All Financial Wisdom

Why the Tech Sector Could be the Big Loser of the US-Chinese Trade War

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“We know how wars start, but not how they end.”

This is one of those phrases from the repertoire of popular wisdom that are shown again and again to be true. But the phrase is not only applicable to conventional wars, we can also say the same about a modern commercial war like the one that the Trump administration has declared against China.

This war began on a battlefield that limited the United States, and may end up moving to completely different fields. In fact, in part it has already done so, as the war is now inclusive of the technology sector. And the damage caused between our two countries (US and China) could also affect all the economies of the rest of the planet significantly.

The larger-scale commercial war that could occur

We are the largest economy on the planet. China is the second largest. If we look in the equation of possible commercial wars between two countries on a large scale, obviously the biggest trade war we could witness is precisely between the two largest economies in the world. And it has happened.

Some people view this commercial war from a distance, curious to see the outcome and if President Trump gets his way, and others view it with the passion of someone whose attending an entertaining show armed with a good portion of popcorn. But those of us who follow this unarmed conflict between the two biggest superpowers from an economic prism, can not help but feel a deep concern.

To start, the first risk  is that President Trump has not only declared the commercial war on China exclusively. As in all artillery exchanges, blows exchanged between the US and China can end up impacting other countries. While it is true that most of the measures and new Trump tariffs are designed to damage imports from the Asian giant, we can not forget that there are tariffs such as taxes on steel that also affect other countries, including Europe.

The second risk that would affect third parties would be that the commercial war between the two superpowers would degenerate into a mass legal conflict on a large scale.  The risk is that war would fully affect the courts that are in charge of sentencing on international economic disputes, with the more than probable scenario of a collapse.

For this reason, there is a fear of a collapse of the world trade system as a whole. The truth is that we find ourselves in a return to the times of protectionism policies that lead to the Great Depression.

This collapse would mean legal uncertainty at the global level for all world trade, since virtually all judgments regarding international trade would be paralyzed. Not only would we see that the avalanche of disputes between the US and China are impossible to resolve, but any other dispute between, for example, the EU and Japan could not have legal coverage, with all that this implies. Legal uncertainty and potential paralysis of a good part of international trade.

The third risk is that the conflict degenerates into a generalized commercial war, but especially in a certain strategic sector…

It is the tech sector; commercial battle horse in a non-bellicose plane for years for its strategic nature with respect to the socioeconomy of the future, and which could now become a workhorse of conflict.

The case is that the technology sector has embraced globalization, and the socioeconomies of the planet have ended up being deeply intertwined with one another. China and the US are no exception, and their economic ties in the world of technology are many. The great American tech companies buy countless Chinese components, manufacture and assemble their final products there, sell in their colossal market, etc. Passing the commercial war to the technological level could be very harmful for everyone, but especially for the US and China.

There are many voices that are absolutely sure that, if the commercial war with China passes to the technological terrain, it will be only the Chinese who will be greatly affected. This apriori belief is well founded. And we must not forget that President Trump has already openly stated to the tech world the need to repatriate jobs in the sector back to US soil.

But everything that shines is not American, and China is also a great leader in technology

But no matter how much is “Made in the USA,” the fact is that globalization has woven a tangle of indecipherable economic relations. The reality is that measuring the full impact of any commercial attack has certainly become impossible. Socio-economic relations between the US and China (and the rest of the world) have become so complex that the technological battlefield is as unpredictable as the hidden board of a classic minesweeper game.

China and its citizens are very advanced technologically

For example, China accounts for more than 40% of all e-commerce transactions worldwide; A decade ago, it was less than 1%. In 2016, the digital economy of the red giant stood at 30% of the national GDP, reaching some 3.4 trillion dollars, with China ranking as the second largest digital economy in the world by importance, only behind the United States.

Other significant technological indicators reveal how the total value of all mobile transactions in China is 11 times higher than that of the US, how Chinese citizens total 49 hours per month of smartphone usage compared to 45 for Americans, or how 19% of Chinese Internet users are exclusively mobile users compared to 5% of the North American country.

All this shows how China is not merely a supplier of technological products, but also has a colossal IT market, which significantly changes the tides of technological war in the diametrically opposite direction.

That is not to mention the impact that a technological war between both countries could imply for the rest of the world: imagine for a moment what would happen globally if Apple stopped being able to put smartphones on the market, or worse, if Amazon Web Services suffered a disruption in the provisioning of servers for their ubiquitous cloud services.

You see then how the battle in the technological arena is not as unbalanced in favor of the US as a priori you might think. In fact, the reality is that it is fairly balanced, and the damage can be huge and mutually inflicted between both opponents. In the technological field, China can not live (at least without unbearable damage) without the United States, but I am afraid that the United States, cannot live without China either.

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