Four decades on from the re establishment of diplomatic relations between the US and China, tensions are running high as the trade war threatens to decouple the two economies - a dispute the tech sector finds itself square in the middle of. The complex nature of trade negotiations between the US and China depend on an inextricable array of factors including intellectual property (IP), technology, money markets, tariffs and manufacturing. The tech industry finds itself in the throes of the state’s concerns over intellectual property theft and its own bottom line threatened by increased tariffs. To give some indication of the scale, around 70% of the US’ combined imports of major consumer electronics like smartphones, laptops, and TVs originate in China. These implications however pierce beyond the surface consumer technology sector down to the R&D driven tech component sectors as well.
In that sense we can think of the impact on the tech sector as largely belonging to one of two categories:
- In relation to Intellectual Property (IP)
- In relation to tariffs, manufacturing and access to the Chinese market
Naturally sectors focused on the innovation of tech components like computer chips are more visibly part of the category 1 narrative, while consumer tech companies like Apple find themselves more impacted by category 2. For the firms more concerned with intellectual property theft, President Trump’s focus on securing better conditions for American companies when it comes to dispute resolution and protection serves well. On the other hand, for the firms more concerned with an increase in tariffs, the fall out of the trade war means restructuring global supply chains and projected revenue. But there is nuance and overlap even across these two general distinctions, an intricate balance of incentive and risk we can explore by looking at some of the most prominent players at present. This article will act as part one of a two part series covering both categories and their respective actors. In part 1 I will focus on the role of the intellectual property tug of war as it pertains to the microchip and semiconductor tech sub sectors in particular.
Microchip Technology: the choice weapon of the IP war
There is one particular memory chip company at the heart of the intellectual property war between the US and China, a case of IP theft so sensational it will probably serve as the plot of a production one day - but for now we can think of it as a key piece in the American negotiation strategy in the early stages of the trade war. Micron is the $50 billion technology company that rebuffed a proposed takeover by a Chinese state-owned company in 2015 on the premise of security concerns, only to allegedly have its IP stolen and find itself shut out of the Chinese market a year later. Taiwanese authorities went on record to affirm that Chinese company Fujian Jinhua acted with another Taiwanese company to steal Micron’s proprietary designs in order to build a $5.7 billion microchip factory in China. Off the back of this investigation, the Department of Justice charged the actors with theft of trade secrets from Micron and simultaneously the Commerce Department blacklisted the company for reasons of national security. But most notable were the $50 billion in tariffs that followed, the price hike for imported equipment and materials was a direct hit to the semiconductor industry in the US. Any chip finished in China would be subject to a 25% tariff, no matter the makeup or origins of the components (even if made in the US). At the time The Semiconductor Industry Association voiced concerns over this as it saw Chinese customers move to other markets like South Korea and Taiwan. Interestingly, it wasn’t the tariffs that impacted Micron post all of this, but another building block in the trade war - the black listing of Chinese telecommunication company Huawei to whom Micron made 13% of its sales.
How this played out for the different stakeholders:
US Administration:
Was able to achieve the following through negotiations and pressure from tariffs:
- Preliminary injunctions and expanded legal recourse for theft of trade secrets
- A promise to cease pressuring American companies to transfer technology to Chinese companies
- American companies able to sue individuals including ex employees and hackers
Semiconductor industry:
While the progress made on unfair practices was meaningful, the industry pushed for the negotiations to cover subsidies. Industry organisations raise concerns around tariffs claiming it will damage the semiconductor industry and the bedrock of the American economy.
“According to research commissioned by SIA, imposing tariffs on virtually all Chinese-imported IT products would decrease the U.S. IT market by $70 billion over 2019 and 2020. Prior to this escalating trade conflict, IT spending was forecasted to grow at 5.0% in 2019 and 5.3% in 2020. If the additional tariffs are implemented, IT spending growth would drop almost 3 percentage points, down to 2.1% in 2019 and 2.4% in 2020.
According to SIA commissioned research completed at the beginning of the year, the net impact of the additional tariffs on IT products would decrease U.S. GDP growth by 0.9% in 2019, and 0.3% in 2020 from the baseline Economist Intelligence Unit (EIU) forecast of 2.5% GDP growth in 2019 and 0.8% in 2020. The additional tariffs on IT products would also weaken investment in new technologies in which the United States currently maintains a clear advantage over China and other countries, such as artificial intelligence (AI), cloud, and big data and analytics.”
Additionally, the major pain point is highlighted as US chip-makers paying tariffs on the re-importation of chips made in America that were shipped to China for assembly, testing and packaging due to more optimal labour costs.
China:
In retaliation to the section 301 tariffs imposed by the US ($16 billion in tariffs) that included the semiconductor components (full list here) China implemented 25% tariffs on 333 goods originating from the US (also worth US$16 billion). See timeline at bottom of page for detailed timeline.
Micron:
Positive sentiment toward the negotiations and pushing for further talk around subsidies. Not as impacted by tariffs on imported goods from China as Micron doesn’t ship its Chinese made products back to the United States. Micron was more impacted by Huawei’s blacklisting later down the road, accounting for 13% of its microchip sales.
The Ripple Effect
As the flow on effects of these original tariffs and all subsequent developments plays out, a new dynamic in the global chip industry emerges. Capital controlled by many American technology companies look outward to investment avenues that will continue giving them access to the Chinese market. On the other hand, rumours that American company NVIDIA could potentially acquire ARM - the Softbank Group owned semiconductor giant - raises increasing concerns for Chinese companies that could potentially be shut out from doing future business with ARM.
Before Softbank acquired ARM for $32 billion (the highest price ever paid for an European tech company) in 2016, it was British based. Rumours claim NVIDIA could be willing to part with just as much or more in its current deal negotiations. This acquisition is an intimidating one for all of NVIDIA’s competitors, not just its Chinese counterparts. Put simply, NVIDIA designs and sells computer chips while ARM makes the fundamental blueprints that most chip-makers use to build their products. ARM’s core product offering is the set of designs that it sells to giants like Apple, Huawei and Qualcomm, if acquired by NVIDIA these designs would also come under the control of NVIDIA to an extent. Given the acquisition comes with the potential power to control competition and/or access to the pervasively used chip structures, the hefty price tag doesn’t seem as absurd. Whether NVIDIA’s play at ARM will result in it becoming a formidable Intel competitor, gateway to ARM’s instruction-set architectures (ISAS) or another weapon in the American administration’s arsenal against Chinese tech companies remains to be seen and hinges on the deal actually eventuating.
While China has indicated a willingness to take active steps toward fairer practices concerning intellectual property and trade secrets, current diplomatic ties hang in a precarious balance. The future of technology targeted tariffs and access to either market will depend a lot on how the two states are able to negotiate across multiple fronts beyond technology itself. The below timeline indicates growing hostility between the two tech superpowers as it pertains to intellectual property and tariff negotiations in the trade deal - somewhat indicative of the tech sector’s position as leverage in this complex geo-political standoff.
The timeline below highlights the back and forth nature of the trade negotiations, where tech,IP regulations and tariffs serve as the tools of leverage. Look out for part 2 which will focus more on consumer facing tech companies like Apple, Facebook, Google and Amazon.
