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The Doomsday Clock now stands at two minutes until midnight, meaning that, according to the Bulletin of the Atomic Scientists, humanity is closer to nuclear war than we've been since 1953. Economists are worried about a different kind of conflict: a trade war with China.
Fears that a decades-long "cold trade war" with China would escalate into a more serious conflict reached new heights last summer when the Trump administration announced an investigation into whether the country's intellectual-property policies harm US businesses.
Since then, the federal government has only stoked those fears. Congress reportedly pressured AT&T and Verizon to drop plans to sell phones made by China’s Huawei, Republican lawmakers proposed a bill that would block government agencies from doing business with contractors that use networking gear from Chinese companies, regulators blocked the sale of money-transfer company MoneyGram to an affiliate of China’s Alibaba, and President Donald Trump announced a 30 percent tariff on foreign-made solar panels.
The results of the IP investigation are expected any day, leaving analysts bracing for possible retaliation from China. This week, China announced its own investigation into sorghum imports from the US, and asked the World Trade Organization to review the solar-panel tariffs. More drastic action could follow if the US takes additional steps after the IP investigation.
The back-and-forth with China, along with US saber-rattling in other arenas, has some US tech companies concerned. “We’re worried about the politically motivated demonization of global trade,” says Jamie Girard of SEMI, a trade group representing the makers of semiconductor-manufacturing equipment.
Tech companies could benefit if China alters its policies around intellectual property, but the industry could suffer if it’s caught in the crossfire of a trade war. It’s hard to gauge the stakes precisely: Most tech companies don't report sales to China, and many, including Google and Facebook, do little or no business there.
Apple is among the few that report significant sales to China, where the iPhone is popular. In its most recent quarter, Apple said about 20 percent of its sales came from “Greater China,” which includes Hong Kong and Taiwan. Another touch point: China consumes 29 percent of the world’s semiconductors, more than half of which are imported from the US, according to a report from the US Department of Commerce. That suggests that China has significant leverage that it can bring to bear on the technology industry.
Some expect China to use that leverage. William Zarit, chairman of the American Chamber of Commerce in China, told The New York Times last month that he expects China to retaliate against any US trade sanctions. Still, US companies are surprisingly sanguine about the situation. The Chamber’s annual survey found that most US companies that do business in China believe relations between the two countries will improve or stay the same this year. In fact, the number predicting improved relations increased to 36 percent, from 17 percent last year.
Although the IP investigation is designed to benefit tech companies, the industry isn't sold on the idea that the US should punish China---at least not right away.
"We strongly support the administration doing an investigation of Chinese tech policies and practices," says Josh Kallmer of the Information Technology Industry Council, which represents tech companies ranging from Apple and Google to IBM and Oracle. "It's appropriate to think about strong responses." But he says the US shouldn't impose tariffs or other penalties on China.
Kallmer says the organization is more concerned about tariffs raising prices than the potential of igniting a trade war. There also could be some side effects, like making consumer electronics that the US exports to other countries more expensive if those products contain Chinese-made components.
Instead of tariffs, Kallmer says, the US should use the potential of a penalty to pressure China into reforming some of its policies.
The big question is whether the US has enough leverage over China. "The problem here is that anything small, such as tariffs on just a few items, is just symbolic, and anything large will be disruptive to the U.S. and world economies," David Dollar and Ryan Hass of the Brookings Institute wrote last summer.
The Brookings economists say the US lost an important bargaining chip when President Trump backed out of the Trans-Pacific Partnership, a proposed trade agreement among all major Asia-Pacific economies other than China.
Kallmer says that making progress with China will require bringing other economies to the table. In a joint statement in December, the US, European Union, and Japan promised to work together to counter unfair trade practices. But the statement didn't propose any specifics.
Tech companies already face obstacles in China. In order to do business in the country, China requires foreign tech firms to partner with domestic companies and share or license their intellectual property with those partners. Many fear this practice, known as "technology transfer," enables Chinese companies to steal IP from US companies. The intellectual-property investigation centers on China’s technology-transfer policies.
"China will pay close attention to the investigation and will take all appropriate measures to resolutely safeguard the legitimate rights and interests of the Chinese side," a spokesman for the Chinese Ministry of Commerce said in a statement in August.
Not everyone sees the recent round of actions as an escalation. Kaiser Kuo, host of the China-focused podcast Sinica, says the IP investigation and other actions are typical of the trade disputes between the US and China. Kuo says Beijing probably sees things like blocking Huawei from the US as retaliation against China over a cybersecurity law that requires technology companies to host their data in China. Apple is moving its Chinese customers’ iCloud data to a government controlled cloud hosting company to comply with the law.
Likewise, analyst Neil Cybart, who specializes in Apple, says he doesn’t expect new tariffs on Apple products. “Instead of implementing policies that would directly impact iPhone or iPad sales in a negative way, China has been looking to curtail Apple's influence as a content distributor,” Cybart says. For example, Apple has long removed apps from the App Store, such as those that help users bypass the “Great Firewall of China,” at the request of Beijing. Regulators also shut down Apple’s e-book and digital movie offerings in 2016. Cybart says he expects such pressure to continue.
- A proposal that the US government build a next-generation wireless network reflects fear of China.
- China is well on its way to being a global power in artificial intelligence.
- Doing business in China means playing by Chinese rules, as Apple showed when it removed VPN apps from its App Store.
