting US–China technology divide will be in anyone’s long-term interest.

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