Friday, May 11, 2018

Full tilt trade war will have unintended and serious consequences

This piece first appeared in Asia Times in April.

President Donald Trump’s order to deny ZTE access to essential American made electronic components for telecommunication equipment and mobile phones will for sure stymie ZTE. Just as surely the move will lead to a tit for tat response from China.

One obvious reaction is for China to stop supplying rare earth compounds to the US. Rare earth components are essential for all kinds of high tech applications including electronic warfare. While a dominant world supplier, China is not the only source and therefore the retaliation would not be as dire for the US as for ZTE.

However, as the confrontation raises the ante, unintended consequences will inevitably follow. Being “unintended,” of course, means not all outcomes can be anticipated.

One can reasonably expect China to intensify its effort to develop its own semiconductor technology and become totally independent of American devices and components.

It would be a mistake for US policy makers to assume that China’s technical and scientific development will always rely on inputs from America.

China developed its own atomic bomb in the mid ‘60s and was followed by the hydrogen bomb in quick order, a rate of progression more rapid than any other members of the nuclear club including the US.

In that era, China was very much isolated from the West including the Soviet Union and the only western influence came from the PhD graduates trained in the West and returned to China to lead the weapon development.

In the ‘90s, China began a concerted effort to grow its internal semiconductor technology. A major part of the strategy was to enter into a joint venture with a foreign semiconductor company. NEC was the partner that signed on.

This effort largely failed because bureaucrats with no technical training were put in charge of China’s effort. These leaders did not understand that one couldn’t leap to the latest and greatest without learning to walk and grasp the technical fundamentals in as complex a field as semiconductors. They pressed until the partnership broke down.

The situation is vastly different now. There are many more returnees that are seasoned technologists having worked at senior levels in the West. They are already engaged in developing basic technologies and devices that would free Chinese products from the US strangle hold.

The latest trade war development will add pressure and incentives for them to succeed.

Hard to know when China will have their own competitive technology but they surely will. They are fully aware that licensed technology or even purloined technology will only get them to a level behind the West.

By way of confirmation, China has already broken through in many technical fields based on their own development. Examples include mobile phone and applications, facial recognition using artificial intelligence, robotics in manufacturing, advances in drone design and so on.

With the world’s largest domestic market to test and verify their advances, the day will come when China will announce their own proprietary chipsets and licensing terms, confident of their competitive advantages relative to American sources.

China’s appetite for semiconductor devices that goes into all kinds of electronics far exceeds the US. The competition developed to serve this hunger will be formidable and American makers may rue that day sooner than expected.

Another possible unintended consequence is the rumor that Hainan Island may be permitted to develop casinos on the “Hawaii” of China.

A major blow in the trade war would be for China to allow Hainan to become a destination with gambling and divert visitors that would otherwise be visiting Macau—most of the visitors to Macau are from inside China.

Whether Hainan becomes a competing tourist attraction or not, Beijing can always put the squeeze on the American casinos operators in Macau, specifically MGM, Wynn and Las Vegas Sands.

The hurt on LVS would be particularly painful since slightly more than 60% of the New York listed company revenue comes from Macau. So far since early this year, Macau has been doing nicely, but I wouldn’t want to make book on the future.

LVS is majority owned by Sheldon Adelson and his family. Thirty plus billions of dollars of his net worth is tied to his holding in LVS. As one of Trump’s principal supporters, it’s undoubtedly a good time for Mr. Adelson to have a private conversation with the president.

He could be wholly above board and speak for the greater good of both countries to counsel President Trump that anti China action will only have short-term effect and won’t stop China’s rise. The president should be thinking of the benefits of long-term collaboration as opposed to inflicting mutual losses in the near term.
The author was a former member of the board of Las Vegas Sands from 2008 to 2014.