At the end of 2018, former U.S. Treasury Secretary Henry Paulson evoked Cold War terminology in his premonition for the evolving U.S.-China trade disagreements: “I now see the prospect of an economic Iron Curtain – one that throws up new walls on each side and unmakes the global economy as we have known it.”
Since the opening up of the Chinese economy in the late 1970s, the West has largely held the view that China’s rise posed no threat to their economic model. The logic was that the West would innovate, and China would make.
However, this view is being upended as Chinese companies are racing ahead in technologies such as artificial intelligence, quantum computing, 5G, and electric vehicles, to name just a few.
“You now have highly integrated economies that see each other as adversaries,” said Wolf, just hours after an apparent further escalation in the bilateral trade dispute.
“They currently have a complete lack of trust in each other, and they’re looking to reduce their reliance on each other.”
Nonetheless, neither Wolf nor Huang believe that an “Iron Curtain” or “Cold War” are appropriate characterizations for the current situation.
“This isn’t a cold war,” said Wolf, “because the economies are too heavily integrated.”
Unlike the United States and former Union of Soviet Socialist Republics (USSR), where science and technology developed on two largely independent tracks, the United States and China are part of a globally integrated economic system.
“For the U.S. to really divorce with China, it would be very challenging – and that challenge will be compounded by the growing technology development,” said Huang.
“Tech has become part of the critical infrastructure – the same way energy is, or the same way oil supplies are.”
Is “Cold War” an appropriate characterization?
This isn’t a cold war because the economies are too heavily integrated.
Alexander Wolf
Head of Investment Strategy for Asia
J.P. Morgan Private Bank
The sources of tension are numerous and varied. While much of the recent media attention has been devoted to the blocking of some of China’s largest tech players to Western markets amid apparent security concerns, the tech conflict is more often connected with the broader trade war and a pursuit for national self-sufficiency.
To return to the notion of interdependence, it may surprise some to learn what each country currently needs from each other.
“In terms of value, China imports more semiconductors than they do oil – and by some margin,” explains Wolf. (Semiconductors are the building blocks of today’s complex electronic devices.)
China buy these semiconductors from the United States, Taiwan and Korea, and given that many of these economies make a lot of money from supplying China’s growing middle class, any change will be significant.
Where are the tensions?
Gina Huang joined J.P. Morgan China in May 2018, serving as Head of Government Relations. She started her career in financial services industry at New York City since 2004. In 2009, Ms. Huang came back to China, her motherland, and joined China Banking Regulatory Commission as Head of Derivative Supervision Division. In 2012, she was appointed as Head of Secondary Market Surveillance Dept. at National Association of Financial Market Institutional Investors. From 2014 to May 2018, Ms. Huang served as Beijing Branch Manager for Bank of New York Mellon.
Ms. Huang earned her Bachelor’s degree from University of Science and Technology of China. She also holds a PHD from Columbia University, majoring in Operations Research.
Gina Huang
Head of Government Relations, J.P. Morgan China
Alexander Wolf is the Head of Investment Strategy for Asia at J.P. Morgan Private Bank. In this role, Mr. Wolf is responsible for developing and communicating the Private Bank’s view on the market, economy, and geopolitics for investors and clients in the Asia region.
Prior to joining J.P. Morgan, Mr. Wolf was the Senior Emerging Markets Economist with Aberdeen Standard Investments responsible for economic analysis and macro investing strategies covering China and global EM. Prior to this he spent ten years with the U.S. Government in roles at the State Department and Defense Department. Most recently, Mr. Wolf served as part of the diplomatic service with overseas postings to the U.S. Embassy in Beijing and the American Institute in Taiwan. His responsibilities included managing a range of economic policy issues including trade and investment negotiations, sanctions implementation, intellectual property rights protection, as well as advising senior officials on macroeconomic issues. Prior to joining the diplomatic service, Mr. Wolf was an officer at the Defense Department working on Asian security and defense policy. In addition to his government experience, Mr. Wolf has held roles at Lehman Brothers and Zhejiang University of Finance and Economics.
Mr. Wolf holds degrees in economics from Johns Hopkins University and the University of Pittsburgh and has published extensively on China’s economy, US foreign policy, and North Korea. He resides in Hong Kong and speaks and reads Mandarin Chinese.
Alexander Wolf
Head of Investment Strategy for Asia, J.P. Morgan Private Bank
Jackey Chan is a Managing Director and the Investment Team Lead for China Market of J.P. Morgan Private Bank for Asia. Based in Hong Kong, she leads her team on providing portfolio management and investment advisory services for clients with a focus on absolute returns across equities, fixed income and alternative assets.
Ms. Chan joined J.P. Morgan Investment Bank in 1998 in the Foreign Exchange Department as an institutional sales person focusing on foreign exchange derivatives. Subsequently, she relocated to Singapore, New York and Hong Kong offices servicing institutional clients such as sovereign wealth funds and hedge funds on foreign exchange and equity derivatives products. She then joined J.P. Morgan Private Bank in 2012 as the Asia Head of Global Alternative Investments Group, where her responsibilities include the origination and due diligence of hedge fund, private equity, real estate and direct deal opportunities in Asia.
Ms. Chan received a Master degree in Economic Development from the Graduate School of Public Administration, International Christian University in Japan, where she was awarded a full scholarship.
Jackey Chan
Head of Investments for China, J.P. Morgan Private Bank
The contest for technological dominance between the United States and China has intensified over recent years, leaving the world’s two biggest economies increasingly protective of their own leading-edge industries, and mistrustful of the other’s.
The geopolitical struggle for technological dominance is spilling over into global trade and threatening to divide the world into two technological blocs, each of which seeks autonomy and self-sufficiency and strives to limit the other’s access to its advanced know-how.
This first panel discussion at the 2019 Morgan Tech Exchange addressed this emerging idea of a “technological cold war,” and explored how it might impact the global economy and markets.
Featured on the panel was Alexander Wolf, Head of Investment Strategy for Asia at J.P. Morgan Private Bank, along with Gina Huang, Head of Government Relations for J.P. Morgan in China. The session was moderated by Jackey Chan, Head of Investments for J.P. Morgan Private Bank in China.
Unpacking the Technological Cold War
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An Insider's View
Alexander Wolf served in the U.S. government for ten years working across a range of U.S.–China bilateral issues. In this video, he offers insights into where the current U.S.–China tensions may be heading.
But Wolf notes, that isn’t new, or even a U.S. phenomenon, “China has been strategically reducing foreign components in its tech infrastructure for a number of years, and Huawei has been de facto blocked from the United States since around 2012. So while it’s currently making headlines, it’s not necessarily a new source of tensions.”
Moreover, as someone who has participated directly in trade negotiations for the United States, Wolf declared that amidst the ongoing trade negotiations, attention needed to be paid not to any specific deal itself, but follow through of the deal.
“Despite all the time and energy invested in reaching agreements, a good proportion of these deals do not ultimately lead to changes in operating methods, business or government practices,” he said.
“Enforcement is key,” said Wolf. “On issues such as tech transfer, it is very difficult to enforce these agreements, or know whether the terms are being abided by.”
Unpacking the Technological Cold War
Alexander Wolf
Head of Investment Strategy for Asia
J.P. Morgan Private Bank
Competition doesn’t always have to have winners and losers. And sometimes, there is no competition at all.
“For Artificial Intelligence, there are clear advantages for advancing more quickly than your competitors,” said Wolf, “But regarding 5G, it might not matter as much who comes first.”
As China continues to advance in industries traditionally controlled by Western firms, its sheer size alone could bring Chinese firms to dominate industries such as semiconductors or electric vehicles the same way it has with electronic goods or solar panels.
A silver lining to the battleground?
Huang suggested that Chinese investment in next generation technologies might spark a new multi-year investment cycle. In other words, the response from global companies could usher in a new era of competition and growth, allaying fears of secular stagnation.
“It might be good for China to see this current pressure as an opportunity,” said Huang.
“They can do more research and development in technological innovation, to build capability, and to reform to a more market-driven system,” she said. “There could be a silver lining.”
If the two countries avoid further conflict and engage in fair competition, it’s not unrealistic to suggest that we might see a new golden age of innovation led by advancements in artificial intelligence.
Meet the Panelists
China imports more semiconductors than they do oil.
Alexander Wolf
Head of Investment Strategy for Asia
J.P. Morgan Private Bank
Enforcement is key.
Alexander Wolf
Head of Investment Strategy for Asia
J.P. Morgan Private Bank
It might be good for China to see this current pressure as an opportunity.
Gina Huang
Head of Government Relations
J.P. Morgan China
Wolf posits that “Made in China 2025” aims to replace imports with domestic production effectively saying to their current suppliers, “we want to put you out of business.”
“If you were Samsung, or a policymaker in Taiwan, or Korea, that would be concerning,” he says.
So what is the furthest extent that these tech tensions could go? Wolf can see an escalation to the point where Chinese companies could be blocked from establishing bases in Silicon Valley, but not on the imminent horizon.
In addition, the more damaging aspect could be restricting market access in each country to the other countries’ tech firms, similar to what is currently happening with regard to Huawei in the United States.
Enforcement is key.
Alexander Wolf
Head of Investment Strategy for Asia
J.P. Morgan Private Bank
Wolf posits that “Made in China 2025” aims to replace imports with domestic production effectively saying to their current suppliers, “we want to put you out of business.”
“If you were Samsung, or a policymaker in Taiwan, or Korea, that would be concerning,” he says.
So what is the furthest extent that these tech tensions could go? Wolf can see an escalation to the point where Chinese companies could be blocked from establishing bases in Silicon Valley, but not on the imminent horizon.
In addition, the more damaging aspect could be restricting market access in each country to the other countries’ tech firms, similar to what is currently happening with regard to Huawei in the United States.
China imports more semiconductors than they do oil.
Alexander Wolf
Head of Investment Strategy for Asia
J.P. Morgan Private Bank
It might be good for China to see this current pressure as an opportunity.
Gina Huang
Head of Government Relations
J.P. Morgan China
近年來,中美之間的科技統治地位之爭日趨白熱化。世界最大的兩個經濟體對本國尖端行業的保護日益加大,相
互的不信任感逐漸加深。
圍繞科技統治地位的地緣政治角力正在蔓延到全球貿易領域,或將使世界分裂為兩大科技陣營。每個陣營都努力
尋求獨立自主、自給自足,同時對另一方陣營實行尖端技術封鎖。
作為摩根大通科智薈2019的首場專題討論,本場會議着重探討了正在興起的「科技冷戰」概念及其對全球經濟和
市場的潛在影響。
參與本場專題討論的嘉賓是摩根大通私人銀行亞洲投資策略部主管吳安瀾先生(Alex Wolf)和摩根大通中國政府關
係主管黃直女士。本場會議由摩根大通私人銀行中國投資部主管陳秀珍女士主持。
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An Insider's View - Transcript
[Music]
Alexander Wolf: Today I spoke on a panel entitled: The Politics of Tech. A New Cold War?
where we explore this issue of increasing tech tensions between the US and China as they evolve past a trade war and trade negotiations, what does this increased competition over tech look like?
We talked about what the implications could be for investors, how both economies could be affected, and how this, in many ways, unprecedented situation of great power competition, rapid advancement in China, the threat that China can pose to western tech companies. How that might play out in the future.
A good example is 5G.
Right now, China in many ways leads the world in terms of 5G operational roll out.
But an example of just how interconnected the two economies are is that China is ahead of the US in rolling out 5G, but, in many ways the 5G network in China relies on critical components from the US.
So, very much it is a double-edged sword.
in that they heavily rely on each other, and the fact is that a lot of countries around the world, if they want to roll out 5G cheaply, will probably have to rely on Chinese firms to do it.
And so this interconnectedness, and then the threat of that pulling apart in this concept of a tech cold war, creates very large risks.
We do think that this interconnectedness is profitable, it’s, for many companies, it boosts growth, it’s positive for consumers … will be enough to prevent some of these worst possible outcomes.
As tensions increase, as this competition increases, whether it’s rapid advancement of China in 5G or its rapid advancement in artificial intelligence, facial recognition etc. … competition is not necessarily a bad thing.
I think the way this is often portrayed, even just using the phrase cold war, makes it sound overwhelmingly negative.
But the fact is, in the actual Cold War, you saw one of the erm, a period of rapid innovation because of competition between the US and Soviet Union.
And so as China is competing in semiconductors, as China’s competing in a lot of industries they didn’t used to compete in, it is forcing more investment - on both sides.
And as you see increased investment, whether it’s in IOT or many of these fast growing sectors, that investment can boost growth.
That investment can boost innovation.
That investment is good for the consumer.
And so, competition, just like competition between companies, competition between countries is not necessarily something to fear.
So, there could be a silver lining there.
One thing we did talk about on the panel was this, of course, old Cold War concept of mutually assured destruction.
Where, right now, because China relies on the US consumer, and the US market. Whereas, US companies also rely on the Chinese market for sales. But because both countries rely on each other, there is so much, there is a lot of sales, there’s a lot of trade, there’s a lot of profits generated by trade between countries, and that is enough to prevent some of the worst outcomes.
And so while we think that there are different risks of a tech cold war, there are risks of the economies decoupling, there’s risks of these economies seeking self-autonomy in the tech world.
The fact is that integration of the two economies’ trade, multi nationals, manufacturing base being set up in both countries, has been very successful, has been very positive.
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