Trump's trade war in tech: What's China doing, and is it working?

The US has delivered some heavy blows in the ongoing trade war against China. What is Beijing doing to hit back - and what will the fallout be for global tech?

Everybody knows about President Trump's trade war with China. According to US Census Bureau figures, as of May, America had imposed tariffs on more than $250bn of goods - around half of all its imports from China. China has sought to retaliate in kind, imposing tariffs on $110bn of goods, but Beijing has limited scope for widening its tariffs further as Chinese imports from the USA are only $120bn.

So what else can China do to hit back at Trump?

Chinese state media has been hinting that Beijing may seek to manoeuvre against the US and its Western allies in an area that could hurt them badly: specifically, technology. According to official news sources in China, the People's Republic is planning a new "technology security management system" which might bring in new controls, not of China's imports but of its exports.

China's top economic planning organisation, the National Development and Reform Commission, has been assigned to design the details of the plan. So far, little other information has been released.

The move would seem to foreshadow a response to the recent US move placing a ban on Huawei Technologies, barring the colossal Chinese networking vendor from buying American technology and compelling the Shenzhen-based giant to remove US components and software from its products.

One major impact of this is that Google has ended deals with Huawei under which the Chinese firm used its software in mobile handsets. Huawei, like almost all smartphone makers other than Apple, uses Google's Android operating system in its phones. With the ban in place Huawei's ability to offer a viable user experience in smartphones is in question.

‘We are capable of impacting the US supply chain'

According to Xinhua, Beijing will now establish a list of so-called 'unreliable" entities that may not be able to source certain supplies from China, a move that could potentially affect thousands of foreign firms.

"China is capable of impacting the US supply chain through certain technical controls," the Global Times, a paper published by the official People's Daily, stated in a leader piece last month.

Neither article identified specific products China may decide to withhold. The American ban on software and component exports is a huge threat for Huawei, but China is in fact quite weak in such areas as semiconductors and software.

However there is one essential item required for high-tech engineering in which China does have a strong position: so-called ‘rare earths', the minerals which supply such elements as lanthanum, neodymium and erbium. These are famously vital in such applications as electric cars, wind turbines, headphones and loudspeakers. It's less well known that rare earths are also very important in refining oil.

Perhaps more importantly for our purposes, however, rare earths are needed to produce disk drives, many kinds of digital displays, lasers and optical fibres. Without rare earths, it's very hard to have a tech industry at all.

China "leads the global field in its mastery of rare-earth refining technology," the Global Times editorial said, and it is true that at the moment almost all rare earth mining is done in China. The only rare earth mine in the Western hemisphere, Molycorp's facility at Mountain Pass in California, was mothballed in 2015.

In theory, then, China might restrict exports of rare earths just as the US is restricting the supply of chips and software, potentially crippling many advanced industries across the US and its allies.

Rare earths aren't rare

But in fact China has tried to use its dominance in rare earths before, and it didn't work.

"In a nutshell: rare earths aren't rare," commented metals trader and economist Tim Worstall, analysing the consequences of the 2015 Mountain Pass closure.

There are "rare earth" deposits around the world: all that's needed is for prices to rise above the low levels offered by China in normal times and deposits in other places become economically exploitable. As soon as China restricts supplies, mines will open elsewhere. Indeed, as Worstall noted, this has already happened once.

[In 2010] China produced some 97 per cent of the world's supply of rare earths ... they wanted people to move rare-earth-consuming businesses into China. There were export restrictions and high export tariffs on the raw materials but none at all on things that were made using them inside China and then exported.

The result of Beijing's attempt in the early 2010s to apply rare-earths leverage was that Mountain Pass re-opened for a few years and a new mine was established in Australia. (It's worth noting at this point that a single rare-earth mine usually produces quantities of all the valuable products: there aren't separate mines for lanthanum, neodymium etc.) And, as Worstall noted then:

The rise in the rare-earth prices [caused by Beijing's tariffs] meant that Molycorp and Lynas [the Australian producers] were able to gain financing to respectively reopen, and open for the first time, their mines. Not only that but they could do something vastly more expensive: set up the processing plants needed to do the complex separation of each rare earth from the others.

So it's clear that the western world not only doesn't need Chinese rare earth minerals, it doesn't need Chinese extraction knowhow either. If Beijing attempts to use the rare-earths lever again, Mountain Pass will simply reopen for a second time and Lynas will also make a lot of money.

Anywhere the US isn't looking

So what else can China do to oppose Trump's trade war?

So far, it has sought to make deals with new friends elsewhere: or in some cases, with the enemies of its enemy.

Russian President Vladimir Putin, despite the suggestion from many in the USA itself that he is a Trump backer, has strongly condemned the White House's attempt to "unceremoniously push" Huawei out of the global market. Major Russian telco MTS has signed a deal with Huawei to develop a 5G network in the country, showing none of the reluctance to let China into its network that has been exhibited by the US, Australia and others.

Chinese President Xi Jinping, attending an economic forum in Saint Petersburg in June, said for his part that China was "ready to share technological inventions with all partners, in particular 5G technology".

Then there's Africa. Huawei signed a new agreement in June with the African Union. The deal comes despite the fact that French media reported in 2018 that China had spied on the AU's headquarters in Ethiopia. The reports said that Chinese surveillance began in 2012 after the completion of the AU's new headquarters, financed by China, and was only noticed when technicians discovered that data on the building's servers was being sent to Shanghai.

Both China and the AU stated that there was no truth in the reports, however, Huawei now operates in 40 African countries, providing 4G networks to more than half the continent. These are often built using cheap finance arranged by Huawei and provided by Chinese state-controlled banks. Huawei is actively showcasing 5G mobile technology in Egypt at the Africa Cup of Nations, underway until July 19.

Huawei's presence in Africa goes far beyond selling smartphones and building mobile networks. In South Africa, it provides training in 5G tech at the country's top universities. Kenya's government inked a 17.5-billion-shilling ($172 million) deal with Huawei in April to build a data centre and ‘smart city' services.

The Chinese giant also offers ‘safe city' surveillance technology, which has been deployed in Kenya and in Mauritius, with 4,000 ‘smart' surveillance video cameras set up on the Indian Ocean island. According to Huawei, this technology "can prevent crimes before they occur".

All in all, then, it might be said that America and President Trump are on the front foot in those parts of the trade war being fought out across the Western world and the Far East in a glare of publicity.

But in other places, more quietly, the People's Republic - often with Huawei in the forefront of its campaigns - continues to do more and more business.

Today it may still be an American world: but tomorrow could be a different story.