Wilson China Fellowship Paper

Abstract

The rise of China’s high-tech giants, such as Huawei and ZTE, has aroused much anxiety in policy circles, leading to a recent “tech-cold war” between the U.S. and China. How does the movement of Chinese firms up the technology ladder influence US-China relations? More specifically, can the United States weaponize its position on the supply chain effectively to contain China? Have China’s businesses collapsed after the launch of the tech war? This paper starts with the state-business alliance behind China’s joint venture period and the engagement with the global value chain period, when the incentives of the state and firms were often misaligned. Then it proceeds to analyze how the interruption of the global value chain acted as an external shock that reshuffled state-business relations by aligning the incentives of the state and businesses under the structure of a new technology innovation system. It evaluates how such state-business relations, in turn, influence the effectiveness of U.S. policies in the short and long run. In the short run, the tech war directly reduced the Chinese products relying on U.S. chips, but in the long run, it facilitated the re-alignment of states and businesses in hardware tech industries and also propelled China into a period of self-sufficiency, an import-substitution industrialization (ISI) period that it originally skipped. Furthermore, businesses in the United States and other regions (especially in East Asia) have come up with various strategies to recover the broken value chains with relocation. This means that U.S. policymakers may have overestimated the leverage of their technological advantage and weaponization and underestimated the interdependence along the value chain.