How Will the US-China Trade War Play Out?
Alan Pentz, CEO
Washington DC
August 27, 2019 - The US-China Trade War is just an opening skirmish in a larger conflict--the Lexington and Concord of the Revolutionary War, if you will, but without the bullets. We are now in a Long Competition (link to 1st blog) with China for technological, economic, and military world leadership. We aren’t going back to “normal.”
In my mind, there are a few potential outcomes to this Long Competition:
China rises and supersedes the US in technological, economic, and military power in the next few decades. The US response will be to form a balancing coalition with China’s neighbors seeking to contain China.
There’s a rough balance between the two powers. In this case, the US and China find a rough equilibrium where neither can dominate. The US will again form a balancing coalition, as in scenario one.
The US maintains supremacy. In this scenario, China’s debt burden, demographic issues, and inability to transform to a consumption-based economy leads to a multi-decade stagnation. In this case, the US soon stops worrying about China and the urge to form a coalition diminishes.
No matter which scenario plays out, though, there are a few essential things that seem inevitable to me:
First, the US must double down on investment in core future technology areas. Most of what makes an iPhone and computer work were invented or funded by the government. The new economy will be based around 5G which will form the basic infrastructure for innovation. It is the national highway or electrical system for the 21st Century.
Our nation has a long history of investing in this type of infrastructure and ensuring that disadvantaged and rural communities are given access. 5G is the basic infrastructure on which entrepreneurs can then innovate. So no matter what happens with China, we need to ramp up investment in 5G and beyond including artificial intelligence, other infrastructure, cloud technology, biomedical research, and the like. You get what you pay for--and we aren’t paying for enough.
Next, the US should resist a top-down model. US innovation has traditionally focused on core infrastructure and basic research. We then allow entrepreneurs to innovate on top of these platforms. Keeping this model will maximize our investments and allow us to leapfrog into new technologies we haven’t even thought of yet.
And, there are a few essential things that will happen:
The Committee on Foreign Investment in the United States (CFIUS) will inevitably expand its reach and/or new regulations/legislation will do the job for it. Remember that military power is based on technological and economic supremacy*, so just as technology and communications are converging, so will what is considered a national security issue. Sure, we might let the Chinese buy movie theater chains--but any dynamic and growing advanced technology industry will eventually fall under scrutiny.
Additionally, technologies are tending to converge. Cloud and AI seem to be in everything so how do you neatly sort out what is national security and what isn’t? My guess is we begin defaulting to national security.
Production will start to filter out of China--supply chains are going, going, gone! A new report claims Apple is among the companies that have instructed major suppliers to evaluate the cost implications of moving 15% to 30% of their production out of China. Apple is already moving on this with Foxconn, and everyone else will have to follow suit.
We will have two economic blocks. My guess is that a growing China will continue to demand tight control over its communications systems. As mentioned above, communications are now at least a component of just about everything and the Chinese one-party state can’t afford to lose control. The Great Internet Wall of China will grow and increasingly separate its technology infrastructure from the global infrastructure. In reality this will lead to at least two Internets: one comprised of the West and another centered around China and the Belt and Road countries. As future commerce and innovation take place on top of those two internets, they will become less compatible effectively creating two economic blocks.*
No matter what happens in our current trade spat with China, the long-term course is pretty clear. We are just beginning our Long Competition with no clear end in sight.
*You have to have dollars to pay for planes and tanks. https://mearsheimer.uchicago.edu/pdfs/StructuralRealism.pdf
*My guess is there would be some non-aligned group of countries as well trying to create “APIs” to move back and forth between these systems.
Author
Alan Pentz, CEO and Founder of Corner Alliance, has worked with government leaders in the R&D and innovation communities across DHS, Commerce, NIH, state and local government, and the non-profit sector among others. He has worked in the consulting industry for over ten years with Corner Alliance, SRA, Touchstone Consulting, and Witt O'Brien's. Before consulting, Alan served as a speechwriter and press secretary for former U.S. Senator Max Baucus and as a legislative assistant for former U.S. Representative Paul Kanjorski. He holds an MBA from the University of Texas at Austin.
