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Home / Business / Comment: Disconnect from Chinese technology or reforms to China's economic model? The United States cannot have both

Comment: Disconnect from Chinese technology or reforms to China's economic model? The United States cannot have both



CANBERRA: In two dramatic political announcements this month, the Trump administration has effectively prevented US companies and governments from purchasing telecommunications equipment or services from – or selling some components to – Chinese technology master Huawei.

President Donald Trump signed a broadly-based confirmation order limiting trade in information communication technology (ICT) products or services related to a "foreign opponent" who is believed to constitute an "unacceptable risk to US national security".

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The US Department of Commerce placed the Huawei Company and its affiliates on its Entity List – a term that requires US companies and foreign companies to sell products containing US components to obtain US government license before trading with a blacklisted company.

These traits represent the last steps towards "decoupling", the discontinuation of interconnection supply chains and trade relations that have made the US and Chinese economies so deeply interdependent in the last two decades.

  File picture of a Huawei phone

File image of a Huawei phone and logo. (Photo: AFP / Fred Dufour)

The decline in the private sector was fast. Stock markets fell, and key US and UK vendors quickly announced Huawei's hardware and software sales restrictions.

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Perhaps as a confirmation of the first over-reaction, white houses later lighten the constraints, which temporarily allow the sale of US goods and software to Huawei to maintain the reliability of existing networks, but maintain export restrictions on components for producing new products.

But the damage was already done. In fact, these decisions seem deliberately intended to accelerate the decoupling.

The ongoing commercial war may also target this underlying purpose because, as analyst Ely Ratner has assumed, the Trump administration believes that "the vulnerabilities associated with being too dependent on China are a problem in themselves".

COLLAPSE OF AN OPEN, GLOBAL MARKET

Restrictions on Huawei have urged someone to argue that we are currently witnessing the collapse of an open global market for ICT goods and services . Others cite the new guidelines as the last confirmation of a provocative "economic" or "technological" cold war between China and the United States.

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  FILE PHOTO: Huawei P30 handset is displayed in a phone shop at a Bangkok mall

A Huawei P30 handset appears in a phone shop at a mall in Bangkok, Thailand. (Photo: REUTERS / Soe Zeya Tun / File Photo)

For the companies that are trapped in the middle, the decoupling will not be a neutral process. Businesses must make decisions about which side of the "economic iron curtain" they will fall, ruled for reasons of profitability and political risk.

Some may see greater opportunities on the Chinese side, such as Sinovation Venture which recently announced its decision to stop investing in the United States and concentrate on tech startup in China.

Others will choose the US market. Supermicro, a California-based chipmaker, recently instructed its vendors to shift production out of China to help American customers worry about possible cyber-espionage vulnerabilities.

The Japanese manufacturer of printers and scanners, Ricoh, announced this month that they would move some production from China to Thailand to avoid US tariffs which continue to increase as negotiations to end the trade war fall.

These companies are part of a growing list of companies that have tried to move some or all of their Chinese productions to other markets in the past year.

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TRUMP's CONTRADICTORY GOALS

Nevertheless, there is an inherent and fundamental contradiction in Trump administration's China policy.

On the one hand, decoupling of US and Chinese technology supply chains can well facilitate perceived national security issues posed by companies such as Huawei.

But the United States, and just as important its European and other Western partners, have a further goal: to push China to make significant changes to its state-dominated economic model, characterized by an activist industrial policy, discrimination against foreign competition and a party-led legal system .

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  China's President Xi Jinping attends the Beijing Conference on Dialogue on Asian Civilizations

China's President Xi Jinping attends the Asian Civilization Dialogue Conference in Beijing, China May 15, 2019. (Photo: REUTERS / Thomas Peter )

These two goals are completely contradictory. Liberalization of the economy cannot happen without elaborating China's integration with (and dependent on) global markets.

If there were any opportunities for such reforms, the Chinese government would have greater certainty that China's economy could rely on unobstructed market mechanisms to increase its continued growth.

It may be that Western hopes of a liberalized market-priority China that led him to join the World Trade Organization were always unrealistic in relation to the Chinese community's governing ideology and pushed it faces to maintain domestic political legitimacy.

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Nevertheless, regardless of remaining confidence Beijing could have had in markets, this latest intervention has been completely erased. China's leaders will only have the incentive to accelerate their activist industrial policy and self-sufficiency in leading technology sectors.

DECOUPLING DILEMMA

This is the decoupling problem facing the United States: The tactical benefits of prioritizing national security concerns in economic policy design come with the long-term strategic consequence of undermining confidence in free markets.

While a withdrawal from classical free-market liberalism is par for Beijing's course, a more statistical approach to steering the economy is less well-known to Washington (though it still has its advocates).

  US President Donald Trump shakes his hand with China President Xi Jinping after 2017 talks in

US President Donald Trump shakes hands with China's President Xi Jinping after 2017 talks in Beijing (Photo: AFP / Fred DUFOUR)

This may be inevitable. While open markets and deeply interdependent dependencies have long been seen as contributors to geopolitical stability, they may not be able to limit the impact of technology on great power competition.

The deliberate "decoupling" of certain sectors of their economies – as witnessed in ICT by the Huawei decision at the moment – can therefore actually reduce the tension between the two major powers.

A more diversified form of "managed interdependence" may arise in a major purchase between Washington and Beijing, or it may occur gradually as each side carries out unilateral action to limit specific vulnerabilities.

Decoupling – once lost as a fantasy held by the Trump administration fringe elements – quickly becomes a reality, and policies that accelerate this trend appear to have broad two-sided support. Although greater economic independence in some sectors may alleviate some of the greatest uncertainties, there is just as much risk of such a project going too far.

Clearly, the policy community must face the disintegration dilemma: Should the United States go completely away, and possibly irreversibly, from a decade-old project to liberalize the Chinese economy and integrate Beijing into the global community by facilitating access to open and non- discriminating markets?

Although this project may not have succeeded as desired, too much of an over-correction can just as easily lead to the kind of great disagreement that integration was intended to avoid in the first place.

Darren Lim is a senior teacher, and Victor Ferguson is a PhD candidate, both in the police school and international relations at the Australian National University. This comment first appeared on the Lowy Institute's blog The Interpreter. Read it here.


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