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On Trade, the U.S. and China Consider the Unthinkable: Breaking Up

May 16, 2018

In China, leaders were alarmed five years ago by the former National Security Agency contractor Edward Snowden’s disclosures that American intelligence services had involved technology companies in the United States in its spying on China and its allies. China also faces rising labor costs — meaning cheap manufacturing will no longer provide as many jobs — and has a rising class of educated young people for whom it needs to find well-paying, high-tech jobs. While many American and European companies see Made in China 2025 as building up government-supported rivals, Chinese leaders see the plan as essential to the country’s future prosperity.

ZTE’s punishment, in particular, exposed big gaps in China’s economic prowess.

“It seems likely that the current trade dispute, and the ZTE sanctions in particular, will spur the Chinese government to double down on its economic autarky model, where they seek self-sufficiency in a wider array of technology-based products,” said Robert D. Atkinson, the president of the Information Technology and Innovation Foundation, a Washington policy research group backed partly by Western technology companies.

The Chinese and American plans both face long odds.

At first glance, China’s might seem to have a better chance of success. The country’s state-controlled banking system can steer huge loans at very low interest rates to any industry the central government chooses. Local governments have also been urged to promote targeted industries, which they can do through subsidies like providing downtown land at virtually no cost. Semiconductor factories are now rising in major cities all over China, posing a formidable challenge to the industry’s global players.

But China has a long way to go. It trails the United States significantly in crucial areas like microchips, software design and high-end precision manufacturing. As one example, semiconductors designed in the United States make up account for half the chips China buys every year. American companies can already design and will soon be manufacturing semiconductors with circuits just one-fifth of the size of Chinese circuits.