US-China Geopolitical Rivalry Threatens Global Economy, Innovation Economy Hangs in the Balance
The intensifying geopolitical rivalry between the United States and China is posing a significant threat to the global economy. This conflict shows no signs of resolution, and this stalemate could have far-reaching consequences, particularly for the innovation economy.
In his book Doing Capitalism in the Innovation Economy, venture investor William H Janeway emphasizes the pivotal role played by the US government in driving innovation. By funding research and development in critical defense technologies, the US government has propelled technological advances and subsequently reduced the costs of cutting-edge tech products and services through economies of scale.
China, following a similar model, has integrated into the global economy by adopting advanced technologies at lower costs, thus enhancing its industrial and military capabilities. However, China’s assertive foreign policy has raised concerns among US policymakers who see China as their main geopolitical rival.
To prevent American technology from bolstering Chinese military capabilities, the US imposed sanctions on Chinese companies. This has had a significant impact on China’s economy, exacerbating its ongoing economic slowdown and deflation risks. Furthermore, with US allies imposing their export restrictions, Chinese companies are now deprived of key inputs for advanced semiconductor production.
The US-China trade has declined by 17.9% during the first half of 2023, with China’s share of US imports dropping to 13.3%. This deglobalization trend will have profound implications for the US economy since over 70,000 US companies currently operate in China, with nearly 90% of them being profitable. China is the world’s largest semiconductor market, accounting for a significant portion of global sales.
The fragmentation of the global innovation economy will result in higher costs for research and development and manufacturing equipment for both Chinese and US companies. Government subsidies might become necessary to compensate for the loss of the Chinese market, which may trigger a harmful subsidy war.
Furthermore, increasing restrictions on technology trade could distort incentives for technological development, as all technology has potential military applications. Balancing restrictions and subsidies will be crucial to ensure innovation is driven by consumer-oriented high-tech products and services, rather than solely focused on national security.
To address these challenges, the US and China must establish a transparent rules-based framework that facilitates private-sector participation in open trade while ensuring market openness, protecting property rights, and setting boundaries on punitive measures such as sanctions.
Delays in initiating negotiations may result in further suffering for both countries and the rest of the world. It is essential for China and the US to find a way to come to the table and engage in meaningful discussions before the situation escalates further.
In conclusion, the US-China geopolitical rivalry poses a significant threat to the global economy. Properly managing this conflict is crucial to avoid further deterioration and to foster innovation and growth in the global innovation economy. It is imperative for both sides to find common ground and establish a rules-based framework that promotes cooperation and economic stability for the benefit of all.
