The Tech War between the US and China

China is closing the gap on US technology. The recent trade tensions between the two countries is being driven by the race for digital supremacy. 

How did China close the technology gap? Through Chinese companies investing in US tech companies. Chinese investment in the US technology sector increased from less than USD 1 billion in 2010 to approximately USD 11 billion in 2015, at its peak, and fell back to approximately USD 6 billion in 2016[1] because of US scrutiny on Chinese deals. Investment remained at around USD 6 billion in 2017, but according to market research firm, Rhodium Group, Chinese investment was down to USD 1.8 billion in the first half of 2018.[2]

China’s phenomenal technology growth was also helped by Chinese government policies which forced US companies to share knowhow and data in return for access to China’s massive 1.4 billion consumer market. Many US companies have willingly complied with these rules and have been allowed to set-up-shop in China under joint-venture agreements requiring continuous technology transfers from the US parent company.

Another way China draws on US technology knowledge is through US research and development (R&D) activities in China. A number of US firms carry out R&D in China due to some rules preventing them from selling in China if research to improve the product is undertaken outside of the country.

The Trump administration has argued that these rules are unfair and accuses China of intellectual property theft. The Wall Street Journal reported that President Donald Trump plans to bar Chinese companies from investing in US tech. Last year for instance, telecom-equipment maker ZTE Corp almost stopped US operations after the US Commerce Department blocked its access to American components because of sanction violations.[3]

President Xi said the trade fight would only encourage China to reduce its dependency on the US and to not hold back on its technological ambition. The US has dominated the technogical sector from the beginning, and since China is closing the gap, its battle to dominate is inevitable. The first to get ahead in 5G technology, which is considered the stepping stone to driverless vehicles and future cities, will win the race.  5G technology meets China’s ambition to be the world leader in artificial intelligence (AI) and is the key to President Trump’s pledge to “make America great again”.[4]

Source: CBInsights, FT

By Saraswati Kiran, Data Scientist at International Economics Consulting Ltd.


[1] Financial Times (2018) ‘The tech fear behind Donald Trump’s trade war with China’. Available from: https://www.ft.com/content/40304bea-7eb9-11e8-bc55-50daf11b720d

[2] The Wall Street Journal (2018) ‘Trump Plans New Curbs on Chinese Investment, Tech Exports to China’. Available from: https://www.wsj.com/articles/trump-plans-new-curbs-on-chinese-investment-tech-exports-to-china-1529883988

[3] The Wall Street Journal (2018) ‘Trade War Punctures China’s Pride in Its Technology’. Available from: https://www.wsj.com/articles/trade-war-punctures-chinas-pride-in-its-technology-1530186663

[4] CNBC (2018) ‘A major factor behind the US-China trade war is winning at a $12 trillion technology — 5G’. Available from: https://www.cnbc.com/2018/07/06/a-major-factor-behind-the-us-china-trade-war-is-winning-in-a-crucial-t.html

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