"From Economic War to Arms Race"

The Next Round of Boycotts

Over the past few days, the United States has intensified its fierce economic war against China. In addition to the Chinese Huawei telecommunications group, the Trump administration has blacklisted four more tech companies and one IT institute from the People's Republic last Friday: enterprises involved in the development of so-called supercomputers, exceptionally fast machines needed for calculating highly complex processes and used in various tasks ranging from weather forecasting to military applications.[1] The US boycott is cutting the companies off from some of their major suppliers and is thus aimed at crushing them.

The Next Economic Dictate

It has also been reported that the United States is planning to compel companies that supply its 5G technology to produce their components outside China. This would affect Sweden's Ericsson and Finland's Nokia, two groups from the EU, which - following Huawei's official exclusion from the US market in Mai - would have been the only potential suppliers for setting up the USA's 5G-network. According to experts, China represents 10% of Nokia's manufacturing-facility area and 45% of Ericsson's.[2] Withdrawing production sites from China is considered expensive and risky, because of the high construction costs of tech factories on the one hand, and, on the other, because highly skilled workers and highly specialized suppliers are nowhere as available as in the People's Republic.

Profits for the EU

In addition, Beijing has just proposed to Ericsson and Nokia the possibility of a highly lucrative participation in developing China's 5G networks. Of the first contracts awarded last week by China Mobile, the world's largest telecom operator, Ericsson bagged 34 percent and Nokia 9 to 12 percent (depending on the sector).[3] Following this goodwill gesture - a $2 billion package - Beijing is now expecting that the EU will also take Chinese interests into account, observers note. This issue was one of the points on the agenda in the negotiations Germany's Minister of the Economy Peter Altmaier (CDU) held last week in Beijing.[4] Altmaier confirmed that Beijing is very interested in EU companies participating in the development of the People's Republic's 5G networks.

Chinese Countermeasures

The situation is growing even more complicated - and for German companies, more precarious - through the fact that Beijing is beginning to apply countermeasures to the USA's unrestrained boycott policy. As a countermeasure to the USA's "entity list" (boycott blacklist), the Chinese government is currently drawing up its own list of "unreliable companies" - for foreign companies, that, in the future, make decisions blatantly detrimental to Chinese companies without any obvious economic necessity, i.e. for political reasons. It is reported that the US logistics company FedEx could be one of the first companies affected. Beijing sharply protested that the company recently did not deliver packages addressed to Huawei to the recipient, but rather forwarded them to the United States on its own initiative. FedEx is also confronted with significant problems, because US boycott regulations - if applied to the letter - impose the task of guaranteeing that, in conformity with the boycott regulations, Huawei instruments are not delivered in the United States.[5] FedEx would hardly be able to carry out the necessary controls, besides this being illegal, in many cases. FedEx has taken the case to court, in the meantime, suing the US Department of Commerce.

Infineon Endangered

German companies, such as Infineon, are also threatened to be black-listed by Beijing, if they abide by the US boycott of Chinese companies. Infineon, headquartered in Munich, has stopped delivering particular components to Huawei, because they comprise a US share of at least 25 percent. US boycott regulations forbid their sale to the Chinese telecommunications company. However, this may now fulfill the criteria for Infineon being placed on China's list "of unreliable companies," because it is damaging the company Huawei for political reasons. Still unclear is what sanctions Beijing will impose on those companies on its list. Infineon is running a great risk. The company is currently generating 25 percent of its turnover in the People's Republic of China - significantly more than in Germany (15 percent) or even in the USA (9 percent).

Backfire

Alongside the immediate losses looming over companies in Germany and the EU from the USA's economic war, there may also be additional long-term damages. As a current article in the US periodical Foreign Affairs notes, in the past, China has always succeeded - in spite of embargos - in producing high-tech products. This was true in the 1960s, when the People's Republic of China developed a nuclear weapon, without any foreign support; then in the 1990s, when, in spite of the US boycott, they managed to build state-of-the-art missiles and satellites. Most recently, in 2016, when the Obama administration in April 2015 forbid the delivery of US semi-conductors, China constructed the world's fastest super computer of the day, exclusively with Chinese processors. The current US boycott will cause short-term impediments to China, Foreign Affairs predicts, but they will oblige the People's Republic of China to single-handedly produce all the important high-tech components. The Trump administration may be "paving the way for a technologically independent and possibly more powerful China."[6] If this happens, German high-tech companies will not only lose their Chinese markets, and more than ever before, they will be competing with an overwhelming Chinese rival on the world market.

Gloomy Predictions

Economists are increasingly scrutinizing the long-term consequences of the Trump administration's economic war - and are arriving at gloomy predictions. This would even hold true, if Washington should succeed in forcing China from the western market. Beijing would then want to carve out "an area in Asia under its own hegemonic control," suspects Gabriel Felbermayr, President of the Institute for the World Economy in Kiel (ifw). However, in such a case, the United States will not be simply "watching from the sidelines," but will probably "expand its military presence in the region." "In that sense, the trade war can lead to an arms race."[7] What, on the other hand, would happen, should the US administration fail in the long run, to defeat Beijing with economic means? This question Felbermayr does not address. Particularly in such a situation, the West would find itself confronting the question of whether China should be fought with other means.

Please note our video column on this theme.

[1] Ana Swanson, Paul Mozur, Steve Lohr: U.S. Blacklists More Chinese Tech Companies Over National Security Concerns. nytimes.com 21.06.2019.

[2] Stu Woo, Dustin Volz: U.S. Considers Requiring 5G Equipment for Domestic Use Be Made Outside China. wsj.com 23.06.2019.

[3] Li Tao: Huawei wins half of China Mobile's 5G network contracts while Ericsson picks up a third. scmp.com 17.06.2019.

[4] Jakob Hanke, Laurens Cerulus: Germany's Altmaier seeks to head off a trade war in China. politico.eu 21.06.2019.

[5] FedEx sues the US government over the "impossible" task of policing exports to China. cnbc.com 25.06.2019.

[6] Lorand Laskai: Why Blacklisting Huawei Could Backfire. foreignaffairs.com 19.06.2019.

[7] Malte Fischer: "Der Handelskrieg kann in einen Rüstungswettlauf münden". wiwo.de 25.06.2019.