US-China trade deal could be bad news for China’s tech companies

An artist’s depiction of foreign tech companies climbing China’s tariff wall. Or possibly the cover art from the 1993 video game Doom.

An agreement between the US and China to expand of the Information Technology Agreement, announced by US President Barack Obama earlier this week, could spell trouble for China’s tech companies. The agreement could see China forced to drop and lower tariffs on the import of a variety of foreign tech products, including everything from semiconductors to game consoles to GPS devices to MRI machines.

The details of the deal have yet to be ironed out and it will also need to be ratified by the World Trade Organization next month, but if it all goes through, the deal could be as bad for the Chinese tech industry as it is good for the American tech industry.

While both countries have some tariffs on imported tech products, China’s are much higher. That means that right now, many imported tech products simply can’t compete with domestic alternatives when it comes to price, because the foreign firms have to raise their prices significantly to account for China’s import duties. If those duties are eliminated – and this new agreement could eliminate a lot of them – then foreign and domestic firms could be on equal footing when it comes to pricing. The price advantage Chinese tech companies have enjoyed for years would vanish.

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There are plenty of Chinese tech companies that are already competing with foreign tech companies outside China’s borders, of course, but there are also domestic firms that likely won’t be able to compete if consumers can buy foreign brands at the same price points as domestic products. As an article on China’s Sina Tech puts it, “Without the protection of the tariff wall, when these foreign firms enter the domestic market, it may be quite an blow, perhaps even a devastating blow, to domestic companies with weak competitive strength.”

In an attempt to combat this, China is expected to push for a gradual reduction of its tariffs over the long term, rather than the immediate, total reduction preferred by the US. A more gradual reduction would give Chinese companies time to adjust and build up their ability to compete in a global market.

Regardless of whether China gets its way, I have a feeling that the increased global competition in China’s tech market will spell disaster for some of the Middle Kingdom’s weaker tech companies. But in the long-term, that might not be a bad thing for the industry as a whole. This new deal should force China’s tech sector to up its game in terms of global competitiveness, and that in turn could inspire more of China’s stronger companies to try their luck outside China’s borders, and bring some of the country’s best tech products to the rest of the world.