The much bigger threat to U.S. economic primacy. Photographer: Wang Zhao/AFP/Getty Images
By Noah Smith
If you only scan the headlines, you could be forgiven for thinking that the U.S.-China trade war is mainly about tariffs. After all, the president and trade-warrior-in-chief has called himself “Tariff Man.” And the tentative trade deal between U.S. President Donald Trump and Chinese President Xi Jinping was mainly about tariffs, especially on items like automobiles.
But the startling arrest in Canada of a Chinese telecom company executive should wake people up to the fact that there’s a second U.S.-China trade war going on — a much more stealthy conflict, fought with weapons much subtler and more devastating than tariffs. And the prize in that other struggle is domination of the information-technology industry.
The arrested executive, Wanzhou Meng, is the chief financial officer of telecom-equipment manufacturer Huawei Technologies Co. (and its founder’s daughter). The official reason for her arrest is that Huawei is suspected of selling technology to Iran, in violation of U.S. sanctions. It’s the second big Chinese tech company to be accused of breaching those sanctions — the first was ZTE Corp. in 2017. The U.S. punished ZTE by forbidding it from buying American components — most importantly, telecom chips made by U.S.-based Qualcomm Inc.
Those purchasing restrictions were eventually lifted after ZTE agreed to pay a fine, and it seems certain that Huawei will also eventually escape severe punishment. But these episodes highlight Chinese companies’ dependence on critical U.S. technology. The U.S. still makes — or at least, designs — the best computer chips in the world. China assembles lots of electronics, but without those crucial inputs of U.S. technology, products made by companies such as Huawei would be of much lower-quality.
Export restrictions, and threats of restrictions, are thus probably not just about sanctions — they’re about making life harder for the main competitors of U.S. tech companies. Huawei just passed Apple Inc. to become the world’s second-largest smartphone maker by market share (Samsung Electronics Co. is first). This marks a change for China, whose companies have long been stuck doing low-value assembly while companies in rich countries do the high-value design, marketing and component manufacturing. U.S. moves against Huawei and ZTE may be intended to force China to remain a cheap supplier instead of a threatening competitor.
The subtle, far-sighted nature of this approach suggests that the impetus for the high-tech trade war goes far beyond what Trump, with his focus on tariffs and old-line manufacturing industries, would think of. It seems likely that U.S. tech companies, as well as the military intelligence communities, are influencing policy here as well.
In fact, more systematic efforts to block Chinese access to U.S. components are in the works. The Export Control Reform Act, passed this summer, increased regulatory oversight of U.S. exports of “emerging” and “foundational” technologies deemed to have national-security importance. Although national security is certainly a concern, it’s generally hard to separate high-tech industrial and corporate dominance from military dominance, so this too should be seen as part of the trade war.
A second weapon in the high-tech trade war is investment restrictions. The Trump administration has greatly expanded its power to block Chinese investments in U.S. technology companies, through the Committee on Foreign Investment in the United States. CFIUS has already canceled a bunch of Chinese deals: