Current State of Affairs: US-China AI Trade War

Kathryn van der Plank|July 12, 2021

Reading Time: 6 minutes

Last updated: 17 May 2024

The US-China trade war, a multi-year economic confrontation that began in 2018, was a significant disruption to the global economy. Stemming from long-simmering tensions between the two economic giants, where the US had concerns about China‘s trade practices, such as intellectual property theft, limited market access for US companies, and a large trade deficit.

These concerns also extend to the fast-growing field of AI, where both countries are investing heavily. The US fears China’s government subsidies and aggressive tactics could give it an unfair advantage in AI development, potentially leading to a dominant position in this critical technology. This growing rivalry sparked an “AI cold war,” with both countries restricting access to cutting-edge research and technology.

Let’s delve into how the trade war hampered international collaboration in AI research and development and created uncertainty for businesses that relied on global supply chains for advanced tech components.

The AI Cold War: A New World Race

The emergence of the “AI cold war” characterizes a growing standoff between the United States and China. Unlike historical Cold War dynamics revolving around nuclear arms and ideology, this conflict centers on artificial intelligence (AI) technology. It describes a new Cold War paradigm, potentially carrying seismic global trade implications and disruptions.

The trajectory of the AI evolution hinges on the resolution of this East-West rivalry. Will the US and China navigate toward collaboration, ensuring the ethical advancement of AI, or will the world witness a new age of geopolitical contention propelled by artificial intelligence?

What Does an AI Cold War Mean for Global Trade?

Yes, you can still import your AI tech goods.

While we don’t know what the outcome will be, we do know that the world of trade has to continue in spite of this. TecEx’s extensive understanding of global trade requirements, including Rules of Origin and compliance with various customs authorities, allows us to safeguard your tech shipments throughout the entire import/export journey.

Now You Know

Know Your Rules of Origin

The murky rules of origin still leave many importers confused about tariffs, duties, and embargos, often finding themselves in unexpectedly expensive situations. The nationality of a processed product, such as highly divisible technology, is often hard to determine and can lead to unforeseen import costs. Ultimately, the rules of origin stemming from the US-China trade war have left the tech industry, particularly, at the mercy of various customs authorities.

To assist with these technical import details, you will need to reach out to a compliance specialist. TecEx is your partner for tailor-made import solutions.

Reach a Compliance Specialist

How Did We Get Here? | US-China Trade War Timeline

Where it All Started

Jan-Mar: To make his mark on American Industry, former President Trump began a campaign intended to address the country’s growing trade deficit. As a first order, Washington imposed several tariffs over three months, starting with solar cells and washing machines and ending with 25% tariffs on steel and a 10% tariff on aluminum. While neither action was directly aimed at China, its widely believed that these were the first moves against the competing superpower.
Apr: China fires back in response to the steel and aluminum duties with about 3 Billion USD worth of tariffs on U.S. goods targeting 128 products.
In response, America makes its first openly China-centric move and bans selected Chinese corporations from buying U.S. technology. The U.S administration also imposes fines for doing business with North Korea and Iran (link).
Jun: The USA implements a 25% tariff on 50 billion USD in Chinese goods. Motivation for this move is given as China’s alleged theft of intellectual property and technology and its other unfair trade practices. Beijing quickly retaliates by announcing tariffs on 50 billion USD in American products.
Sep: Washington announces 10% tariffs on 200 billion USD in Chinese goods, with a plan to hike the rate to 25% at the start of 2019. Former President Trump then threatens additional tariffs on 267 billion USD in Chinese products if Beijing retaliates. China does retaliate, saying it will add tariffs on 60 billion USD in U.S. products as a response to the latest U.S. duties.
Dec: Trump and Xi meet at the G-20 summit in Argentina. The U.S. has decided to delay a planned increase in tariff rates on Chinese goods from 10% to 25%. Both parties commit to negotiating a trade deal within 90 days.

Tit-for-Tat Tariffs

Aug: Washington announces the U.S. will add additional tariffs of 10% on 300 billion USD worth of Chinese goods. Washington delays duties on more than half of the 300 billion USD in imports until Dec. 15. Washington cites the holiday shopping season to explains the move. A large portion of the products will still be affected as of Sept. 1
Aug: In response, Beijing says it will impose new tariffs on 75 billion USD in American goods and restart duties on U.S. automobiles. Furthermore, it threatens further duty hikes of between 5 and 10% that will take place over two rounds on Sept. 1 and Dec. 15.
Oct: Washington announces the U.S. reached a deal with China. The agreement covers topics such as intellectual property, financial services, and agricultural purchases. The U.S. also commits to scrapping further tariffs set to take effect on Oct. 15. However, disagreements quickly break out over tariff relief, and both sides fail to ink the deal for months. The U.S. Commerce Department puts 28 Chinese companies on its “entity list,” which further adds to the complexity of rules of origin trade around the world.
Dec: Both sides announce they have reached a trade agreement. As part of the transaction, the U.S. agrees to cancel the Dec. 15 tariffs and cut other duties in half, while China states it will buy more U.S. agricultural goods.

Phase One Truce

After a period of heightened tensions, a partial agreement was reached. China pledged to increase purchases of US agricultural products, energy, and manufactured goods in exchange for a rollback of some US tariffs. This agreement aimed to stabilize the situation but left many core issues unresolved, including intellectual property and industrial subsidies.
The Phase One deal did little to thaw the underlying geopolitical and economic tensions. The US continued to express concerns about China’s technological ambitions and implemented stricter export controls on semiconductors and other critical technology. Additionally, the Biden administration restricted US investment in some Chinese high-tech sectors, citing national security risks

Renewed Tensions Brewing

Aug: The US passed the CHIPS and Science Act to bolster domestic chip production.
Oct: The US implemented stricter export controls on advanced chip technology headed to China.

An Uncertain Path Forward

May: the US-China trade relationship remains precarious. The Phase One agreement has expired, and the future course of action is unclear. The Trump presidential campaign has signaled a potential return to aggressive tariffs if re-elected. The Biden administration, on the other hand, is walking a tightrope, maintaining a firm stance on China’s trade practices while seeking areas for potential cooperation. The coming years will likely see a continuation of this complex economic and political dance between the world’s two largest economies.Other concerns left in the wake of the trade war include:
- Tariff Standoff: Despite the transition to the Biden administration, many tariffs initiated during the Trump era persist on both US and Chinese goods. While the Biden administration extended certain tariff exclusions in May 2024, it has also initiated investigations into China’s shipbuilding practices, potentially resulting in further tariffs being imposed.
- Slow Decoupling: The trade relationship between the US and China has yet to fully rebound. Notably, US exports to China, particularly in sectors such as manufacturing and semiconductors, continue to fall short of anticipated levels. This trend suggests an ongoing process of gradual economic disengagement between the two nations.
- Tech Embargoes: The US has adopted a more stringent stance on technology exports to China, with a specific focus on Nvidia GPUs. This strategy is designed to impede China’s progress in high-tech industries and has emerged as a fresh source of tension between the two countries.

Caught in the Trade War Crossfire

Because world trade doesn’t happen in a vacuum, the trade war has consequently hindered the intricate web of the global supply chain with tariffs and duties. This has led to price inflations and other economies being pressured to fill the gap.

Major Countries Impacted by The US-China Trade War

The US-China trade war reverberated throughout the global tech industry, extending its effects far beyond the two players. East Asian tech hubs like Taiwan and South Korea encountered investment hesitancy amid trade uncertainty, while Vietnam experienced a surge in demand but struggled with infrastructure limitations. Japan faced intensified competition, prompting innovation efforts, and the European Union, though not directly involved, felt the repercussions of heightened tensions, contributing to an atmosphere of global trade unpredictability affecting its tech sector. Here is a closer look at some winners and losers.

The Winners

The trade war hasn’t been all bad news. Rather than simply paying higher prices for taxed resources, new markets emerge worldwide as China and America seek more competitively priced products. Places such as Brazil, Taiwan, and parts of Europe became more significant suppliers of items affected by the trade war.

Export Powerhouses:

Countries like Vietnam, Thailand, Mexico, and South Korea saw their exports surge. Companies began searching for alternatives as the US and China slapped tariffs on each other’s goods. These nations, with their established manufacturing bases and lower production costs, were perfectly positioned to fill the gap.

They ramped up production of electronics and machinery, becoming go-to suppliers for these in-demand items.

Shifting Strategies:

Some countries, like Taiwan, a major player in the global semiconductor industry, strategically positioned themselves to benefit from the tensions. The US, wary of its dependence on Chinese chipmakers, looked to bolster its domestic semiconductor production. Taiwanese companies received significant investments and formed partnerships with US firms, strengthening their position in the global tech supply chain. Unfortunately, Taiwan also suffered some losses.

The Losers

However, the renewed demand has also increased strain on new markets, with insufficient infrastructure to meet global needs and new order flows. This results in worldwide product shortages. Notable is the shortage of microchips spurred on by drought in Taiwan and encouraged by the U.S., which has barred China from accessing vital technologies needed to start producing microchips of its own.

Disrupted Supply Chains & Higher Prices:

While the US and China aimed to hurt each other’s economies, both ended up grappling with unintended consequences.

The back-and-forth tariffs disrupted established supply chains, causing delays and raising costs for businesses.

This burden ultimately trickled down to consumers who faced higher prices for a range of goods. American farmers, particularly soybean producers, were hit hard as China turned to other sources.

Collateral Damage:

The trade war also had negative effects on some bystander countries that were not directly involved in the dispute. For instance, Ukraine is a major exporter of wheat and corn, products that are often used together with soybeans in animal feed. When China reduced its imports of US soybeans due to the tariffs, the demand for Ukrainian grains also fell. Colombia, a major coffee producer, faced a similar situation. When Chinese consumers cut back on US chocolate imports due to the tariffs, the demand for Colombian coffee also dipped.

Where Does the AI Trade War Leave Us?

The US-China trade war’s impact on global trade is complex and multifaceted. While some countries like Vietnam and Mexico saw their exports boom as companies sought to diversify their supply chains, others like the US and China themselves experienced disruptions and economic slowdowns. The trade war also created opportunities for new trade partnerships to form, such as the increased collaboration between Taiwan and the US in semiconductor manufacturing. However, these shifts came at a cost. The uncertainty caused by the trade war dampened business confidence and investment, leading to a slowdown in global trade growth.

Overall, the US-China trade war highlighted the interconnectedness of the global economy and the potential for trade disputes to cause widespread economic damage. With the AI Cold War intensifying, a pending election year for the US and a truce unlikely, the true ramifications of this feud are likely to be felt for decades to come.

Want to Ship AI?

Current State of Affairs: US-China AI Trade War

The AI Cold War: A New World Race