The technology gap between the US and China is a race to the bottom | United States | China

The complex technological divide between the US and China is forcing a rethinking of what industry would look like for consumers in a disconnected world.

This Monday, the Pentagon blacklisted Internet and video game giant Tencent Holdings Ltd. for his alleged links with the People’s Liberation Army. And this Friday, TikTok will present its final arguments to the US Supreme Court in an unprecedented ban on national security grounds.

The news surprised visitors this week at one of the sector’s main events in Las Vegas, where companies usually meet to present their dreams of a techno-utopian future full of robots that make clothes, flying machines and other utopian visions.

Despite the tension, more than 1,200 Chinese companies present at CES are vying to enter the United States market, which represents the largest foreign presence and more than 25% of the nearly 4,500 exhibitors.

Jensen Huang, CEO of Nvidia Corp. (NVDA), led the opening night with an impassioned keynote and a wide range of product updates.

In December, Chinese market regulators launched an investigation into the US chipmaker amid a recent escalation in tensions.

I wondered what companies might find themselves in the middle as Huang explained his vision of a future full of robots and autonomous vehicles, or how these cars would be built without Chinese supply chains and materials.

Washington’s latest decision to add Shenzhen-based Tencent to a blacklist of Chinese military companies carries no sanctions or fines. However, it meant a drop in its stock and a major blow to the reputation of the world’s leading video game publisher, which has invested in high-profile US startups from Reddit ( RDDT ) to Epic Games.

The decision will spark even more anger, and it would be surprising if Beijing didn’t retaliate against more consumer-focused American tech companies.

Another unintended consequence is that China may end up providing more support to its own companies that it sees as being unfairly attacked, redoubled its efforts to reduce the advantage the United States is trying to maintain. We have seen Beijing support Huawei Technologies Co. and local IC makers after they came under fire from Washington.

Blacklisting Tencent also threatens negative consequences in other ways.

The United States has cited perceived national security risks as a reason for pursuing Chinese technology companies, but leaders have not always been candid about what that means.

Lawmakers voted to ban TikTok after classified reports allegedly identified it as a major threat from its parent company ByteDance Ltd., but largely edited out the smoking gun.

The Ministry of Defense has also not provided any public evidence that Tencent is working with the Chinese military (this is optional). But it has become more difficult to understand how national security relates to consumer technology.

In 2021, Xiaomi Corp. reached an agreement with the US government to remove it from the same blacklist after the company sued. Before reaching a settlement, a US judge called the smartphone maker’s argument “deeply flawed.”

Xiaomi was included in the list due to its investments in 5G and artificial intelligence, which could have potential military applications, although everyone else was doing so at the time. Another perceived risk was the government-linked founder’s award, which has also honored hundreds of entrepreneurs, including the creators of hot sauce.

Tencent said its listing was “obviously a mistake”. And you will likely sue or settle with the government to remove it. Either the United States will eventually share more information about why it sees China’s most valuable technology company as a threat, or it will become a legal headache and temporarily hurt stocks while irritating Beijing.

Washington has made it clear that it does not want its adversary to take the lead in innovation, but its “whack-a-mole” strategy to slow China’s tech sector is fueling a race to the bottom. Politicians need to be much more strategic, especially when it comes to protecting national security.

There’s another irony at CES right now: Chinese companies flock to the show to show off their power, and state media have fought hard to get them to attend amid visa issues. But they are also eager to come because of mounting problems at home that have nothing to do with Washington’s restrictions.

The government’s crackdown on the Internet sector and new macroeconomic difficulties have proved devastating for startups. And incentives for entrepreneurs don’t seem to be moving forward, especially amid consumer austerity.

The United States was already well on its way to demonstrating to the world that its free-market technology ecosystem was the ultimate engine of innovation. Opaque and porous attacks on Chinese technology under the ever-expanding banner of national security undermine this claim.

The new administration needs to assess what it hopes to achieve before making matters worse with tariffs and pointing the finger at China as responsible for the problems of the country’s working class. A more chaotic collapse of America First will only embolden Beijing and slow down its own consumer technology industry.

This note does not necessarily reflect the opinion of Bloomberg LP or its owners.

Read more at Bloomberg.com

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