The Chip War is Undermining Competitive Coexistence
By Sharon Huang
When visiting Beijing in 2017, former Secretary of State Rex Tillerson described the U.S.-China relationship as one “built on nonconfrontation, no conflict, mutual respect, and always searching for win-win solutions.”
Unfortunately, this description cannot be further from the current Sino-American relationship. Despite their economic interdependence, the United States and China have consistently prioritized national security measures over collaboration, and geopolitical expansion over solving the key problems that should be uniting us all. In response to the US sanction on Chinese Minister of National Defense Li Shangfu in 2018 and the unexpected Taiwan visit by former Speaker of the House Nancy Pelosi to signal US support of Taiwan’s democratic movements, Beijing has suspended U.S.-China climate talks and some high-level military communication channels, heightening the risk of military confrontation.
Cross-Strait Tensions and Semiconductors
Many analysts agree that the escalation of tensions with China due to the Taiwan issue and the South China Sea territorial disputes are real concerns. In a war game, CSIS predicts that even if China fails an attempt to invade Taiwan, the United States and the world economy would still suffer an enormous cost. An alternative is to reach the preferable ‘competitive coexistence’ relation with China, in which both countries are economically interdependent but compete on other fronts, making the risk of major wars low and cooperation in addressing pressing global challenges attainable. These demands maintain the US lead in crucial economic sectors while deescalating high-profile military tension in the Taiwan Strait and the South China Sea intensifies. However, these efforts have become increasingly difficult against the backdrop of the intensifying Chips War between the two countries. The endless tit-for-tat trading policies in this encounter have led many business owners, investors, and countries involved in the market of chips to worry.
Semiconductors power crucial future technologies – including artificial intelligence, quantum computing, and military capability – that are key to national security. Currently, China dominates the production of two primary raw materials used in semiconductor production gallium and germanium, accounting for 80% and 60% of global production respectively, according to the Critical Raw Materials Alliance. The economic interdependency between China and the US and the linkage between national defense and technologies presents a complex challenge to US strategists and policymakers: How can the US guard against national security threats and maintain global technological dominance while minimizing domestic economic and international political backlash from trade frictions with China?
A Look at U.S. Trade Restrictions
In his recent work “U.S.-China Technological “Decoupling”: A Strategy and Policy Framework,” Jon Bateman accurately describes this present challenge: “China’s tech sector continues to benefit American businesses, universities, and citizens in myriad ways—providing critical skilled labor and revenue to sustain U.S. R&D, for example. But that same Chinese tech sector also powers Beijing’s military build-up, unfair trade practices, and repressive social control.” As a result, the U.S. approach has been to restrict China's access to technology deemed of "national security", while also trying to limit the harm placed on American companies that have a continued presence in China.
In recent decades, China’s economic growth and rapid technological advances married with numerous allegations of intellectual property theft and economic coercion have heightened many US officials' concern over maintaining US global dominance. Most importantly, China’s Military-Civilian fusion strategy, which comprehensively supports military improvement with cutting-edge technologies and innovation, is used to justify the White House’s 2021 portrayal of China as a “sustained challenge to a stable and open international system.” With President Xi avowing to turn the People’s Liberation Army into a “world-class” military by 2049, the Biden administration has been proactively forestalling this agenda through multiple US-issued restrictions on exports of semiconductors, chip-containing devices, and US chip technology to China and Chinese institutions.
Some officials applaud the chip exportation bans, arguing these measures are necessary to slow down the technological growth of China and deter further aggression of the PRC. Without question, this is a huge blow to China’s chip industry, which relies on foreign semiconductor production corporations, none of which are Chinese-owned. Analysts believe the ban might delay China’s expansion of chip-production capacity and technological advances by 10 or more years. In fact, Huawei hasn't produced a 5G phone since 2019-2020 due to US-blocked access to advanced chips, demonstrating the high impact that US sanctions and blacklists can have. Yet, it is important to note that China has a more dynamic tech sector than often perceived. As Dan Wang, a technology analyst at the Beijing-based economics research firm Gavekal Dragonomics points out, China’s process knowledge allows its manufacturing sector to produce semiconductors in a more cost-effective way than most developed and developing countries. That means China will remain a formidable competitor even without direct access to the most cutting-edge foreign technologies and equipment. Restraining Chinese access to foreign technologies can also force China to tap into this capability and develop its domestic high-end technological goods and services.
As the US increases its investment in the Chip War with China, it has troubled many multinational corporations that suffer significant blows to their profits when giving up their largest consumer market. Nvidia, a leading US company in accelerated computing, was banned from selling sophisticated chips to China. It estimates a loss of approximately $400 million in potential sales in the third quarter and warns of a “permanent loss of opportunities” for the US industry, according to CNN. Semiconductor equipment stocks have also been adversely impacted by the export bans.
Despite the foreseeable blow to many US companies and investors, the Biden administration has doubled down on stalling Chinese technological advancement. According to Al Jazeera, on August 9th, President Biden signed an executive order authorizing the US Treasury Secretary to restrict US investment in Chinese enterprises in three sectors: semiconductors and microelectronics, quantum information technologies, and certain artificial intelligence systems. Intending to prevent the “indigenization” of technology and capabilities sensitive to US national security by China, the administration is cutting off both capital and expertise crucial for the innovation and modernization needed by China to significantly elevate its military and intelligence prowess. This expansion of existing restrictions and prohibitions on foreign investment in China, although applied only to new investments, complicates compliance challenges for companies and private equity owners seeking to invest in China's market.
Ramifications
Though the restrictions create considerable challenges for China’s semiconductor industry in the short term, they might incur more consequential threats by signaling a shift of US policy towards protectionism and escalating trade relations. Ally countries such as South Korea have voiced concerns about losing their current dominance in chip global memory chip making as the US-China competition ramps up. Some might also regard such policies as violating free and fair international trade terms. In 2022, China initiated a dispute against the U.S. at the World Trade Organization over chip export control. Though the case is unlikely to be resolved anytime soon, the US demonstrates its willingness to sacrifice the economic gains of partner countries and multinational corporations for its national security. This could further undercut the US’s ability to strengthen and retain existing partnerships. Meanwhile, the increasingly domestic-focused US policy direction can potentially widen the door for China’s global presence expansion. The restriction placed upon US investment in China’s tech industry will likely drive domestic Chinese companies to seek foreign investments elsewhere, further decreasing their reliance on the US economy and deepening trade relations with other countries.
Earlier this year, the US convinced Japan, South Korea, and the Netherlands to join the export control, doubling down on stifling China’s technological development. The decision to officially ally with the US in this Chips War was not an easy one to make, especially for South Korea. A country with a trade-dependent economy (70% of GDP), South Korea has been trading extensively with China since 2003. Today, China’s market accounts for more than 60% of South Korea’s chip exports, in contrast to 7.7% of exports to the US. As the export bans take effect, the South Korean economy will surely take a toll. The strengthening security alliance comes at the cost of the economic prospect of allies. Though China has limited leverage in this Chips War to take on the US, the deteriorating Sino-American relation has extended into additional areas of competition, keeping many neighboring countries’ nerves on high alert. The heightened competition and sense of insecurity erode norms of collaboration in areas far beyond the semiconductor industry. The possibility of greater domestic discontent and individual interests of the partner countries should be carefully assessed and factored into US policy consideration to ensure long-term, strong alliances.
Without a doubt, measures to confine China’s economic and technological growth are merited and imperative for the US as geopolitical tensions between the two countries mount. However, US policymakers must carefully assess and manage the risk of major conflicts as the United States competes with China on the technological, economic, and military fronts. Meanwhile, they must also keep the third-party countries’ interests and perception of security in mind to maintain strong alliances and build a coalition — all crucial to solidifying U.S. national interests, buttressing the liberal international order, and addressing pressing global challenges.