U.S. President Donald Trump, left, walks with Xi Jinping, China’s president, during a welcome ceremony outside the Great Hall of the People in Beijing. (Photographer: Qilai Shen/Bloomberg)

As Trump Targets China's High-Tech Rise, Xi Strives Even Harder

(Bloomberg) -- Donald Trump’s attempt to stem China’s technological advance could already be backfiring.

His counterpart, President Xi Jinping, has responded to tech-focused pressure from Washington, including a ban on a leading Chinese telecoms company buying American parts, by vowing to pour even more resources into research and achieve home-grown breakthroughs. He urged China last week to “cast aside illusions” it could rely on others for help.

As Trump’s team continue talks in Beijing Friday armed with complaints about China’s industrial strategy and trade surplus, the hosts said their technological advancement goal isn’t on the table. The mix of Trump’s tariff threats and the realization that the U.S. wants to stunt its Made in China 2025 development plan -- aimed at dominating industries from transport to robotics -- complicates prospects for detente.

“The more pressure the U.S. puts on China, the more urgently the country has to develop its own high-tech products to reduce reliance on the U.S.,” said Xu Jianwei, a senior economist for greater China at Natixis SA in Hong Kong. “The dilemma thus turns into a vicious circle. As long as the two countries’ objectives are unchanged, it’s really difficult to find a solution.”

Strategic Rival

Beyond China’s outsize trade surplus and Trump’s call for a “level playing field” on trade, the race for technological supremacy is emerging as the most intractable long-term issue, now that the U.S. has branded China as a strategic rival and at the same time as they vie for military supremacy in the South China Sea.

At the core of the rivalry is the 2025 blueprint aimed at making China a global superpower in 10 strategic industries. “These are things that if China dominates the world, it’s bad for America,” U.S. Trade Representative Robert Lighthizer recently told a Senate committee.

“It involves a long list of discriminatory policies that help domestic firms at the expense of their foreign counterparts,” says Scott Kennedy, a U.S.-China expert at the Center for Strategic and International Studies in Washington. “Made in China 2025 is threatening not only because it will lead to a shift in market share from global to Chinese firms, but because the extent of subsidies and government support will make it difficult for anyone else to compete.”

The plan, announced in 2015, highlights 10 sectors for support on the way to China becoming an advanced manufacturing power. The strategy envisions warp-speed expansion and domination of a “fourth industrial revolution,” a catch-all term for rapid technological advances.

Trains, Planes

Among the 10 industries, China is best positioned competitively in communication equipment, advanced railway equipment, aerospace, new energy vehicles and shipbuilding, Citigroup Inc. said in December.

It also could make rapid inroads in robotics, biotechnology, new materials, agricultural machinery and new generation information technology and software if significant state resources are allocated to them, Citigroup said. Still, there’s no guarantee throwing state money at the plan will succeed. China has tried to build a domestic semiconductor industry for decades and is still coming up short.

China views its shift into higher-tech manufacturing as a crucial part of its development. Labor costs are surging as a rapidly aging population causes the workforce to shrink, undermining competitiveness in the industries that underpinned its rise. To continue to thrive, it must shift into industries now dominated by developed economies.

Global Force

China sees its artificial intelligence industry being in line with those of the most advanced countries by 2020, and will be the world’s primary AI innovation center by 2030, the State Council said in July. Although in most sectors AI is still catching up, Chinese researchers have become a global force in AI that cannot be ignored, according to a report last year by LinkedIn Co.

“The two countries seem to be on a collision course because both sides see technology as being key to national security,” said Andrew Polk, co-founder of research firm Trivium China in Beijing. “Both the U.S. and China are fighting to dominate the industries of the future and they may be able to agree on the rules of the game but it’s a competition and no side wants to voluntarily lose.”

There may be more room to negotiate in other areas. Xi promised greater opening up last month and officials then announced steps to further open the financial sector and cut tariffs on autos, both areas where the U.S. has complained of a lack of progress.

Still, China is prepared for a long confrontation. Its unique political system and centralized leadership mean that it will have more endurance should a trade war break out, a senior government official said Wednesday, adding that won’t compromise on core interests.

That leaves Trump to decide how much pain he can take, and inflict, as he pushes China to follow global capitalism’s rules, says Michael Every, head of financial markets research at Rabobank Group in Hong Kong.

“I’ve long argued ‘a lot’ because it’s existential at this point: a few billion here and there means nothing anymore to a U.S. fearing a loss of hegemony and a China aiming for it,” he said. “If there has to be such a clash, it’s better for the U.S. if it happens now.”

©2018 Bloomberg L.P.