US trade war could impact China's tech sector: S&P

China has been developing homegrown innovation, but still relies on foreign technology in areas such as semiconductors.
China has been developing homegrown innovation, but still relies on foreign technology in areas such as semiconductors.PHOTO: REUTERS

The trade war between the US and China could severely hamper technology acquisitions, given the higher tariffs and restrictions on Chinese investments, S&P Global Ratings said.

It noted that the direct impact on China's growth so far has been small and manageable.

But more worrying is how the conflict affects technology acquisitions for a country dependent on technological progress and productivity growth now that its labour force has stopped growing. Permanently higher tariffs and restrictions on Chinese investments overseas will prevent companies from gaining access to foreign technology through acquisitions.

"Tariffs create incentives to remove parts of global value chains from China and locate them where tariffs are lower, even if this is a less efficient place to install capital," said S&P Global Ratings Asia-Pacific chief economist Shaun Roache on Wednesday. "Research suggests that one benefit of being part of a global value chain is technological spillover - local workers and firms can learn from participating in global value chains."

China has been developing homegrown innovation, but still relies on foreign technology in areas such as semiconductors.

"Restricting access to foreign technology is unlikely to... trigger a sharp slowdown in the near term. However, it would probably lower China's potential growth over the medium term."

S&P Global Ratings said it believes China can manage the short-term impact of trade tensions and continue deleveraging, albeit at a slower pace.

A version of this article appeared in the print edition of The Straits Times on October 19, 2018, with the headline 'US trade war could impact China's tech sector: S&P'. Print Edition | Subscribe