Trade Wars: offence and defence in the race to innovate

In an age of rapidly advancing artificial intelligence technologies, big data and extraordinary IT applications, innovation power is as important to the security and wealth of nations as empires once were. We are in an age of “innovation wars” and trade policies have become key weapons in the competition between great powers – above all the US and its declared strategic rivals, China and Russia. Trade is an old frontier for global conflict but this age of innovation gifts it with new purpose.

President Donald Trump is the quickest on the draw when it comes to reaching for trade weapons. The confrontation triggered by the Trump administration’s tariffs on steel and aluminum imports into the US has fired up anxieties among America’s traditional allies in Europe and the Far East. In most cases they managed to secure exemptions, very possibly only temporary. Such is the present US administration’s careless approach to managing alliances, they are very likely to be caught in the cross fire of “innovation wars.”  

Trump’s main target is China whose actual steel exports to the US, at little more than 10 per cent of total US imports, inflict little or no damage to American jobs or profits. But in planning the next stage of the confrontation, Washington has drawn up a very long list of products that could be hit by higher tariffs in the absence of significant changes in Chinese policies.

Still the world’s premier superpower, US trade sanctions pack a powerful punch with enormous extra-territorial reach. The Chinese telecoms group, ZTE was brought to its knees almost instantly in April by a US Commerce Department ban on it sourcing vital components from US companies. Its crime had been to supply equipment to Iran and North Korea in breach of US export control rules. The seven year ban put the company out of business, but then resurrection became a possibility. To the astonishment of all, on April 14 president Trump revealed that he had asked the Commerce Department to help save the company, apparently on a request from Chinese president Xi Jinping.

Nonetheless, Trump believes that advanced technologies need to be jealously guarded against Chinese raiding parties bent on stealing intellectual property, or buying up homegrown innovation champions. He is now ready to deploy tariffs and quotas that have traditionally been used as lines of defence against unfair competition or import surges.  On the shallow pretext that his actions are justified by threats to national security, Trump’s purpose is to try to prevent China from gaining easy access to technologies, even when many can be legitimately acquired on global markets.

According to Bruegel, the Brussels-based think tank, more than 70 per cent of the products being targeted are high-end manufactures. They have been selected in the hope that tariffs on these products may hurt China in its attempts to upgrade its manufacturing industry – a strategic plan known as Made in China 2025. The worry in Washington is that China will “own” the 21st century if its technological rise continues to be partially fired by easy and/or improper access to US and other western innovations.

Washington’s aggressive intent is causing a great deal of hand wringing in Europe. There is nothing new in controls on the export of sensitive technologies, usually military, and Europe has frequently adopted them in step with the US. But Trump’s approach looks to the EU like a deliberate weakening of the multilateral trade system. The president could have taken his concerns about steel imports destroying American jobs to the World Trade Organization. He may yet do so, but only as a genuflection to established procedures.

Beijing has been asking for trouble for years because it has done little to change its ways as the world’s most compulsive thief of other countries’ intellectual property. Foreign companies allowed to invest in China have been required to share their technologies, while Chinese acquisitions in Europe and the US are heavily accented on technologically advanced businesses. The Trump administration will quite likely have Congressional backing before long for stiffening obstacles to Chinese acquisition of advanced technology companies in the US.

Nevertheless, trading with modern China can also be a positive for western economies, not least in the pressures to innovate it generates in Europe across a broad spectrum. A recent study from ECIPE, the Brussels think tank, concluded that import competition from China significantly boosted productivity by pushing European firms to invest more in R&D and information technology.

It is by no means clear whether the US can actually put a damper on Chinese industrial development. Trade, after all, leads to faster diffusion in a globalised system of technology and innovation. As the OECD has pointed out, the smartphone’s speed of adoption around the world contrasts with the 75 years the telephone needed to reach a million users. The radio took 38 years to reach the same number, while the Internet needed only four years to attract 50 million users.

Increasingly, technological competition between China, the US and Europe is focusing on artificial intelligence. China’s relative advantage lies in the mountain of data collected by both the public and private sectors. This is a vital resource for developing advanced algorithms. Yet for most countries seeking AI advantages, global trade in data products and its management are essential.

ECIPE, has devised a Digital Trade Restrictiveness Index. The ranking shows that China has the most restrictive policies on digital trade, followed by Russia, India, Indonesia and Vietnam – all middle-income emerging economies. According to ECIPE, “So far China has built the provision of digital goods and services almost exclusively on its own market. For digitalisation to sustain growth in the long run, China needs to have more digital competition and greater opportunities for digital entrepreneurs.”

France leads among the developed economies with restrictive digital policies related to taxation and subsidies, digital competition, data, online sales and transactions. Germany ranks only slightly lower than France, also with many restrictions related to the usage and movement of data, digital competition and online sales and transactions

The conclusion for Europe is that while some obstacles to digital trade between member states can be justified by governments on privacy grounds, they should be careful not to disqualify themselves from the global race to “own” the 21st century.