Joe Biden has declared a tech cold war to ‘decouple’ the Chinese and US economies. Although “divorce will be expensive” and companies from both countries, as well as third parties, will be affected, Washington is confident that sooner or later its allies will follow suit.
In October, the Bureau of Industry and Security (BIS), a small federal agency of the US Department of Commerce, published a series of regulations that garnered little media attention regarding the depth and global ramifications of the announced measures: the veto on exports to China of advanced semiconductors –vital for multiple strategic sectors, from artificial intelligence (AI) to autonomous vehicles–, even to companies without ties to the army or intelligence services.
Never before has Washington gone so far to stop the rise of the Asian giant. In 2011, then-Secretary of State Hillary Clinton said that a prosperous China could only mean good news for the US. Around those years, Thomas Friedman wrote in The New York Times that the Chinese Communist Party could not control the desire for freedom and political and civil rights that the market economy would supposedly generate in Chinese society.
With the BIS lists, writes Jon Bateman in Foreign Policythe Joe Biden administration has declared a technological cold war to “decouple” their economies and to which it wants to add the G7, the ruling elite of the new “global West”, which in geopolitical terms today extends to Singapore, Australia, Taiwan, Japan and South Korea.
The price of divorce
Divorce will be expensive. The big US chipmakers depend on the Chinese market for a good part of their revenue: Applied Materials, 33%; Intel, 27%; and Lam Research, 31%. Lam predicts that in 2023 it will lose 2.5 billion dollars, 15% of its income, due to export controls.
Tesla makes half of its cars in Shanghai. Apple’s success, which in 20 years multiplied its revenue by 70 and the value of its shares by 600, to 2.4 trillion dollars, is largely due to China, where it manufactures and assembles 90% of its products. products. 25% of its customers are Chinese. In return, the Cupertino company keeps your data on local servers.
In 2021, China imported 400,000 million dollars of semiconductors because its production only covers 30% of domestic demand. The White House knew it was touching a sensitive point. In his speech to the 20th Party Congress, re-elected Chinese President Xi Jinping mentioned the word “technology” 40 times, stressing the need for self-reliance (I played tizhi) technological.
The plan Made in China announced in 2015 by Prime Minister Li Keqiang, he proposed reaching world leadership in 10 key technology sectors by 2025, including aerospace, AI, robotics and electric vehicles. The day after the BIS announcement, Shenzen, the main Chinese technology node, announced new financial incentives, tax breaks and R&D subsidies for the semiconductor industry. The Chinese central bank has created special credit lines for the sector.
Regulation change
But now the rules of the game have changed. According to Hideki Wakabayashi, a professor at the University of Tokyo, the Trump administration’s tariff hikes, visa restrictions, and sanctions on Huawei and ZTE were just skirmishes in the new tech war.
Although 19 of the world’s 20 fastest-growing semiconductor makers are Chinese, the bulk of their production is low- and mid-range chips. Taiwan produces 92% of the advanced semiconductors and South Korea the rest. The US dominates the design and initial production, the most complex and sophisticated of the process.
Taiwan Semiconductor Manufacturing Co. (TSCM) is the world’s largest manufacturer, but the US controls the nodes of its supply chain, allowing the BIS to place conditions on its technology transfers through the Foreign Direct Goods rule ( FDP). It is worth noting that TSMC, which accounts for 15% of Taiwan’s GDP, produces 53.4% of the world’s most advanced semiconductors and 92% of the most advanced chips. In 2021, it overtook China’s Tencent as the most valued Asian company on the stock market. In Taipei it represents almost 30% of its capitalization. But Taiwan’s so-called “silicon shield” has a serious handicap: its intensive energy and water consumption. In 2030, TSMC could consume 10% of the island’s electricity production, in whose energy mix renewable energies only account for 8%. Between 2015 and 2019, TSMC’s water consumption increased by 70%, to 156,000 tons of water per day in three industrial parks.
“Although 19 of the 20 fastest-growing global semiconductor manufacturers are Chinese, the bulk of their production is low- and mid-range chips”
Among other things, the Commerce Department has banned South Korea’s SK Hynix from installing ultraviolet lithography equipment at its Wuxi plant. Japan’s Sony has limited its ties to Chinese semiconductor makers. And because chips are often designed in one country, manufactured in another, tested in a third, and put into electronic devices in a fourth, Chinese manufacturers like Semiconductor Manufacturing International Corporation (SMIC) won’t be able to produce 14- or 16-nanometer chips for years. .
Washington’s goal is to freeze Chinese technological development at its current levels. The latest national security strategy report considers China as the only rival with the intention and the means –economic, military, diplomatic…– to reconfigure the world order. In June, the Senate approved the Innovation and Competition Law, which gave the green light to an unprecedented industrial policy since the New Deal of Franklin Roosevelt.
In a June appearance before Congress, Gilman Louie, director of the Americas’ Frontier Fund, proposed that the “visible hand” of the state correct market distortions, especially in matters of national security. According to The Washington Post, taxpayers subsidize tech companies that export software that helps the Chinese military make hypersonic missiles and simulate nuclear explosions. Supercomputers and AI can be used for the aerodynamic design of such missiles, capable of flying at five times the speed of sound and changing trajectory in mid-flight.
European neutrality?
The European Union is not so clear. The document “EU-China. A strategic perspective” of 2019 described Beijing as a partner, economic competitor and systemic rival in different passages. In 2021, for the sixth consecutive year, China was Germany’s largest trading partner. Angela Merkel visited China 12 times over 16 years, most of the time accompanied by large business delegations.
Volkswagen sells 40% of its cars in the Chinese market. China accounts for 13% of Siemens’ revenues and 15% of BASF’s, which in July announced it would build a $10 billion plant in Zhanjiang and reduce its presence in Europe due to high energy costs.
Without turning back
Washington is confident that sooner or later its allies will follow suit. The Chips and Science Act, sponsored by Indiana Republican Senator Todd Young and New York Democratic Senator Chuck Schumer, passed by Congress in August, allocates $280 billion to revitalize, among other things, the industry of semiconductors. Some 52,000 million are incentives to create new plants, which are already making their multiplier effect felt, as indicated by Intel’s announcements that it will build a 10,000 million dollar plant in Ohio and Micron and IBM other similar ones in New York.
There is no going back. At its peak, the Soviet Union had a GDP equivalent to 60% of that of the US. China’s current rate is 70%, with a per capita of $12,500, 20% of that of the US. If in 2050, China reaches 50% – the current figure of South Korea – it will be 1.8 times richer than the US and if it reaches 60%, like Japan, 2.3 times richer. But nothing is said yet. If the US grows 1.5% per year with similar inflation rates and stable exchange rates, China will not overtake the US as the world’s leading economy until 2060. And that’s if it succeeds.
“Apple has already begun to withdraw to countries like India and Vietnam, where in 2017 it had 18 suppliers and last year there were 37”
Washington wants to make up for lost time after sponsoring China’s entry into the WTO in 2000, believing that economic development and greater integration into world markets would democratize its political system. In 2021 John Mearsheimer wrote in foreign affairs that there is no similar case in history in which a great power helped the rise of a rival power so much.
In 2008, venture capital firms invested $2.4 billion in China. A decade later, 100 billion, making 206 unicorns bloom (start-ups valued at more than 1,000 million dollars), three times more than the US. Apple has already begun to withdraw to countries such as India and Vietnam, where in 2017 it had 18 suppliers and last year there were already 37. In September the apple company began manufacturing its iPhone 14 in India and its MacBooks and iPods in Vietnam.
Real and virtual borders
Since 2019, government agencies have been banned from using equipment from Huawei, ZTE and three other Chinese companies designated as national security threats for their records of espionage and data theft. In 2021, Huawei had its biggest drop in revenue.
Between 2018 and 2022, the number of Chinese companies on the BIS Entity List, which are prohibited from importing products Made in USA, it quadrupled, from 130 to 532. In August, there were already 600 on the list, 110 of them added by the current administration.
Australia, India, Japan have created a trilateral supply chain resilience initiative to help their companies exit China. The Trade and Technology Council (TTC) between the EU and the US, for its part, sets transatlantic standards to supervise technology investments and exports to China. Beijing, in turn, can retaliate against Apple, Microsoft or Tesla and South Korean, Japanese and Taiwanese companies that abide by BIS export controls.
Bateman believes the result will be a blocky world with incompatible tech ecosystems. The Internet will fragment. When someone travels from one block to another – if they obtain visas – they will find that their phones do not work, that they will not be able to access their favorite websites, their email accounts or their social media applications. Thus, the borders in cyberspace will be as real as those in the physical world.
