Turning from a trade war to a tech-centric war would accentuate those pressure points. For instance, a blanket ban on major Chinese smart phone producers would see US technology excluded from roughly 50% of global annual sales in that market.
Huawei has garnered the most attention and action from the US government. No other Chinese firm involved in physical technology has the same stature on the global stage, and its 5G ambitions pose untenable security challenges. This unique set of circumstances suggests extrapolating directly from the US-Huawei relationship to the rest of the Chinese tech ecosystem is not an appropriate base scenario, and closer to a worst case outcome. The rollout of additional export controls may introduce more complications for both US and Chinese technology companies, but are likely to be sufficiently porous in the short term rather than an inviolable supply chain severance.
The scale of the mutually assured damage to both US and Chinese companies that would follow a “sudden stop” moment of tech decoupling suggests the US government will instead continue to gradually refine the mechanisms by which it restricts China’s access to technology.
As is the case with leading US firms, a more expansive definition than the IT sector is required to capture Chinese leaders who make extensive use of technology or online platforms but fall in the communication services or consumer discretionary sectors.
This broader group of Chinese tech leaders – Tencent, Alibaba, Baidu, Meituan-Dianping, and JD.com – have much more concentrated domestic exposure than the FANG stocks, Microsoft, or Apple in the US, and have a much larger weighting in MSCI China than the traditional IT sector. These companies are important sources of demand for high-tech products produced around the world rather than a meaningful part of global supply chains.
Despite their size and pervasive reach, Chinese technology heavyweights are not frequently at odds with the domestic authorities. The propensity for cooperative, symbiotic relationships between industry titans and the state entails that dominant positions are a feature, not a bug. This relatively insular position and access to a significant, captive domestic market may prove a stabilizing force for China’s biggest companies, as there are fewer regulatory points of conflict and a ruling class whose commitment to macroeconomic stabilization and the success of technology is resolute.
Beijing has also shown an increasing willingness to underwrite activity in the traditional IT sector in a bid for eventual import substitution (Made in China 2025, a state-led industrial policy that seeks to make China dominant in global high-tech manufacturing), enhancing this structural trend. Money is no panacea in a worst-case scenario that includes the loss of foundational US technologies, but does help reduce the ramifications of any cyclicality in Chinese tech and offset the adverse impacts of restrictive US policies. For instance, Huawei was able to grow revenues at a double digit pace year-on-year in the first half of 2020 thanks to its leading position in the domestic smartphone market and demand from state-owned Chinese enterprises across a variety of business units.
Global Presence, global stakeholders
The ability of US tech heavyweights to post persistently elevated profitability or add to their commanding global footprints will be challenged by politicians who question aspects of their business models that provide this dominant market position and how little their tax burden is proportional to their size and success.
A bipartisan consensus of US politicians favors more scrutiny of domestic technology giants, which have come under fire over low effective tax rates, tolerance of disinformation, privacy concerns and anti-competitive behavior.
Democrats would likely be more aggressive and thorough in redressing the perceived societal and economic ills linked to the sector. Current polling and prediction markets suggest that if the November US election were held today, the expectation would be for Democratic candidate Joe Biden to prevail, with the Democrats retaining control of the House of Representatives while also taking the Senate. Biden’s plan calls for a tax on minimum book income and a higher rate levied on profits associated with intangible assets shifted to a lower-tax foreign locale. US tech multinationals would be among the most negatively affected by these measures. Foreign governments are also likely to push for taxes as well, based on these firms’ substantial international presences.