24 October 2020, NIICE Commentary 6383
Ragul Palanisami
The US and Chinese economies are deeply intertwined with their bilateral trade volume reaching its peak at USD 660 billion in 2018. The economic relations between the US and China has been part of a grand bargain, which Niall Ferguson and Moritz Schnulirack has termed as ‘Chimerica’ in 2006. However, this grand bargain remained under threat since the time of the great recession of 2008. At the time of recession, it was agreed by both the US and China that some form of adjustment is needed on both sides. This was meant to correct the ‘global imbalance’, which was argued to be responsible for the recession in the first place. The adjustment required the US to reduce its deficit with China by importing less and saving more. On the other hand, China agreed to increase domestic consumption and reduce its exports. Since, both the countries failed in this “first step towards decoupling,” their bilateral trade relations remained fraught throughout the Obama years.
US President Donald Trump entered office with a vow to take strict actions against China’s ‘unfair’ trade practices. Decoupling was on the administration’s agenda when it imposed tariffs on a range of Chinese goods. Tariffs acted as a trigger which compelled foreign companies with production bases in China to shift to countries like Vietnam, the Philippines, Cambodia, and India. As part of the trade war, the Trump administration imposed 25 percent tariffs on USD50 billion worth of Chinese tech goods containing “industrially significant” technology related to the Made in China 2025 (MIC 2025) plan.
Huawei and the US’ Tech-Decoupling from China
Technology decoupling is the central feature of the Trump administration’s China strategy. The main target of Trump’s campaign was the Chinese telecom equipment giant Huawei. Even though the US cites ‘national security’ concerns for targeting Huawei, the real reason seems to be the 5G technology that the company is mastering. 5G technology will be providing a platform for the much-touted fourth industrial revolution. Huawei’s success in large-scale 5G deployment would mean that China will have a head-start in the industries of the future. Huawei dominance will enable China to set the standards in 5G and in other associated future technologies. All this would mean that the US will be losing its technology leadership to China, which might pose national security implications for the US.
Chip Wars
The technology war between the US and China is mainly fought in the arena of chips. Semiconductor chips form the building block of the entire electronic industry. In May 2019, the Trump administration targeted Huawei by adding the company and its 114 affiliates to the US entity list. This move was meant to stop US semiconductor companies from selling their proprietary products to Huawei without approval from the US Department of Commerce. Under the regulations, even products manufactured outside the US would require a license, if the US-made components make up for more than 25 percent of the total value. Besides Huawei, the entity list was expanded to include Chinese Artificial Intelligence (AI) firms like video surveillance equipment suppliers Hikvision and Zhejiang Dahua; voice recognition champion iFlyTek; and supercomputer maker Sugon, among others.
An array of US semiconductor companies that include chip-makers like Intel, Qualcomm, Nvidia, AMD, Micron, Qorvo, and Skyworks; chip design tool suppliers like Synopsys and Cadence; and chip-making equipment suppliers like Applied Materials, KLA, and LAM Research, and many others were affected by the ban. However, despite the embargo, the US companies continued to ship products manufactured overseas to Chinese companies placed under the US’ entity list.
Taking aim to plug these loopholes, the Trump administration tightened its embargo on Huawei in May 2020. Under the new regulations, chips produced around the world using America-made machinery and software was blocked from supplying to Huawei. This move targets HiSilicon, Huawei’s chip unit, as the company began to ramp-up in-house chip production for Huawei smartphones, following Trump’s initial siege on Huawei. However, the main target of the move is the contract chip-fabricator Taiwan Semiconductor Manufacturing Company (TSMC), which mass produces chips for Huawei’s 5G base stations.
Lobbying of Allies
Besides its own ban on Huawei, the Trump administration has been lobbying allies to ban Huawei from their 5G infrastructure. Australia became the first country to ban Huawei citing security risks. Besides Australia and the US, Huawei 5G equipment is banned in Japan, Taiwan, New Zealand, and the UK. Likewise, following pressure from the US, the Dutch government blocked the sale of products from the chip equipment company ASML to China.
China’s Tech-Decoupling Measures
The technology war is not one-sided. Beijing also has economic and security concerns about dependence on American technology. Chinese policymakers worry that the economy is too dependent on labor-intensive, low-end manufacturing, and too reliant on foreign technology. On its part, China has been taking great efforts to move up in the value-chain and attain technological self-sufficiency. Chinese government’s policy actions in this direction include the Indigenous Innovation Policy brought out in 2006, which was followed by the MIC 2025 unveiled in 2015.
MIC 2025 aims to raise domestic content in core components and materials to about 70 percent by 2025 in key sectors including next-generation telecommunications. The core components in telecom equipment industry include the semiconductors, wherein the focus of the plan is on mastering advanced semiconductor manufacturing. With the Trump administration’s recent ban on foreign chip fabricators from selling to Huawei, if they used American equipment for production, Chinese government’s focus will also be shifting towards developing its own semiconductor equipment industry.
Beijing’s recent advancements in industrial research methods, and big data, combined with Huawei’s industrial know-how could help China to attain rapid technological leap in the semiconductor industry. Added to this is the mainland’s recent hiring of 3,000 Taiwanese chip-engineers. Moreover, American companies do not completely dominate the chip equipment industry. According to VLSI research, four Japanese companies along with one European and one Singapore-based company share the market with four American chip equipment makers in different segments of chip fabrication process. All the above would ensure that China’s advanced chip-fabrication dreams will not meet a cul-de-sac following the recent actions taken by the Trump administration.
Conclusion
The Trump administration’s actions portend its belief that only through a chip war could the US delay China’s advances in 5G. Still, taking the allies together in its campaign against China is important. This is because the US does not enjoy a ‘total’ monopoly in the semiconductor industry so as to place an insurmountable barrier for China. In this context, creation of an “international fabrication consortium” with Japan, Netherlands, and the US as members, as proposed by a CNAS study released earlier this year, is worthy of consideration. Meanwhile, the fear of “technology balkanization” is exaggerated as there were instances in the past, where various countries adopted different standards for their national telecom networks. While the methods adopted by the Trump administration appear disruptive in the short-term, it should be remembered that the Chinese ‘mercantilist’ behavior, if not tempered down, will have deleterious effects on the western technological dominance as a whole.
