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Why U.S.-China 'Trade War' Is Really About Future of Innovation
By: Geoffrey Garrett, Wharton School of Business - 04/12/2018

The escalation of tariffs between China and the United States is haunting the financial markets. "Manageable, orchestrated trade skirmishes" is probably the right description. But "trade war" is so much better a headline.

Either way, what is really going on is not about trade; it is about who will lead global innovation in the 21st century. Think less steel, soybeans and solar panels, and more electric vehicles, self-driving cars and artificial intelligence.

The electoral incentives are clear for the Trump administration to talk up links between wages and jobs and the mushrooming of America's trade deficit with China over the past 15 years.

But the administration's much bigger concern is China's very real challenge to American global dominance in the innovation economy. Rising power vs. incumbent power normally refers to the growing military competition between China and the U.S. But it also describes rising Sino-American competition over the future of innovation.

Consider some facts. China has laid down more high-speed rail lines than the rest of the world combined (see the breathtaking new Chongqing-Guiyan line below). Mobile payments in China are 50 times as large as in the U.S. Last year, more electric vehicles were sold in China than in the rest of the world, and more than twice as many industrial robots were in use in China than in the U.S.

Apple, Amazon, Facebook, Google, and Microsoft are firmly entrenched in the top 10 companies in the world by market capitalization. They were joined a couple of years ago by two Chinese companies--Alibaba and Tencent--that continued to climb up the standings.

Over the period 2012-2016, Goldman Sachs estimates that total AI investment in the U.S. were about $18 billion, compared with only $2 billion in China--big advantage to America. But by 2020 China intends to invest about $150 billion in AI--looming enormous advantage to China.

There is no doubt that most of the best new underlying technology continues to come out of the U.S. Realistically, it will take China many years, probably decades, to change this.

But the ability of China to adopt and adapt American technology, and to do so at warp speed and massive scale, is extraordinary. If the definition of innovation is turning ideas into outcomes, China is already an innovation economy.

This is what the Trump administration is really worried about. Dig just below the surface of "trade war" tweets, and the administration's focus on China and the future of innovation is apparent.

The U.S. Trade Representative report on which the new tariffs are based is entitled, "China's acts, policies, and practices related to technology transfer, intellectual property, and innovation." Nothing about steel or manufacturing jobs.

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