The tariff battle between the U.S. and China may ultimately expand into something much larger, an economic war that the U.S. can wage by preventing China from getting any of the U.S.'s most desirable technology.
The Trump administration's invocation of emergency powers on May 15th, which led to the Commerce Department banning the sale of U.S. technology to China's telecom giant Huawei, is part of a vastly larger battle with China, according to one Washington D.C. policy analyst.
This is no longer about a trade war, it is about much broader economic warfare via technology, according to Ed Mills, a Washington policy analyst with Raymond James.
"There's been too much focus on whether this is a trade war, when in reality this is a tech war," says Mills. A tech war, as Mills sees it, could mean broad bans on exports of U.S. technology, possibly banning most or all sales of semiconductors, say, to China.
The Trump administration on May 15th invoked what's called the "International Economic Emergency Powers Act," or IEEPA, instituted during the Iranian hostage crisis in the late 1970s. It allows the executive branch to place quotas on U.S. goods, and restrict what can be sold, in order to sanction a target country on national security grounds.
The immediate action this month was to ban Huawei from receiving U.S. technology, such as Google's Android software.
But the next steps could be far broader.
There could be broad bans on the export of technology to the People's Republic of China, in order to deprive the country of key technology assets of the U.S., on national security grounds.
"What we are seeing here is trade wars moving beyond tariffs, and the beginning of a process of determining which assets does China have the ability to get access to," says Mills. "That starts with company by company" restrictions, such as that imposed on Huawei. "But, it can easily move toward component-by-component, or technology-by-technology bans."
That could conceivably mean limiting exports of, for example, Qualcomm's (QCOM - Get Report) modem technology, given that it will be important for future 5G wireless networks. Or it could mean limiting exports of Nvidia's (NVDA - Get Report) graphics chips that are currently essential for performing machine learning forms of artificial intelligence.
Chip stocks were weaker on Wednesday, with Qualcomm trading down by 12% at $68.32. The weakness in Qualcomm stock is a result of a California court siding with the U.S Federal Trade Commission in finding the company guilty of abusing market dominance. But the decline may have been exacerbated by a headline from The New York Times saying the administration is considering a ban on Chinese tech company Hikvision.
To understand the potential for escalation, one has to look at how the May 15th order intersects with a related matter, a draft proposal by the Commerce Department's Bureau of Industry, Security and Commerce, made public in late November.
The BIS proposal seeks to identify "emerging and foundational technologies" that are "essential to U.S. national security."
Those emerging technologies cover just about anything you'd call important tech, including artificial intelligence, and "A.I. chips" to make it work; "reinforcement learning" and other kinds of machine learning approaches to A.I.; microprocessors, broadly speaking; and quantum computing, among others.
The draft proposal is concerned with "The effectiveness of export controls on limiting the proliferation of emerging and foundational technologies in foreign countries." It's contemplating what kinds of bans can be effective, in other words.
Mills points out both the November 19th BIS draft proposal, and the May 15th IEEPA invocation, are authorized by what's known as the "National Defense Authorization Act," a law passed by Congress last year that pertains to appropriations for the U.S. Department of Defense.
Part of the Act is the "Export Control Reform Act of 2018," which authorizes Congress to "establish appropriate controls, including interim controls, on the export, reexport, or transfer (in country)" of those essential technologies.
That Authorization Act also underlies Commerce's May 15th ban on Huawei, Mills observes, tying the BIS and the IEEPA actions together. "They are related," he says.
"This is the thing we need to be focused on," Mills says, "how government defines the foundational and emerging technologies, and China's access to those. It's been on the back burner all this time."
As for what happens next, Mills contends more bans on individual Chinese companies are the quicker way for the administration to move forward. The "next step" after that is designation of whole areas of technology, such as A.I.
Mills sees momentum for Trump to pursue a course of technology warfare, given bi-partisan support for pressure on China.
"Getting tough on China might be the most popular policy issue that the Trump administration has ever pursued," Mills says. "And that tells me we are more likely to go into the next election cycle with this trade and tech fight continuing"