The real roots of the trade war

The trade war between the US and China is not just about trade, but also about world domination in technology, in the view of Danske Bank’s investment strategist, Lars Skovgaard Andersen.

If you have ever experienced a hole in your roof and water dripping into your living room, then you also know that the hole is seldom right above where you have to place your bucket.

You could say the same about the ongoing trade war between the US and China. Yes, the Americans would like the Chinese to buy more US goods, just as they would like easier access to the Chinese market – but the actual hole in the roof is a fear of China overtaking the US’s dominant position in IT.

Moon landing gave the US a technological advantage
Historically, the world has been dominated by various civilisations that for shorter or longer periods of time benefited from having new technologies that gave them an advantage, and for the past 50-60 years the Americans have had the upper hand when it comes to technology.

One of the reasons is the Americans’ grand project of sending the first man to the moon in 1969. Eight years earlier, President John F. Kennedy declared that a manned moon landing was in the interests of the entire nation, an issue of national pride in the space race with the Soviet Union, and so the vision received massive financial support and fostered much new thinking and the trialling of new technologies. One of the technologies that got a boost was the development of semi-conductors, which are found in electronic equipment, while the project also served as a catalyst for a number of entrepreneurs within high tech who were decisive for the US’s technological dominance – in both the civilian and military spheres.

The Chinese are now the ones thinking big
In recent years, however, the US and the rest of the world have forgotten to think big and long term. While impressive visions are still being formulated, without capital at their back these are just words that pale compared to China. In China, the vision of being world leader in the technologies of the future has massive support – both economical and political – and this is where we find the hole in the roof. The Americans worry that China’s massive investments will give them the technological lead and that this will be a decisive step on the road to being the world’s new superpower.

One area where China is already ahead of the rest of the world is 5G. This technology could mean a quantum leap in our use of the internet due to the very high data speed, but it requires enormous investment, which in the West has been left to private companies, who often have difficulty calculating how to earn the necessary return. In contrast, China sees 5G as a national issue in its efforts to become the world leader in technology, so its roll-out is much faster and more systematic.

Americans protecting their golden goose
But what then can the US do to avoid the Chinese becoming the tech global leader. Well, first they can prevent China gaining access to the US’s golden goose, the inheritance from their space travel, namely semiconductors. This is a mega industry, which in the US supports some 250,000 employees and has spawned a mass of secondary and spinoff jobs. One might think that the Chinese with all their money and determination could simply develop their own semiconductors, and they can – but only to a certain extent. When it comes to more complex products, such as those produced by US tech firm Qualcomm, the Chinese are still years behind.

That US semiconductors are important for the Chinese was illustrated when the US trade administration banned the sale of semiconductors from Qualcomm to the Chinese mobile phone producer ZTE in 2018. In this case, ZTE was forced to cease production at its factories in China until Donald Trump gave the green light for the deal to go ahead.

The Americans are doing their best to protect their lead in semiconductors. In 2018, Donald Trump and the US authorities dug their heels in to block Singapore-based Broadcom’s acquisition of Qualcomm, while Trump also banned the purchase of a smaller company, Lattice, where the purchaser had close connections to the Chinese government.

Fine balance between (trade) war and peace
From an investor’s perspective, it is always good to know what we should read between the lines, and this is also the case with the trade war between the US and China. The trade war may well be about US jobs, but our view is that it has more to do with IT jobs than steel jobs.

US-China relations are a fine balance, as the Chinese are not only competitors but also among the largest customers of US IT companies, while the Chinese, meanwhile, do not wish to be dependent on US goodwill when it comes to the sale of semiconductors.

We expect a trade deal will be agreed in the coming quarters, but we would not be surprised if it did not cover parts or the whole of the IT sector. Unless the evidence suggests otherwise, however, the process of global digitalisation is continuing at an undiminished pace, which supports IT companies generally, regardless of whether they are in the US, China or Europe. And indeed at Danske Bank we are still overweighting the IT sector in our equity portfolios – trade war or not.


Danske Bank has prepared this material for information purposes only, and it does not constitute investment advice. Always speak to an advisor if you are considering making an investment based on this material to establish whether a particular investment suits your investment profile, including your risk appetite, investment horizon and ability to absorb a loss.

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