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Trade war to impact China's growth through technology transfer: S&P Global Ratings report

ONE of the biggest impacts to China's growth from the ongoing trade war between the US and China will be a slowdown in technology acquisitions as a result of the higher tariffs and restrictions on Chinese investments, S&P Global Ratings said in a report released on Wednesday.

Titled "US-China Economic Friction: Technology More Than Trade", the report said that the tariffs' direct impact on China's growth so far has been small and manageable, but more worrying is how the spat 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, and applying it in their overseas operations or back home in China.

"Tariffs create incentives to remove parts of global value chains (GVCs) 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.

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"Research suggests that one benefit of being part of a GVC is technological spillover - for example, local workers and firms can learn from participating in GVCs."

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

"Restricting China's access to foreign technology is unlikely to derail rebalancing or trigger a sharp growth slowdown in the near term. However, it would probably lower China's potential growth - the speed limit for the economy - over the medium term. This will make it harder for China to rebalance the economy smoothly and stabilise its debt-to-GDP (gross domestic product) ratio," Mr Roache said.

S&P Global Ratings said it believes China can manage the short-term impact of higher trade tensions with the US and continue deleveraging, albeit at a slower pace. A combination of moderate exchange rate depreciation and higher domestic demand should help offset the decline in lower net exports.

Because it still relies on foreign technology to boost productivity and maintain per capita growth at close to the current pace over the medium term, China will likely stay on a path of increasing openness and liberalisation, the report added.

However, as progress may not be enough to quickly satisfy the US and other trading partners, higher levels of trade and investment tensions are likely to persist for some time.