Chinese companies boost self-reliance as trade war with US rolls on

Buildings lining the skyline of Shanghai. Chinese companies are looking to new markets, adapting supply chains, sourcing home-grown parts and shifting to domestic suppliers. PHOTO: AFP

BEIJING (AFP) - Whether Beijing and Washington reach a trade deal or not, China is already speeding up efforts to break its reliance on a country that is one of its biggest economic partners but also its biggest adversary.

The effort has gained greater urgency for Beijing after more than a year and a half of protracted negotiations, painful tariffs and US sanctions against leading Chinese technology companies.

Negotiators are working towards a potential "phase one" deal but tensions could escalate again if President Donald Trump goes through with a planned tariff hike on nearly US$160 billion (S$217 billion) in Chinese consumer goods on Sunday (Dec 15).

To fortify themselves for future levies or political waves, Chinese companies are looking to new markets, adapting supply chains, sourcing home-grown parts and shifting to domestic suppliers.

President Xi Jinping issued his own directive in May, calling for self-reliance in "key core technologies" while warning of a "Long March" against foreign challengers - a reference to a now-legendary 1934-35 strategic retreat by China's Communist revolutionaries.

A manager surnamed Liang at Weipai Industrial, a tablet computer maker in the southern tech hub of Shenzhen, said the company was diversifying supply chains to reduce reliance on US parts, and looking for a Chinese company to provide semiconductors.

But other industries have also had to rethink their plans.

A sales executive surnamed Lu at textile exporter Zhejiang Zhuang En said after shipments to the US almost halved this year, they were targeting European and African fashion brands instead.


Samm Sacks, China digital economy fellow at think-tank New America, said the trade war "has added fuel to the fire of the Chinese government's ambitions to duplicate industries inside China that they in the past got from the outside world".

Joerg Wuttke, president of the EU Chamber of Commerce in China, said the two countries were in the process of "decoupling" - a term that has regularly sprung up during the trade war.

"China has realised that it can't rely on some of the foreign suppliers," Wuttke told reporters on Monday.

"And the US has deliberately decided to contain China in many ways and decided to withhold technologies which they deem is beneficial to the Chinese industrial military complex."

Sunday's potential tariff hike would target Chinese goods that were not previously hit by US duties - including about US$12 billion worth of Chinese toy imports, plus cellphones, laptops and tablet computers.

Electronics and technology companies are at the forefront of China's drive to become self-sufficient.

Chinese tech giant Huawei launched its own operating system Harmony OS in August, as it faces the threat of losing access to Android systems with US-China tensions escalating.

The company was swept into the trade war in May when it was blacklisted by Trump owing to suspicions its equipment could provide a backdoor for Chinese intelligence services, something the firm denies.

Another tech firm, ZTE, nearly collapsed after US companies were prevented from selling it vital components over its continued dealings with Iran and North Korea.


Sacks said the ZTE case was a "watershed moment" for the Chinese government, and gave "a glimpse of what things might actually be like if they were cut off from global suppliers".

Trump later allowed ZTE to resume imports under tough conditions.

The trade war is now "a critical battle of ideology, value systems, and morality", said Larry Ong, senior analyst with political risk consultancy SinoInsider.

This week, state news agency Xinhua reported that two Chinese companies were to jointly build a domestic operating system, seemingly in a bid to unseat the dominance of US giant Microsoft's Windows.

Xinhua quoted one CFO as saying there was an "urgent need to develop a domestic independent operating system with a unified technical system and ecosystem".

But experts have warned it is not easy to entirely cut out the world's biggest economy, particularly in the technology sector.

"You open up a ZTE phone - and the same can be said for Huawei - and you're looking at components from all around the world," said Sacks.

"In many ways this nationalistic rhetoric doesn't conform to the reality, which is very tightly woven interdependence (for technology)."

But Beijing's drive to reduce economic reliance on the US is one sign of the hardening tensions between the two in what some have called a "new Cold War".

Max Zenglein, head of economic research at MERICS, warned the two countries were "at the beginning stages of decoupling".

"The outcome of the current negotiations will only have an impact on the speed and scale of the decoupling process, but not reverse the trend."

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