Applied Economics Letters

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The US-China trade war: dominance of trade or

technology?

Anthony W. Chen, Jim Chen & V. Reddy Dondeti

To cite this article: Anthony W. Chen, Jim Chen & V. Reddy Dondeti (2020) The US-China trade
war: dominance of trade or technology?, Applied Economics Letters, 27:11, 904-909, DOI:
10.1080/13504851.2019.1646860

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APPLIED ECONOMICS LETTERS
2020, VOL. 27, NO. 11, 904–909
https://doi.org/10.1080/13504851.2019.1646860

ARTICLE

The US-China trade war: dominance of trade or technology?

Anthony W. Chena, Jim Chenb and V. Reddy Dondetib
a
Mihaylo College of Business and Economics, California State University, Fullerton, CA, USA; bSchool of Business, Norfolk State University,
Norfolk State University, Norfolk, VA, USA

ABSTRACT KEYWORDS
The primary goal of this paper is to provide insight into the causes that led to the current U.S. – Belt and road initiative;
China trade war. It discusses the importance of the ‘Belt and Road Initiative’ and the ‘Made in Chinese dream; competitive
China 2025’ programs to Beijing’s realization of the ‘Chinese dream’, which refers to the avoid- neutrality; made in China
ance of the middle-income trap and the accomplishment of the nation’s great rejuvenation. This 2025; middle-income trap;
state-owned enterprise;
paper points out the leading roles played by the state-owned enterprises in the above two Thucydides’s trap
programs and reviews their destabilizing effects on the Chinese society. This paper also describes
the measures taken by the U.S. to counter China’s efforts to become the new superpower, JEL CLASSIFICATION
thereby preserving its preeminent position in the world. In addition, the paper discusses the F18; N40
steps taken by Beijing to try to satisfy Washington’s demand. The authors posit that the trade war
is not, in fact, about trade but about technological dominance, and that both sides might fall into
‘Thucydides’s Trap,’ the pattern of large-scale conflict when a rising power challenges a dominant
one. According to the events that have transpired thus far, it appears our current trajectory is
towards conflict and a cold war

I. Introduction tariffs on China beyond the deadline of March 1.

If Trump’s latest threat is eventually carried out, it
On 6 July 2018, the United States (U.S.) officially
will result in tariffs on all Chinese imports.
imposed 25 percent duties on $34 billion worth of
To understand the key issues that are at the
imports from China. China immediately retaliated
core of the divide between the United States and
with tariffs on the same amount of U.S. exports to
China, it is critical to know the causes of the
China. On August 23, the U.S. levied 25 percent
trade war.
tariffs on additional $16 billion worth of Chinese
imports. Again, China responded with matching
tariffs on additional U.S. goods worth the same II. Beijing’s agenda
amount. On September 24, the U.S. imposed
A manufacturer, export-led growth model created
a 10 percent tariff on additional $200 billion
an economic miracle for China starting in
worth of Chinese imports. Furthermore, the tariffs
December 1978 when Deng Xiaoping launched
would rise to 25 percent on 1 January 2019.
his ‘Reform and Opening-up’ policy. The average
President Trump told reporters any retaliatory
annual GDP growth rate was an impressive
action from China would prompt his administra-
9.9 percent from 1979 through 2010. However,
tion to impose tariffs on additional $267 billion of
as a result of the middle-income trap, Chinese
Chinese imports. Nevertheless, China responded
economic growth has slowed from 10.6 percent
with tariffs of 5% or 10%, depending on the pro-
in Year 2010 to 6.6 percent in 2018 (National
duct, on additional U.S. goods worth $60 billion.
Bureau of Statistics of China 2019). China cannot
On 1 December 2018, President Trump and
allow this trend to continue as significant eco-
Chinese President Xi met at the G20 summit in
nomic slowdown could lead to political turmoil.
Argentina and agreed to a 90-day truce on tariffs.
Xi trumpeted the term ‘Chinese dream’ in
Since then, the U.S. and China have been working
November 2012. The ‘Chinese dream’ has two
towards a trade agreement. On 24 February 2019,
primary connotations. The first is to avoid the
Trump postponed the imposition of additional

CONTACT Jim Chen jchen@nsu.edu

© 2019 Informa UK Limited, trading as Taylor & Francis Group
 APPLIED ECONOMICS LETTERS 905

middle-income trap and build a moderately pros-
perous society and the other is to accomplish the
nation’s great rejuvenation. China removed the
two-term limit on the presidency in March 2018,
allowing Xi to be president for life. As the political
strongman in China, it is his responsibility to pave
the way for the Chinese to realize the ‘Chinese
dream’. The two initiatives that support the reali-
zation of the ‘Chinese dream’ and have drawn
global attention are the ‘Belt and Road Initiative’
and ‘Made in China 2025’.
enterprises to play a leading role, it focuses on
ten major areas including next-generation IT,
robotics, aerospace, pharmaceuticals, etc.
‘Made-in China 2025’ specifies the goal of rais-
ing domestic sources of parts and materials to
40 percent by 2020 and 70 percent by 2025
(State Council 2015). It reveals China’s ambitions
to reduce its reliance on foreign technology and
make China a global powerhouse in high-
technology industries.

A. Belt and Road Initiative III. Washington’s real intention

The National Science Board (NSB) released
The ‘Belt and Road Initiative’ was introduced
Science & Engineering Indicators on
by Xi in 2013. It focuses on connecting China,
15 January 2018. Noting research and develop-
Russia, Asia, Europe, the Middle East and Africa
ment (R&D) as a driver of innovation, it reported
to further China’s integration with the world, and
that U.S. R&D expenditures in 2015 were
attract investment and trade along these routes.
$497 billion. Though the U.S. led the world in
To implement it, China set up the Silk Road Fund
R&D spending, its annual rate of growth between
and established the Asian Infrastructure
2000 and 2015 was only three percent. China
Investment Bank (AIIB). The Silk Road Fund has
followed the U.S. with $409 billion spent on
total capital of 40 billion USD and 100 billion
R&D. The annual growth rate for China, however,
RMB (Silk Road Fund 2015). The AIIB has 87
was 18 percent from 2000 to 2015. ‘If current
approved members with capital of 96 billion
trends continue, the National Science Board
USD. The U.S. and Japan remain outside the
expects China to pass the U.S. in R&D expendi-
bank. The AIIB has approved 31 projects and is
tures by the end of 2018.’
processing 24 proposed projects (AIIB 2018).
Science and Engineering (S&E) education pro-
A key region of the initiative is Central and
vides a workforce with high-level S&E knowledge
Eastern Europe (CEE). China initiated the estab-
and skills. According to the NSB, more than
lishment of a platform facilitating cooperation
7.5 million bachelor’s degrees in S&E fields were
between China and 16 CEE countries, known as
awarded in 2014 globally. Twenty two percent
the ‘16 + 1’ mechanism in 2012. The trading
were conferred in China. The U.S. had only 10 per-
volume between the two sides reached
cent of the global share. ‘Between 2000 and 2014,
$68 billion in 2017, an increase of almost 70 per-
the number of S&E bachelor’s degrees awarded in
cent from $40 billion in 2011 (Hu 2018). In recent
China rose more than 360 percent to 1.7 million.
years, the platform’s summits have attracted a lot
The US had more moderate growth (54 percent)
of attention.
over the same period,’ the NSB said (National
Science Board 2018).
B. Made in China 2025
The global output from high-technology man-
ufacturing industries totaled $1.6 trillion in value-
‘Made in China 2025’ is Beijing’s industrial
added terms in 2016. The U.S. and China were the
strategy that intends to integrate next-generation
leading providers, with 31% and 24% of the global
IT into manufacturing to make China an
share, respectively; However, China’s output has
advanced manufacturing power in ten years and
grown far faster than the U.S. and now exceeds
escape the middle-income trap. To enable key
that of the EU. China is also the largest producer
906 A. W. CHEN ET AL.
of information and communications technology,
with a 34% global share. Moreover, according to
the World Development Indicators published by
the World Bank, U.S. high-technology (HT)
exports were $218 billion in 2007 and
$110 billion in 2017, a drop of 49.5 percent. In
shocking contrast, China’s HT exports increased
from $303 billion to $504 billion over the same
period, an increase of 66.3 percent (World Bank
2019).
China’s robust growth trends in R&D, education,
knowledge-intensive production, and HT exports
have alarmed Washington over China’s challenge
to U.S. leadership in technology. It is not a surprise
that the Trump administration’s push for ‘fair trade’
with China seeks much more than the reduction of
the merchandise trade imbalance with China. The
U.S. has also demanded China to give foreign com-
panies more access to Chinese markets, strengthen
intellectual property protection, stop forcing
American companies to transfer technology, and
remove subsidies to state-owned enterprises (SOEs).
Many events in the U.S. relating to China occurred
in 2018, including, but not limited to, the following:
1. Trump signed the Foreign Investment Risk
Review Modernization Act into law on
13 August 2018. The intent is to scrutinize
China’s investments in the United States,
especially those related to the ‘Made in
China 2025’ plan (Kuo 2018).
2. Hosting a rally in West Virginia on
21 August 2018 for Republican senate can-
didate Morrisey, Trump made the following
remarks (Hains 2018):
When I came, we were heading in a certain direction that
was going to allow China to be bigger than us in a very
short period of time. That’s not going to happen anymore
3. The U.S.-Mexico-Canada Agreement was
signed on 30 November 2018. It has
a ‘poison pill’ provision (USTR 2018). It
states, among other things, that
Entry by a Party into a free trade agreement with
a non-market country will allow the other Parties to
terminate this Agreement on six months’ notice . . .
This provision effectively prevents Canada and
Mexico from signing free trade agreements with
China. The United States may also duplicate the
provision in other trade deals.
4. Washington has been building a coalition
with Five Eyes and other nations such as
Germany, France and Japan to counter
China’s foreign operations and investments
in sensitive technology (Barkin 2018).
Moreover, to counter China’s ‘Belt and Road
Initiative’, Trump signed into law the Better
Utilization of Investments Leading to
Development (BUILD) Act on 5 October 2018.
The BUILD Act creates the International
Development Finance Corporation which seeks
to facilitate the participation of private sectors in
economic development projects in emerging
countries to complement U.S. assistance and for-
eign policy (InterAction 2018).
The above events clearly point to one thing: the
trade war is not about the trade imbalance in
goods. Washington’s real intention is to signifi-
cantly push back against China’s growing tech
advancement to maintain America’s competitive
advantage in technology and cut down China’s
global influence.
IV. Resolving the conflicts
The U.S.-China trade war had a negative impact
on the Chinese economy and its financial markets.
A sharp slowdown in the Chinese economy could
fuel job losses which Beijing will try its best to
avoid.
To balance the trade, China has purchased
2.4 million tons of American soybeans (SCMP
2019) and cut tariffs on American cars since the
Trump-Xi meeting on 1 December 2018. China
has also offered to reduce its trade surplus with the
U.S. to zero by increasing the import of goods by
a combined value of more than $1 trillion by 2024
(Bloomberg 2019).
To further open the Chinese market to domestic
and foreign investors, the National Development and
Reform Commission and the Ministry of Commerce
issued the first nationwide ‘Negative List for Market
Access’ on 24 December 2018 (State Council 2018).
The sectors not on the list are open for investment to

all market players. From the list, China dropped 171
prohibited sectors from its pilot program started in
2016.
To protect intellectual property (IP), the
National Development and Reform Commission
announced an array of punishments to be applied
to IP infringements on 4 December 2018 (Xinhua
2018). IP violators will be recorded on a blacklist.
Those who are on the blacklist would be restricted
from registering companies, issuing corporate
bonds, participating in government procurement,
acquiring government land supply, accessing gov-
ernment financial support, and foreign trade.
To mitigate forced technology transfer, the
Standing Committee of the National People’s
Congress is reviewing a draft law that prohibits
the government from forcing transfer of foreign
technology to domestic companies using adminis-
trative measures (Wu 2018). The new law is
expected to be enacted and enforced.
Lastly, Beijing is working on a replacement plan
for ‘Made in China 2025’, which Trump called
‘insulting’ and a threat to fair competition. The
new plan would abandon the numerical goals for
domestic sourcing and take a more market-driven
approach to advancing technology. This allows
foreign companies greater access into China and
fairer competition among state-owned, private
and foreign firms (Wei and Davis 2018). The
new plan is a positive response to Trump admin-
istration’s ‘competitive neutrality’ principle and
criticisms of ‘Made in China 2025’, and should
ease Washington’s anxiety over China’s threat to
U.S. technological leadership.
V. IS the stage set for a deal?
To contain China, Trump has vowed to increase
tariffs on $200 billion worth of Chinese imports, if
China fails to satisfy Washington’s demands. The
introduction of bills on 16 January 2019 that
would limit what U.S. companies could sell to
Chinese telecommunication companies (Bartz
and Shepherd 2019) further increase the pressure
on China. On 28 January 2019, the U.S.
Department of Justice filed criminal charges
against Meng Wanzhou, the chief financial officer
of China tech giant Huawei, for being linked to
violations of sanctions against Iran. On the
APPLIED ECONOMICS LETTERS 907
same day, Huawei was charged for allegedly steal-
ing trade secrets from T-Mobile. These events
further escalated tension between the two nations.
These actions occurred during a time when the
U.S. intelligence community is increasingly con-
cerned that China ‘present(s) a wide variety of
economic, political, counter intelligence, military
and diplomatic challenges to the United States and
its allies’ (Coats 2019).
Based on its recent concessions and conciliatory
actions, it appears that China is serious about
resolving the stand-off with the U.S. China, how-
ever, will not surrender to the U.S. demand for
significantly removing subsidies to SOEs, despite
concerns over a slowing economy and a falling
stock market. Although the number of people
working in private enterprises (PEs) in urban
China has more than doubled since 2010 and the
number of SOE employees has been decreasing
since 2012, close to sixty-one million (31 percent)
people in urban China are still employed by SOEs
(Figure 1) (Statista 2019). Moreover, both ‘Made
in China 2025’ and the ‘Belt and Road Initiative’
are led by SOEs. Relinquishing state subsidies to
SOEs in a short period of time will not only derail
Xi’s ‘Chinese Dream’, but also cause social
instability, which is not acceptable to Beijing. To
reach an agreement with the U.S., China will
revise ‘Made in China 2025’ but will not abandon
it. At a conference celebrating China’s forty years
of reform held on 18 December 2018, Xi stated,
‘No one is in a position to dictate to the Chinese
people what should or should not be done’ (China
Daily 2018).
Under strong U.S. Pressure, Australia, Japan
and New Zealand have joined the U.S. in banning
Chinese telecommunications equipment from
their 5G networks. Canada, France, Italy and the
U.K. may follow suit.
Chronicling the thirty-year Peloponnesian War,
Thucydides wrote that ‘it was the rise of Athens
and the fear this instilled in Sparta that made war
inevitable’ (Thucydides 431 B.C.E.). Graham
Allison, an eminent Harvard professor, coined
the term ‘Thucydides’s Trap’ in 2017 to refer to
the situation where war is likely to result when
a rising power threatens to displace the current
dominant power. Twelve of sixteen great power
conflicts over the last 500 years have ended with
908 A. W. CHEN ET AL.

140 133.27

120.83
120
111.8

98.57
Number of Employees in Millions
100

82.42
80 75.57
69.12
67.04 68.39
65.16 63.65 63.12
60.71 62.08 61.7 60.64
60

40

20
5.97 6.03 5.89 5.66 5.37 4.81 4.53 4.06
0
2010 2011 2012 2013 2014 2015 2016 2017

Private Enterprises State-Owned Enterprises Collective-Owned Enterprises

Figure 1. Number of EMPLOYEES IN URBAN China.

bloodshed (Allison 2017). In a technology-based At a recent gala event hosted by the Wilson
world, the world leader in technology will likely Center, the current trade situation was articulated
rise as the dominant power. The U.S., the incum- well by Henry Kissinger: ‘We’re in a position in
bent dominant power, is facing its first serious which the peace and prosperity of the world
rival after overtaking Britain. To avoid becoming depend on whether China and the United States
the thirteenth power struggle to result in war, can find a method to work together, not always in
Beijing should significantly scale back its ambition agreement, but to handle our disagreements. . . .
and Washington should not push Beijing beyond This is the key problem of our time’ (Wilson
a level where it is willing to negotiate to solve the Center 2018).
ongoing conflict.

VI. Conclusion Disclosure statement

The US-China trade war is really a war over tech- No potential conflict of interest was reported by the authors.
nological dominance. A nation that dominates the
field of advanced technology will dominate the
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