COMMENT:

Donald Trump and Xi Jinping have declared an uneasy truce over their tit-for-tat tariff war.

But there are signs the dispute between the two economic superpowers is entering a new phase where the United States ban on China's Huawei from its telecommunications market on security grounds — which is likely to be replicated in the 5G market in NZ — is just one step in a more fundamental technological cold war.

In briefings in Washington DC yesterday, high-level business representatives — speaking under Chatham House rules — foretold a situation where ICT companies trading through global supply chains, may ultimately find themselves encouraged to develop and use parallel supply chains, such is the heightened sensitivity between the United States and China.

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Already some US companies operating in the ICT space in China have withdrawn in the face of Chinese restrictions which require outside businesses to turn over their source code store data on Chinese servers.

It allows the Government to conduct security audits on their products before gaining access to the Chinese market and requires them to operate with local partners in cloud-based businesses.

An Interos Solutions report, on behalf of the US, the China Economic Security Review, earlier this year warned of the extent to which China had penetrated the technology supply chain, and called on the US government and industry to develop a comprehensive strategy for securing their technology from foreign sabotage and espionage. Interos said it was particularly important as the US moved towards 5G wireless networks.

The consultancy suggested Chinese leaders had executed a multi-pronged strategy to put their homegrown companies at the nexus of the US and global technology supply chain, incentivising corporations to build products locally and acquire businesses with contracting footholds in other nations.

An analysis of seven major US-based tech companies — HP, IBM, Dell, Cisco, Unisys, Microsoft and Intel — found more than half of the products they and their suppliers use are shipped from China.

Microsoft relies on such products the most, with analysts tracing 73 per cent of their shipments between 2012 and 2017 back to China.

Clearly the Microsofts, Googles, Facebooks and Apples have also had to deal with questions over the openness of their networks to US security and intelligence agencies in the United States.

But what was interesting in Washington was a growing realisation that the current global supply chains system might end up with different supply chains serving the China market and that of the US when it comes to ICT.

And the US-China tensions do carry associated risks for New Zealand.

New Zealand should be able to weather the GCSB decision on Huawei, which is expected to be ultimately banned from taking part in Spark's upcoming 5G network. This will be made on national security grounds.

The US is a particularly important market for our technology companies as outgoing US Ambassador Tim Groser recently stressed. NZ's top 200 technology companies passed all meat (beef and sheepmeat) in terms of total export earnings (to all markets) around 2015.

In 2017, total TIN200 exports were $7.34 billion compared with just over $6b for all meat exports. But the North American market is the fastest growing of our technology export markets.

If competing supply chains from the US and China become the norm this will require considerable adjustment by our technology firms.

China is also of immense importance to NZ for agricultural exports, tourism and international students.

The recent Beeby Colloquium considered the dramatic escalation of tariffs between the US and China, the increase in systemic legal trade disputes, and, a deepening impasse over appointments to the World Trade Organisation's appellate body.

This is a turbulent time for the global trading system where the old African proverb "when the elephants fight it is the grass that suffers most" comes to mind.

Smaller states like New Zealand do not have to be defeatist in the face of of rising global political and economic uncertainty.

But we do have to consider how to successfully navigate through a period where the retaliatory spiral of tariff increases are raising costs for consumers, damaging supply chains, and forcing changes in production and investment decisions.

At the bottom, Government leaders must withstand any push to force binary decisions when it comes to prosecuting New Zealand's vital interests with both the US and China.

The biggest plus in the last week is the WTO looks likely to be reformed after world leaders signed off an a agreement at the G20 to progress urgent reform.

Trade Minister David Parker's initiative to insert NZ in a group of 13 nations pushing for reform at the WTO was well chosen.

- Fran O'Sullivan is in Washington DC with the NZ US Council where she chairs the advisory board.