Technology - the front line in a new "cold war"?

Tensions between the US and China are not just about trade. Washington’s real fear is China’s rising influence in global technology


Janet Mui

Janet Mui

Global Economist

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Tough talk on trade and tariffs has been key to Donald Trump’s popularity. However, the US-China trade war is about more than just tariffs designed to rebalance US trade.

It is a strategic battle for technological supremacy. With this supremacy comes control of information and much of the infrastructure of modern economies.

This line of thinking suggests that the US will not be satisfied by quick wins on trade. Tension between the two countries will persist for many years to come, especially as the US and China are far apart on key areas including intellectual property rights and long-term industrial policy.

The path to any resolution will be complex. The US-China technology war will have long-lasting implications for the technology sector, global trade, supply chains and geopolitics.

Why Huawei matters

Tensions escalated materially in May when President Trump announced the blacklisting of Huawei. The policy effectively bans any US company from conducting business with the Chinese technology giant. The development is significant and reveals the true objectives of the US administration.


Huawei is a symbol of Chinese technological innovation – indeed, the very name Huawei means “Chinese achievement”. Given the size and national importance of Huawei (see below), the move was regarded as a direct challenge to China’s technology ascent.

China is highly dependent on foreign technology... for now

China is currently highly dependent on foreign technology. For instance, the country accounts for approximately 60% of global demand for semiconductors but only produces around 13% of global supply.

China already had a plan in place to reduce this dependence on foreign suppliers. “Made in China 2025”, a state-led industrial policy, set a target of 70% self-sufficiency in high-tech industries by 2025. The ban on sales to Huawei will prompt China to accelerate its efforts. Given the tensions with the US, the country may be less open about its ambitions but is likely to speed up its work to achieve them. The road will be bumpy as the US may pressure other Western countries to restrict Chinese access to technology.

China has the human and financial capital to meet the challenge. Government-backed investment funds as well as private capital will provide support. KPMG suggests that in 2017 there were over $40bn of venture capital investments in China. Only the US saw higher levels of venture investment.

The level of Chinese investment in cutting-edge tech, such as artificial intelligence, is particularly impressive: Chinese funds make up 48% of all artificial intelligence venture funding globally, ahead of the US.

Economic and market implications

Recent US government actions against Huawei may only be the opening shots in a technology “cold war” between the US and China. The US may take further steps to deny Chinese companies access to markets, technology and even the financial system. Retaliation by the Chinese would be inevitable.

Both sides will suffer. China’s drive for technological self-sufficiency will reduce foreign technology companies’ sales into China and their global market share.

This impact is already evident, with US semiconductor sales declining at the fastest pace since the financial crisis.

Meanwhile, Chinese technology companies will likely experience lower profitability in the near-term as they increase spending on R&D while facing potential restrictions on sales to Western economies.

Globally, continued uncertainty may prompt businesses to adjust their supply chains, resulting in extra costs and short-term disruption. This could be particularly problematic for those sectors with long supply chains, such as the automotive industry.

While there may be short-term agreements on trade, it is likely that geopolitical tensions between the US and China will persist for many years to come.

Over time, it may lead to the reversal of the global integration of businesses and supply chains we have seen in recent years. The cost of this may well be structurally slower growth and lower market returns.

Of course, there will be some winners from the tensions between the US and China. Chinese domestic software companies should benefit as Chinese companies shy away from foreign operating systems or platforms. Selected Asian emerging economies also stand to benefit from supply chain relocation.

Huawei and other key players


From its roots as a provider to Chinese telecoms, Huawei now operates in 170 countries and generates $110 billion of revenues. It was the second biggest supplier of smartphones worldwide last year, behind Samsung.

It is the world’s largest mobile infrastructure supplier, ahead of Ericsson and Nokia. Huawei is a leader in technology innovation with ambitions in artificial intelligence and 5G wireless networks.

Huawei filed by far the most patent applications globally in 2017, followed by ZTE. Huawei’s founder, Ren Zhengfei, has a military background. His status in China is often compared to that of Bill Gates in the US.



ZTE Corporation is a Chinese multinational telecoms equipment company headquartered in Shenzhen. It provides products and services to consumers, carriers, businesses and public sector customers from over 160 countries around the world.

The company invests more than 10% of revenue in research and development. In every year since 2010, ZTE has been ranked among the world’s top five for patent applications, according to the World Intellectual Property Organization.

Chinese state-owned enterprises own just under half of the shares. It is a leader in 5G technology and recently signed an agreement with Tencent to develop 5G applications.


DJI is a Chinese technology company headquartered in Shenzhen with manufacturing facilities throughout the world. DJI is the world’s leader in commercial and civilian drones, accounting for over 70% of the drone market.

DJI designs and manufactures cameras and camera equipment, flight control systems and propulsion systems. Its drone technology has been used in a wide range of industries including agriculture, search and rescue, energy and filmmaking.

In November 2018, it was reported that security flaws had been found in DJI’s software which could allow intruders to access data collected by drones.


Janet Mui

Janet Mui

Global Economist

Janet Mui, CFA is the global economist at Cazenove Capital, the wealth management division of Schroders. Janet is responsible for the formulation and communication of Cazenove’s top-down views. She is a member of the investment committee that oversees strategic and tactical asset allocation at Cazenove. Janet is also the macro spokesperson and a regular commentator at major media outlets including the BBC, Bloomberg and CNBC.

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