The latest cease-fire in the trade war between Washington and Beijing was a major outcome of the meeting between presidents Xi Jinping and Donald Trump on the sidelines of the recent G20 summit. But issues of innovation and technological competition that have been at the heart of the dispute between the two countries were never far from the surface in the diplomatic jostling of key world leaders in Osaka. 

There has long been a debate in the West about China's innovation capacity. Some have seen the country as the next innovation superpower, destined to grab first place in a global race for prowess in research and development. Others have argued that China lags a long way behind. 

Innovation capacity in China has clearly been improving rapidly. But framing the question as one of national innovation capacity misses an important point about the globalization of innovation over recent decades. 

Much of the cutting edge research and development done over the last few decades has been inherently global in nature. Global innovation networks have formed, bringing together researchers, universities, and corporations in multiple countries. Collaboration across borders has become the norm. 

The integration of Chinese researchers and companies into these networks has been a particularly important part of this trend. The result has been a transnational innovation ecosystem primarily driven by multinational companies and research institutes in the West, but increasingly incorporating emerging markets. 

At the same time, both cutting edge innovation and technological application have diffused across global markets, including to China. 

Much of the innovation that takes place in China has therefore developed as part of this globalization. And international cooperation in research and development has enhanced outcomes for all concerned. 

It has been beneficial for Chinese companies, as it has enabled them to enhance their innovation capacity and better integrate into the global economy. Crucially it has also helped them to move up the value chain, from manufacturing and assembly to research and development. 

It has also been good for multinational companies, which have been able to shift some of their research and development activities to China and other emerging markets. 

But this evolution of global innovation networks in which China plays a key role is being undermined by the ongoing tensions between the US and China over trade and technology. 

Rather than looking at the ways in which the benefits of innovation have been spread and shared, the US administration's current policy appears to see innovation as a zero-sum game. Leading companies in China are perceived as an innovation upstarts which need to be contained.

Under this policy approach, both Chinese and multinational companies face new challenges. 

With a less globalized innovation ecosystem multinational companies will see slower growth and a reduction in the opportunities which have come from engaging China's dynamic innovation ecosystem. This will be seen in consumption sectors, pharmaceuticals and applied research across the global economy. 

For Chinese companies, the big challenge lies not in getting consumers or product innovation - where they tend to be stronger - but in the core technologies which still lie predominantly in Western hands. 

The globalization of innovation has made the evaluation of relative capacity in innovation more complex, but in most of the technologically advanced sectors Chinese companies still face an uphill task to challenge the global incumbents. The stress test for China over the coming years will be whether its innovation ecosystem is strong enough to respond to this challenge. 

Only time will tell. But reflecting on the rationale for trade and its relationship to investment in innovation may give modest grounds for cautious optimism. 

To be sure, over the last four decades of globalization Chinese companies have already worked hard to scale the technological heights of globalized production, both through their own efforts and with the support of the government. But ultimately in an open global economy they have been able to buy much of what they have needed, and as a consequence have focused their resources on other parts of the production and innovation value chain. 

This is the logic of comparative advantage. It helps explain where the strengths and weaknesses in China's innovation lie today, with most companies better at innovating in product development and bringing cost efficiencies to manufacturing than in original basic research. 

Now the focus should change in response to uncertainties over Washington's policy approach. By their nature, core technologies pose a greater challenge for any company to develop. It is not just the scientific knowledge which is needed, but the right organization, human resources, strategic focus and open culture. 

China has a well educated and motivated research work force, and a large market for innovative products and services. Chinese companies should therefore be able to pull together the basic ingredients needed to rise to the challenge. The main question is how much time do they need to do so. 

The author is a senior consulting fellow on the Asia-Pacific Programme at Chatham House and a lecturer at the Centre for China Studies at the Chinese University of Hong Kong.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.