Trade War: Will the US and China Enter a Long-Term Technological Arms Race?

US China on chess board
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Will the US and China enter a long-term technological arms race?

The Economist Intelligence Unit (The EIU) said it’s highly likely.

“The likelihood that the US and China will make some progress in the ongoing trade talks has increased as a result of mounting domestic pressure in both economies,” said Cailin Birch, Global Economist at The EIU. “Nonetheless, we do not expect a meaningful agreement, as the US and China enter into a strategic competition for economic—and particularly technological—dominance."

The trade war is just one aspect of a much broader strategic rivalry, which is rapidly evolving into an arms race for technological dominance, EIU pointed out.  

While the negotiating teams are reportedly drawing up an MoU on tech transfer and cyber theft, which would also be an important concession on China's part, if it comes to pass, EIU said.

“That kind of deal could be substantial enough to allow the US to claim victory in the negotiations, allowing Mr Trump to save face politically after a damaging fight over border security and wall funding,” Birch noted.

For China, any such agreement would be politically challenging, but would provide welcome respite from mounting economic pressures, she said.

Regardless of what happens, however, the EIU expects existing tariffs to at least remain in place; the deal would likely only be to avoid a further escalation, the organization added.

Two distinct regional systems: Deterioration in globalization

However, there is still ample opportunity for the deal to fail, as the implementation proves difficult, EIU said.

“Either way, the deal is more of a stop-gap measure than a real step forward, as it does not address the core issues at hand, particularly for US trade representative Robert Lighthizer,” Birch predicted. “This suggests that economic tensions will ultimately return at a later date.”

EIU’s core forecast remains that both sides will be unable to reach a substantive deal that comprehensively addresses the major structural issues in the trade relationship, including US concerns over technology transfer and IP protection.

The US and China have entered into a strategic competition for long-term economic dominance, meaning that neither side is likely to offer significant concession, according to the EIU, adding that the broader strategic rivalry between the US and China is rapidly evolving into an arms race for technological dominance.

“Increasingly, the global economy is at risk of a complete bifurcation of global technology supply chains and the separation of the global landscape into two distinct regional systems: one based on US-led norms and rules, the other centered around China—which would represent a major deterioration in globalization,” Birch said.