China vs. USA – Trade not tech.

Trade war may end but tech rivalry is just beginning.

• Despite an easing of tensions on the trade front, it is clear that while the two are happy to trade, the fierce rivalry over technology standards has already begun as is evidenced by what is happening in Europe.
• The USA and China have signed a new trade agreement that formalises what had already been expected in that China will buy more agriculture products and strengthen IP protection while the US will roll back some of its more recent tariffs.
• This is just the first stage of what will be a protracted process, but it looks likely that a working relationship will be established but will stop well short of trust.
• This is important from the Huawei perspective because later deals are almost certain to include some degree of rollback of the restrictions that the US has placed on Huawei.
• These restrictions have cost Huawei almost all of its overseas smartphone business, put its domestic smartphones business at risk and raised questions about the security of its mobile infrastructure.
• In many ways, Huawei has been a victim of its own success as its ascendancy to become a national Chinese champion also meant it could be used as a political football as the USA and China started to fall out.
• Hence, I suspect that a complete deal is likely to include the ability to licence Google software for smartphones once again as well as an end to any uncertainty related to its ability to licence Arm processors.
• While tensions appear to be thawing on trade, the rivalry over technology standards is heating up and I continue (see here) to see many other countries being forced to make a choice between two separate supply chains.
• On the one hand, China’s offer will come at a much lower price but with the risk of data leaking to China and the remote possibility of key infrastructure suddenly going dark.
• On the other there will be the USA’s offer which will be much more expensive but will come with better safety and security.
• Faced with this choice, I can see much of the emerging world going down the China route with developed countries choosing the USA option.
• This is not going to happen in semiconductor or other established technologies as I think China started too late after most of the core IP and know-how had already been developed.
• However, in new technologies like AR, Quantum Computing, AI and robotics, I see China at the forefront with the capacity to create standards that can rival anything else available.
• We are already beginning to see signs of this rivalry in 5G where the USA is lobbying Europe not to use Huawei’s 5G technology in its networks due to security concerns.
• The net result of dual standards is that the outlook for global growth in technology will take a hit.
• This is because the total value available for all participants is much greater when everyone uses the same standard (e.g. 4G) compared to when there are two or more incompatible offerings.
• The best days of technology’s growth may now be behind it.