The technological fork

The strategic competition between the United States and China began in early 2018, when the Trump administration applied non-selective import tariffs and redirected most of its trade efforts towards widening the technology gap between China and the United States, with particular attention to the “deep technology” (deep tech)like semiconductors. The Biden administration has pushed further in that direction. However, one must not forget that long before Trump came to power, China began to block Western technologies trying to enter its market, especially in the context of the open skies of the Internet and digital platforms. The situation is not just the US trying to contain Chinese technology, but also China choosing where to engage and where to disengage.

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The question is not so much whether this trend will continue, but what the consequences may be. The situation between China and the US would normally be described as technological decoupling, but the reality is more complex. Decoupling is a concept that economists have borrowed from engineering and is the opposite of tight coupling. It implies a sudden action of separation, but this is not what is happening in the economic realm, or even in the technological space. In fact, the idea of ​​suddenly going from hyperglobalization to non-globalization through political action, namely decoupling, does not reflect reality. What we are experiencing is a slow but steady bifurcation of technologies as well as technological norms.

Is the hard fork happening faster than we think? Judging by what US policymakers say they want to achieve, the answer could be yes. In his recent speech on the new Washington consensus, US National Security Adviser Jack Sullivan stated that the goal is to build a “high fence in a small backyard” when it comes to China. This means, in effect, strictly controlling technology transfer, but only for key technologies, especially dual-use and military-use technologies.

By contrast, European policymakers have a different narrative, focusing primarily on reducing strategic dependency rather than blocking China’s access to key technologies. As described by the President of the European Commission, Ursula von der Leyen, in a speech before her trip to China in April, any drive to reduce risks must focus on diversifying the origin of European imports, especially for the transition Union energy sector, from what is now a huge concentration in China. This could be read as if the EU is not going to follow the US in its drive to contain China technologically.

However, the drastic containment measure, i.e. the chip ban that Washington introduced in October 2022, led to a specific EU Member State, the Netherlands, having to make the decision to follow the US in its decision. The reason is that the Netherlands is the only EU country at the top of the semiconductor value chain, exporting lithographic machines to produce advanced chips.

The chip ban is not nearly as comprehensive as the idea of ​​a “little yard” might suggest. It started with a ban on selling most equipment that can make semiconductors that are 10 nanometers or less (ie even more advanced), but that barrier has been moved to 14 nanometers, basically widening the “yard”. Furthermore, the “fence” may not be as high as it seems due to the many loopholes that exist for China to continue importing high-end third-party semiconductors. Finally, Beijing’s ability to move up the value chain cannot be underestimated given the huge number of subsidies dedicated to boosting key technologies, including semiconductors.

“Both Washington and Beijing are trying to create the largest possible cohesive bloc from which to run their tech ecosystem”

Whether or not China succeeds in narrowing – or even eliminating – the technology gap, what seems clear is that both Washington and Beijing are trying to create the largest possible cohesive bloc from which to run their technology ecosystem. Although this is a problem for all countries, as taking sides can only be detrimental, it is much more difficult for larger blocs or countries, such as the EU or India. The choice depends not only on values ​​or political preferences, but also on the degree of technology to which a country may have access.

Although there are still doubts about whether China will succeed in reaching the technological frontier, emerging and frontier economies may be under the impression that China, as the self-proclaimed leader of the Global South, will be more willing to share its own technology. The evidence on technology transfer from China to the Global South is still limited, but there is hope, especially given the Global South’s long-standing complaints about the West’s unwillingness to freely share its technological recipes. The case of vaccine patents during the pandemic still remains in the memory of many political leaders in these countries.

The US and China appear to be bifurcating into two tech ecosystems, admittedly only for a few key technologies, but once the alliance building process begins, it is hard to stop. The EU seems reluctant to start reining in China technologically, but needs to reduce risks by diversifying its import sources away from China. How to achieve the latter without supporting the US in the former? It seems safe to say, “Welcome to the tech fork!”

Article originally published in English on the website of Bruegel.