The US and China: Already Diverging In Tech, Now In Broader Economic Terms

China risks losing the momentum it created to become a truly global innovative force, because it will have cut off much of the world. But the US also risks losing its position as the global standard setter in tech, finance and academia.

In all likelihood, both will suffer more than policy makers on either side realize. JL

Greg Ip and Yoko Kubota report in the Wall Street Journal:

In coming years, products, applications and standards could gravitate toward separate U.S. and Chinese spheres. Trade flows once driven by cost, quality and proximity to customers increasingly reflect political priorities, whether it is Chinese purchases of U.S. energy and agriculture or the location of manufacturing plants.A new Cold War of limited and tightly controlled interactions isn’t likely: China is simply too big and too globally integrated. Nonetheless, American and Chinese investors, businesses and scholars could find themselves increasingly operating in separate spheres pursuing separate strategies.
The sudden deterioration of trade talks between the U.S. and China this week has raised the prospect of a once-unimaginable rupture between the world’s two largest economies.
Whether talks ultimately yield a deal, the decadeslong integration of the two economies appears bound to go into reverse as mutual suspicion and geostrategic rivalry permeate political and personal relationships.

The signs are accumulating: Manufacturers of shoes, cameras and iPhones are looking to move production beyond China. American officials are forcing Chinese investors to sell their stakes in American startups. Chinese scientists’ visas to visit the U.S. are facing delays.
How much further this decoupling goes depends critically on what sort of deal, if any, emerges from the current negotiations. A new Cold War of limited and tightly controlled interactions isn’t likely: China is simply too big and too globally integrated. Nonetheless, American and Chinese investors, businesses and scholars could find themselves increasingly operating in separate spheres pursuing separate strategies.
Some of the early trends are apparent. Trade flows once driven by cost, quality and proximity to customers increasingly reflect political priorities, whether it is Chinese purchases of U.S. energy and agriculture or the location of manufacturing plants.
Even if President Trump eventually lifts tariffs, multinationals will know they can be reimposed if tensions flare again. And China could slap tariffs, too. So to limit their exposure, many will shift assembly of U.S.-bound goods to third countries less exposed to protectionist threats. In some cases, the uncertainties stemming from trade tensions were the final nudge for companies, already facing rising costs in China, to go elsewhere.
Camera maker GoPro is moving production for the U.S. market from China to Guadalajara, Mexico. Shoemaker Steve Madden is moving production to Cambodia. Ford Motor Co. has largely scrapped plans to export vehicles from underused Chinese factory space back to the U.S. Taiwan-based Foxconn Technology Group is weighing assembling Apple Inc.’s iPhones in India, a huge emerging smartphone market.
Consumers often won’t notice: A camera or a shoe once labeled “Made in China” will now say “Made in Mexico” or “Made in Cambodia.” U.S. imports from China will shrink while imports from Mexico or Southeast Asia will rise.
But elsewhere China’s absence will be more noticeable. The U.S. has effectively banned Huawei Technologies Co. from supplying equipment for American telecommunications networks for fear it could become a “back door” for China to spy on Americans. As the definition of national security expands, more companies and sectors may get the Huawei treatment. Senators have proposed barring local governments from using federal funds to buy railcars from China’s state-owned rail company, ostensibly because the cars could be used to spy on American commuters.
If China agrees to open previously closed markets to U.S. investment and exports, then American products such as Tesla electric cars and services such as cloud computing may make inroads.
But some American brands may suffer a nationalistic backlash. Some Chinese consumers suggested boycotting iPhones after a Huawei executive was arrested for allegedly violating sanctions on Iran. Ethan Allen, an upscale furniture manufacturer and retailer, recently reported sales in China have been hurt by the trade war. However, Chinese consumers no longer associate many U.S. brands such as KFC, Coca-Cola and Pizza Hut with the U.S., said Doreen Wang, global head of BrandZ.

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Investment is likely to decouple even more than trade. Starting in 2010, Chinese investment began surging into the U.S. American officials now worry those investment flows enable Chinese state and private actors to appropriate American commercial and military knowledge, and want to curtail them.
The results are already evident. Chinese investment into the U.S. plummeted to $5 billion last year, a seven-year low, from $29 billion in 2017, according to a report Wednesday by Rhodium Group. That is because China clamped down on capital outflows and more of the U.S. became off limits. The firm estimates $2.5 billion in Chinese acquisitions were abandoned because of concerns raised by the Committee on Foreign Investment in the U.S., a secretive Treasury-led panel that vets foreign investment for security risks.
Last year “proved that the five-decade trend of closer engagement in U.S.-China relations was not inexorable, and patterns propelled by powerful commercial logic can be stalled or reversed by policy,” the firm observed.
Legislation last year vastly expanded Cfius’ remit from traditional security-related industries such as aerospace to a broad range of industries from biotechnology to batteries.
The panel has told one Chinese company to abandon a purchase of Grindr, a gay dating app, and another to sell its controlling stake in PatientsLikeMe, which helps people with similar health conditions find each other. Cfius appeared to worry those investments could be used to obtain sensitive personal information about Americans.
Meanwhile, new export controls may bar American companies from sharing key technology through joint ventures or other investments with partners in China. This may be why new U.S. investment in electronics in China plummeted last year while total investment was stable, according to Rhodium.
The effect of these changes may be hard to notice at first. Neither China nor the U.S. lack for capital. Over time, though, decoupling could rob both of valuable synergies, says Adam Lysenko of Rhodium. “The U.S. and China share the two largest cohorts of artificial intelligence researchers and brainpower so certainly bifurcating that talent pool will lead to less-efficient AI” development. Trump administration advocates respond that is a small price to safeguard American values and leadership against the rise of China’s autocratic state capitalism.
Bifurcation is also a risk for the broader technology universe. Technology products are highly standardized, reflecting integrated supply chains, free-flowing capital and knowledge, and international cooperation on standard-setting.
In coming years, products, applications and standards could gravitate toward separate U.S. and Chinese spheres. “In the early days of mainframe computing, the community divided into vertical stacks of IBM vs. Burroughs vs. Control Data,” says Peter Cowhey, an expert in information technology policy at the University of California at San Diego. “That is what would be happening here.”
Last October the Commerce Department barred sales of U.S. technology to Chinese government-backed semiconductor startup Fujian Jinhua Integrated Circuit, allegedly over theft of U.S. intellectual property. Fearing repeats, China has intensified efforts to reduce its dependence on foreign technology. For example, it imports almost all its semiconductors. This week Chinese Premier Li Keqiang called on government officials to speed up policies that would develop China’s semiconductor industry, according to the State Council, China’s cabinet.
It will take many years for China to develop indigenous capacity throughout the supply chain, if it ever does. Still, as supply chains decouple, so might technology ecosystems. Chinese smartphone makers already run their own app stores and use localized versions of Alphabet’s Android operating system. Facebook and Google are unavailable in China and Chinese giant Tencent’s WeChat has a limited presence in the U.S. Huawei has developed its own operating system as a backup in case it loses access to Android, a person familiar with the matter has said. If China breaks the American duopoly on operating systems, expect even more differentiation in available apps around the world.
While the world has converged on common standards for superfast fifth-generation (5G) mobile networks, individual countries and carriers may use different software, which will be more important than in previous generations, to govern how devices, from phones to Internet-enabled appliances, operate on the network. If the U.S. or its allies bar Chinese suppliers, their businesses and consumers may miss out on functions and devices in countries that allow Chinese suppliers.
That didn’t matter when Chinese technology was inferior. Today, though, Chinese equipment, such as Huawei’s, is often cheaper and better than its competitors’. Earlier this year Vodafone Group PLC chief executive Nick Read warned a ban on Huawei “would have significant financial cost, would have significant customer disruption and would delay 5G rollout in several countries.”
The barriers coming between U.S. and Chinese investment and trade may also come between people. The latest data show China accounted for a third of the foreign students studying in the U.S., a third of foreign students in science, technology, engineering and math, 9% of temporary H1B specialty work visas, and 14% of employment-based green cards, according to the Migration Policy Institute, a think tank. This diaspora has seeded the U.S. with manpower and talent and China with American expertise and values.
But U.S. officials say the diaspora is also a vehicle for espionage. “China has pioneered a societal approach to stealing innovation any way it can,” including “through graduate students and researchers,” FBI director Christopher Wray said in April. That may lead to toughened visa requirements that throttle the inflow of Chinese students, researchers and workers.
Chinese scientists are waiting longer for visas to visit the U.S. In February, Pan Jianwei, China’s leading quantum physicist who is working on hack-proof communications, couldn’t attend a ceremony after his team won a prestigious science prize from the American Association for the Advancement of Science.
Chinese applications to Ph.D. physics programs fell an average of 16% in 2018, according to a survey by the American Physical Society. At Kansas State University, Chinese went from a third of graduate physics students a few years ago to 10% now, says department head Brett DePaola. He said students from other countries have filled the gap, but overall, foreign applications are dropping. “Maybe it’s tied to the current administration, maybe it’s tied to other universities around the world opening doors a little more.”
American officials could conceivably designate any technical discussion between an employee of an American technology firm and a Chinese national—even one who works for the same firm—as subject to export controls, says Dan Wang, an analyst at Gavekal Dragonomics, a China-based research service. “It’s plausible that to stay in compliance with U.S. export control laws, these firms may have to sequester their foreign, especially Chinese, nationals, or just terminate them.”
As with diminished ties in trade and investment, reduced human contact won’t have any immediate or noticeable effect. The impact will build over time as the U.S. competes with a slightly diminished pool of human capital.
Ultimately, how far apart the U.S. and China drift will depend on how hard both countries try to contain their current disputes. National-security hawks in the U.S. believe economic interactions have to shrink considerably if the U.S. is to maintain American economic and military hegemony. In China, nationalists see further self-sufficiency as essential to economic dominance and a state-of-the art military.
Against that, more moderate voices may try to compartmentalize national-security risks so as to keep broader commercial ties unchanged. “There is this theory in the U.S. that the future world would consist of two circles. One is the U.S. centric economic order and the other is the China centric economic order,” says John Gong, a professor at The University of International Business and Economics in Beijing. “It’s an economic version of the Cold War. It’s something that we should all avoid.”