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Get Prepared for China-US Decoupling in Science and Technology

Sep 09 , 2019
  • Zhang Monan

    Senior Fellow, China International Economic Exchanges Center

As trade frictions continue to escalate between China and the United States, the Trump administration has begun to make a deep readjustment of its science and technology strategy in relation to China. Forcing a technological decoupling with China has become an important policy option. However, as China and the U.S. both have important positions in the global value, industrial and supply chains as the two largest economies in the world, decoupling will certainly throw the chains of others into confusion, disrupt the global industrial division of labor, cause global economic disorder and shock the international market.

Like it or not, China-U.S. relations are being reshaped. The cooperation strategy of the past four decades or more is giving way to a decoupling trend in trade, investment, science, technology, personnel exchanges and other fields. In science and technology in particular, the United States, from the White House and Congress to the Department of Commerce, the State Department and others, is using various means, including legislation and diplomatic pressure, in an attempt to weaken China’s institutional advantage in stimulating indigenous innovation. Chinese high-tech champions have become the primary targets in this connection.

The technological decoupling process is unfolding. In 2018, Chinese high-tech imports and exports accounted for about 30.7 percent of its total external trade, with manufactured goods accounting for more than 90 percent of total Chinese exports. Of that, high-tech products accounted for more than 30 percent. As the American monopoly in global technologies wanes, the United States has started to safeguard its interests by exerting state power. President Donald Trump even ordered American companies to look for alternatives to their China businesses, which will largely cut off close links between China and the U.S. in the global value, industrial and supply chains and speed up the reconstruction, division and transfer of the world’s industrial landscape.

Along with the sustained shrinkage of global external demand and the decreasing logistical costs enabled by the new technological revolution since the international financial crisis of 2008, a reconfiguring trend has been apparent. Production chains have been migrating and value chains have been readjusting. Many multinational corporations have started to look for new production sites in Asia and shifted some of their production lines away from China. The trade war has only sped up the process. Many cost-oriented industries were among the first to be relocated, while market-oriented and efficiency-seeking ones may have opted to stay where they are.

China’s economy has grown in the past 20 years thanks to the proximity of suppliers within the industrial chain eco-system, leading to faster, cheaper and more efficient production. “Made in China” combined with “Chinese market” constitutes the country’s unique and hard-to-copy comprehensive comparative advantage, which no other country enjoys. Indeed, the trade war has led to the relocation of American high-tech companies, but most have gone to places other than the United States. For example, last year Apple announced the transfer of some high-end iPhone assembly from Foxconn’s factory in China to India. But even if the cost increases caused by such transfers is excluded, the transfers that have been taking place seem not to involve incremental capacity and output. With shrunken market resources and capacity, high-tech U.S. companies will face pressure in terms of overall profit and revenue.

In the future, decoupling will certainly lead to two technological ecosystems, a scenario that will affect all countries and companies, including China. In the past 20 years or more, competition in global manufacturing has shifted from being between heavy and light industries to being between high-tech and low-tech. Although the indigenous technologies are fairly competitive in the labor-intensive industries, “market for technology” remains an important path to industrial upgrading in China. Its production in the high-tech industries continues to face technological constraints and relies heavily on imported raw materials and semifinished goods.

Technological decoupling will cost American high-tech companies their royalties and intellectual propery-related revenue. In recent years, the contribution of intangible assets to the global value chain has been increasing. The shares of R&D and capital expenditures for intangible assets have been increasing with each passing day. Overall, from 2000 to 2016, the ratio of intangible assets in global total revenues increased from 5.4 percent to 13.1 percent. And the trend has been most apparent in the global innovation value chain.

In this connection, forcing a technological decoupling will weaken American high-tech companies’ revenues generated from intellectual property and related businesses, while speeding up independent research and import substitution in China. China has realized that it must change the long-standing model of the United States selling knowledge and services while keeping China locked into the low-end of selling products and labor. It must also extricate itself from a development model featuring high levels of reliance on external markets, external technologies and raw materials and comprehensively enhance its competitiveness and position in the value chain through investment in R&D.

China-U.S. relations significantly influence the world in the 21st century, though their competition in the high-tech sector is subordinate to their strategic competition. In this connection, the ongoing decoupling will reshape a new international order. It is predictable that as China moves to the higher end of the global value chain and becomes a high-quality economy, competition between China and the United States in the field of science and technology will become routine and more intense. The market will have to prepare for a new international environment.

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