The 90 day “truce” agreed to in the G20 dinner between Presidents Trump and Xi is certainly a plus. The world has been spared, at least for the moment, an acceleration of a destructive trade war between the world’s two largest economies.
China, for the short term, has a smaller economy than the US and therefore is in the weaker position. It now has to come up with changes in policy that will open its economy and satisfy Trump’s demands, be they reasonable or not. As far as the stock markets of the US and China, the truce is a big positive but there must be follow up.
But trade truces aside, there is unfortunately a movement in the American government and media to demonize China and cut off all contact with China. Government ministries, when it comes to policy, take on a life of their own and are not known for their objectivity.
The Department of Commerce’s recent announcement seeking public comment on export controls to China is one example of this. But the hysteria goes beyond the Department of Commerce. One hears such things as proposals to prohibit Chinese students from attending universities in the United States and to US government reviewing all communication between Chinese students in the US and their families in China. Another negative. In a move aimed at China, the Johns Hopkins Medical School recently halted a visiting scientist program in response to a national investigation over whether scientists in the US are sharing results with foreign governments.
There are a number of reasons why cutting off contact with China and initiating a new cold war is a big mistake and destructive of American technology. First, China is no angel—the recent shift to more state control is an unwelcome development—but China has 1.4 billion people who score higher than any other major group on standardized intelligence tests. China has a Confucian tradition of discipline. Longer term, there is no way the United States can prevent the rise of China. Only American hubris and short sightedness can lead to the opposite conclusion. Listening to commentators like Peter Navarro, Wilbur Ross and Michael Pillsbury, one is reminded of the immortal words of General George Custer who said, “There are not enough Indians in the world to defeat the Seventh Cavalry.” Except there were and Custer and his troops were wiped out at the Battle of Little Big Horn. America should remain strong militarily. But it should stand up for the rule of law. And as global leader teach China by example and negotiation. And not try to force China into isolation.
Second, arguing that technology flows to China should be cut off because technology might have military uses hurts America as well as China. In fact, all new technologies have military and civilian uses. Railroads were the new technology in the nineteenth century. The North had a superior railroad system as compared to the South. This gave the North an advantage in the American Civil War. Another example. If relations with China were as bad as now when Apple introduced its iPhone, Wilbur Ross probably would have found a reason to ban Apple (AAPL) iPhone from China. The fact is that all technology is subject to misuse by bad people.
Third, technology has been accelerating at an accelerating rate and globalization is a major factor. The world has been the beneficiary, with “good” deflation the result. De-globalization may now be popular but it’s still not intellectually respectable. Knowledge carried by scholars, students, businessmen, scientists has moved around the world at lightning speed. Now, tech breakthroughs are flowing from China to the US. It’s no longer a one-way street. Stop globalization? A major mistake. Incredibly efficient supply chains have been created with China playing a major role. The US is now at full employment. Bring jobs back? Who in the US is going to do them? Move manufacturing from China to Vietnam to avoid US tariffs? This makes no economic sense. And what happens if Trump wakes up one day and imagines Vietnam has hurt his less educated white voting base.
Fourth, cutting off technology flows to the world’s second largest economy hurts American companies and their stock prices. Pick any American tech company and you will find that China is a major market. Often like Apple, their products are made or assembled in China. Actually this is probably true for the majority of non-tech companies as well (of which actually use a lot of tech). McDonalds (MCD), Caterpillar (CAT) and Starbucks (SBUX) are examples. The United States has a comparative advantage in technology and should be exporting tech. The American Department of Commerce with its tech embargo proposal is hurting American industry. The American economy would be better off if there were no Department of Commerce.
Controls on Biotech – the Least Logical Export Control of All
To stop China from encroaching on American leadership in advanced technologies, the US Commerce Department has announced that it is seeking public comment by December 19 on whether to impose more export controls and investment restrictions on a long list of “emerging technologies” including artificial intelligence, biotechnology, microprocessor technology, micro-drone and micro-robotic systems, 3D printing, self-driving cars, robots and quantum computing to China.
Tariffs aside, it is hard to imagine a measure more harmful to the advancement of global progress. In this blog, I will focus on the most irrational control of them all—biotech export and investment controls. Biotech nowadays is all about genomics, artificial intelligence (AI) and Big Data. Biotech, until now, has functioned like one giant global brain. Scientists and entrepreneurs come and go in one world comprising America, Europe, Japan and China. As an illustration of the global nature of biotech, there is even a genomics institute in China named after American noble prize winner James D Watson. Watson of course, along with Francis Frick, discovered the famous double helix structure of DNA and (despite some controversy) is a god in genomics—in China as well as in the US.
China now has an extensive supply of US-trained scientists working in this area. Chinese-origin scientists in the United States have played a very prominent role in biotech. China has the Big Data advantage with its large population and more relaxed notions of privacy. China is coming on strong in AI which is crucial for genomic research. Chinese biotech companies like BeiGene (BGNE) have IPOd in the US. If there is a cure for cancer and other diseases that have plagued humanity, a full global effort including China will find these cures so much faster.
The founder of Chinese firm Fosun is quoted as having a strategy to help everyone live until 121 years old. An ambitious goal to say the least! Fosun has positions in robotic surgery specialist Intuitive Surgical (ISRG) and anti-cancer CAR T-cell companies in its portfolio and wants to add more health care companies. One has to wonder how this threatens the US national interest. One would think Secretary of Commerce, Wilbur Ross—aged 81—might be enthused about the prospect of a 121 year lifespan.
Global Sequencing Competition — Bring It On!
In the year 2000, at the cost of some $2.7 billion FY1991 dollars and in a US-led global project in which the Chinese participated, the human genome was sequenced. Genome sequencing is figuring out the order of DNA nucleotides, or bases, the order of As, Cs, Gs, and Ts that make up an organism’s DNA. In other words: the first step in understanding the genetic code.
Today, the undisputed “king” of sequencing is a US firm called Illumina (ILMN) which has 75% of the market. Illumina’s machines can now do a whole gene sequence for $1000. Incredible progress from $2.7 billion in the year 2000 but still not good enough! The race is on to drive the cost down to $100 and to improve various quality aspects. One competitor, Pacific BioSciences (PACB) has announced it will be acquired by Illumina. A fantastic merger for Illumina.
But it is a big world. In England, a startup sequencing competitor named Oxford Nanopore is reportedly planning an IPO. Oxford Nanopore has a different technology than Illumina. And in Shenzhen another competitor, BGI has just rolled out a sequencing machine that it claims is the equal of the Illumina machines. So, yes, the Chinese and the Brits are coming.
This is wonderful news for medical progress. The users of sequencing include clinicians and researchers. Sequencing is the foundation for so-called precision medicine. Illumina has sold its machines in China including to BGI. It would be a disaster if protectionists in China and the US rope off the two markets. Global competition unfettered by protectionism is a great driver of medical progress. Illumina should be allowed to freely sell in China and BGI in the United States (subject of course to regulatory safeguards). If BGI has stolen any of Illumina’s intellectual property, Illumina can sue in US and international courts. Illumina in the past has aggressively protected its patents in the court system. No company with international ambitions can violate patent rights. And regarding protectionism and intellectual property, if the Chinese backslide on these issues, this is something Donald J Trump should be raising “holy hell” on. But no tariffs please.