It’s not a trade war, it’s a tech war – has one side already won?

Financial news has been dominated by the trade dispute between the US and China. But is it really about steel, Jack Daniels and soybeans?

Donald Trump’s trade negotiator, Robert Lighthizer, was in talks with Chinese officials last week. Speaking in front of the Senate finance committee, he admitted that trade talks have entered their “final weeks”.

However, this does not mean that an end is in sight. I believe that a resolution to this (disguised) tech war will be kicked down the road, pending very modest Chinese concessions that will allow President Trump to claim that the world’s second-biggest economy has capitulated to the first. In reality, this will be nothing more than a temporary resolution, lightly covering a series of issues still to play out.

In his recent speech to the National People’s Congress, Chinese premier Li Keqiang dropped any explicit reference to the “Made in China 2025” government-led industrial programme. Perhaps in a bid to placate the US. Instead, he stated that the government would promote “advanced manufacturing”, so “Made in China 2025” by another name. While the name may have changed, this is sure to concern President Trump and US officials in several ways.

First, while the US is divided at present, the nation seems to be in agreement regarding the threat of Chinese tech. No one has articulated how it is a security issue quite yet, but China’s National Intelligence Law states that organisations “support, co-operate with and collaborate in national intelligence work”. People in Western governments are afraid that if 5G networks are entirely built by, and reliant on, Chinese tech, sensitive information could potentially be accessed by the Chinese.

Moreover, Beijing would be in a position to simply turn the switch “off” on the rest of the world should they choose to do so. In short, the US is afraid of technological terrorism.

The second problem is that everyone has been left behind by the Chinese, who have been the harbingers of change and advancement in the tech space. They are light years ahead of the rest of the world, with their development of 5G technology.

Playing catch-up

The US, Europe and other developed nations have made forays into the tech, but they are too far behind, and it would take billions in investment to catch up. In Europe, reports state that 30 to 40% of the 5G network remains committed to Huawei.

Moreover, President Trump remains in a real dilemma with regards to what to do with the chief financial officer of Huawei (and daughter of the founder), Meng Wanzhou, who has been arrested in Canada and is awaiting extradition to the US. The long-term political and legal ramifications of any action, or inaction, in the case will be felt both in the US and China.

At home, President Trump will be aware that he needs to demonstrate that he is still a dealmaker to his electorate, and establish an agreement with China as part of the trade talks, especially after the disaster of the North Korea summit in Hanoi, to secure re-election, and, at the very least, to save face.

No doubt, Trump will have to make some concessions, but where these will be, we do not know. Until then, we are reliant on the updates from Robert Lighthizer.

For its part, China is a unique case and will continue to trundle along. It is an isolated market, in many senses, and centrally controlled. There is evidence that regulators have tried to press the accelerator on credit creation to get it firing on all cylinders again, like they did in 2016, but even if it does not work, China is still in healthy growth territory. With its dominance of 5G development, China has taken the future and is running with it.

So, while the tech war may be hiding in plain sight as a trade war, the battle lines are drawn, and one side seems to have outmanoeuvred the other already.

Eoin Murray is head of investment at Hermes Investment Management.

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