Straight Up on US-China Trade Tension

On 22 April 2021, WIEF Foundation’s initiative Straight Up, discussed the situation of US-China trade tension, how it currently affects businesses in Asia and in the future. Su Aziz summarises the webinar.

The ongoing trade tension that began mid 2018 between America and China have hurt the global economy and thus, increased uncertainty worldwide. A turning point was when the Phase One trade deal was signed in early 2020. Followed by the US-China Alaska talk in early 2021 which ended with both sides agreeing to maintain open channels for continued dialogue while moving towards Phase Two negotiation to improve trade certainty.

Undoubtedly, a sound international trade ecosystem is heavily influenced by the world’s two super powers and how the two countries plan to continue their relations. During WIEF Straight Up on U.S. and China: Navigating Market Uncertainties, Richard Javad Heydarian, a professorial chairholder in geopolitics at Polytechnic University in the Philippines and Dr Shirley Ze Yu who is the director of Shirley Yu & Co in China as well as an expert on the country, discussed the US-China trade tension, how it currently affected businesses in Asia and in the future.

Here are the highlights of the one-hour webinar.

Building a Sound Global Trade Ecosystem
Dr Shirley Yu: Let’s talk about China’s long term vision between 2020 and 2035. China in 2020 has surpassed the EU’s 27 economies combined. Its economy had an 18 per cent growth year-on-year in the Q1 of 2021 and it has planned for its economy to double in the 15 years. By the end of 2020, China’s nominal GDP hit around 80 per cent of America’s nominal GDP. This is the first time a rising economy has come this close to America’s economic might. The last time when this happened, it was Japan when it hit 73 per cent of the US economy back in 1993 but Japan had never made it beyond that and the former Soviet Union stopped at about 65 per cent.

China’s 15-year strategy includes driving its manufacturing industry to the top end of the global supply chain by 2025. Within the smartphone sector, Chinese phone brand such as Xiaomi to be equal to Apple and Huawei Accenture. Currently, they monopolise over 50 per cent of the global smartphone market share and that gives the dominant say on pricing power. However, this wasn’t the case a few years ago. This change in tide is due to the outcome of a deliberate policy to drive smart manufacturing.

The other sector that has achieved phenomenal results is electric vehicles. If you think about the electric vehicles market, it wasn’t really led by a lot of the traditional automobile manufacturers. Instead, it was driven by mainly tech companies like Alibaba and Tencent. In the past three years, they’ve gotten listed in the American stock exchange and have become a plausible competitor to Tesla. While Tesla is amazing, it has no competitors in America. Whereas in China, there’ll be hundreds in time, they’ll buy each other out, become bigger players and create a fiercely competitive market. Due to this, the technology improves very quickly and the market matures faster as well. This is really the difference in the dynamics of the tech space between China and America.

China’s other strategy is to build additional infrastructure within the country from 5G base stations to data storage to cloud computing to AI capabilities and more. China’s goal is to rival America by 2030. China plans to invest USD5 trillion on infrastructure post-pandemic in the next five years. Unlike America that sent a fiscal stimulus check to every citizen in the country, China uses the stimulus to invest in digital infrastructure instead. In this age of US-China competition, the frontier is going to be technology. Perhaps, America should put more focus on digital infrastructure expansion. Also, on China’s agenda is China standards 2035 through building soft elements of global governance, rules and standards for global 5G.

US-China economic integration is more than in the trade space. Supply chains are moving out of China and in 2020, it became the largest foreign direct investment (FDI) destination in the world, surpassing America. 2021 sees its FDI continues to rise. Interestingly, in terms of the growth rate of FDI into China, the Belt and Road region has become the highest growth of foreign investors in China in 2021. It looks like more capital will eventually be coming from the broader Asian region that has surpassed FDI from Europe and America.

A huge supply chain recalibration will happen in China because as it hits USD11,000 per capita GDP, it’ll become an expensive country for low end manufacturing. It used to thrive in this field but it no longer has the labour premium because of an aging society. Thus, a lot of the mid to low end manufacturing capacity will move to Southeast Asia and Africa. Other significant items on China’s agenda include the signing of set agreements between China, Japan and South Korea for free trade arrangements, to top significant global stock exchanges and be carbon neutral by 2030. It has around USD26 trillion to invest in clean energy infrastructure and technology.

A Geopolitical Perspective on the New Cold War
Richard Heydarian: Every indicator, points toward China being a dominant economic player of the 21st century. In short, China will become very important. Shocks like the pandemic reinforce long term structural trends and at the same time, create major changes in the trajectory of those trends. China strides in cutting edge technology and not only in terms of low-end manufacturing. This has created a lot of anxiety in the west.

While China is becoming more economically dominant, it’s ironically a little bit more geopolitically isolated than in the past. China’s growing economic dominance can also bring about growing tensions and potential conflict with the west. Basically, China economic strength can become its geopolitical weakness. China will be very much the centre of the global economic recovery. Some data shows that China alone is responsible for more than 30 per cent of the new global GDP contribution and in fact that has been the case since 2008. The other thing is, partnership which China has major representatives from the American business sector such as the big tech titans.

At the end of the day, good governance and environmental sustainability standards are vital but they’re not the totality of the world. Although, at the same time there’s no way we can get out of this crisis if there’s no cooperation between those two superpowers on every single front. That includes dealing with vaccine issues, mutation of the pandemic, climate change, lowering carbon emission and economic recovery. Basically, US and China will have to work together whether they like it or not.

Dr Shirley: Don’t forget, during the first Cold War, man landed on the moon. That was because of competition. Competition is a great thing. We need to use it wisely to build the technology to support the 21st century. It can be an amazing technological innovation period and we should get into that mentality today.

Q&A Session
Q: Where do you see blockchain technology in the future for Asian economy?
Dr Shirley: The world’s fundamentally moving towards a digital space and the fintech infrastructure is rather interesting. Alibaba, among others, have been building partnerships all across the region from Thailand, Malaysia, to the Philippines and it’s successful. Essentially, that’s based on blockchain. Commercial banking is no longer a solid presence and too many Chinese have shifted to fintech even before they even had a credit card.

Fintech will develop and what will eventually happen is this interconnectivity across different platforms that each country develops which will have a fundamental basis in order for all these additional payment platforms to talk to each other. For example, a Chinese tourist go to Thailand and is able to pay on RT pay and can clear the local currency. Distributed ledger technology such as blockchain has proven to be very secure and efficient.

Richard: China is giving a preview of what can happen in Asia. Unlike in wealthier countries, China’s population isn’t wedded to the old style of credit cards and combustion engine, in which Americans are essentially stuck. Besides that, China is now the leading country when it comes to production and consumption of electric vehicles. A lot in the region are very receptive to new technology, more so that their western counterparts. This may make the Asian region fall increasingly under china’s economic influence. China is will not only be the leader, but it will be an engine for the dispersion of that kind of lifestyle and technology in the ASEAN region.

Q: What’s the outlook for tech consumers in America, given that there’s a split between the tech industry of the east which is led by China and the western tech?
Dr Shirley: What’s interesting was that from Ali Baba to Tencent, they’ve moved their headquarters to Singapore and now hiring hundreds of people. So, Singapore is seen as an Asian headquarter that will radiate technological expansion all across ASEAN region. In the last year has really given tech companies a wakeup call that perhaps the direction of globalisation should be reoriented. Previously, they love to go to mature markets like America and Australia. Now, they’re primarily looking at the developing countries and to a smaller extent, Africa. Besides Huawei’s presence in Africa, Tencent and Alibaba are also building partnerships there. As a result, Africa’s e-commerce is booming. It looks like the globalisation strategy of the next generation of Chinese will primarily be focusing on the developing world.

Richard: We have deep tech problems in terms of monopolistic exercises in the big tech sector. Whether it’s Silicon Valley and its derivatives, or whether it’s China, what’s interesting over the past year or so, is that we see crackdowns both by the Chinese government and in America. It was promised that in a network communication world there will be more democratisation and more prioritisation of economic prosperity, but we’re seeing exactly the opposite of that. Network companies are now the new towers in hierarchies so something really has to be done with that just from a monopolistic economic competition standpoint and not to mention privacy, among others. What’s interesting is that there’s a convergence almost between the Chinese government and American government that something has to be done with this big tech titans running their own show and want to run the world.

There’s some interesting commonality which isn’t being emphasised that China and America realise they have to rein in the big tech guys to a certain degree to protect the interests of their people, citizen and consumers. Also, it really doesn’t help us to look at the east vs west kind of tech. It’s better to look at in terms of spectrum and hybridity. Increasingly in ASEAN, hybrid combination of Chinese, Japanese and American technologies, as well as indigenous big tech technology. Sometimes, ASEAN based tech companies have an edge over their Chinese or western counterparts, precisely because of their familiarity with the domestic market.

Q: Does the race for 5G technology investment create more tension and, if so, will the tension impact the global economy more negatively?
Dr Shirley: Today, when we talk about 5G infrastructure players, there’s Huawei, a smaller Chinese counterpart called, Ericsson, Nokia and Samsung. But there are no American competitors in the global 5G infrastructure space. With that, America has already lost in terms of digital infrastructure. So, the tension is negatively impacting the economy.

Last Words
Dr Juita Mohamed, moderator of the session: In summary, looking at the developmental plan of China in the next 40 years or so, it’s very clear that it aspires to move into the next stage of production which centres on high value-added products and also services. It has successfully done so, to a certain extent and is aggressively investing in local manufacturing sector to nurture the sector so that it can be stronger as well as more resilient in the future for the next coming external shocks.

The next frontier, it seems, will be in the AI as well as blockchain technologies, digital economy and even in carbon trading. Again, China is leading in innovation and has a long game plan. This is very apparent. Thus, China will again be an important player.

Main photo by Tumisu from Pixabay