By Eric Vandenbroeck and co-workers

China's Technology Trap

As quoted by Project Syndicate, the tech war between the two superpowers could well be the defining struggle of the twenty-first century. But whereas China continues to play a long game, America’s tactical assault on China’s technology industry is all about short-term advantage.

Since the Biden administration sought to hobble China’s semiconductor industry with export controls last October, one of the big questions has been how Beijing would retaliate. More than seven months later, it finally made a big move.

The Cyberspace Administration of China, the country’s main cybersecurity regulator, announced on May 22 that it would bar semiconductors made by Idaho-based industry giant Micron from being used in critical infrastructure projects, citing a failure to pass a weeks-long “cybersecurity review.”

Micron said the restrictions could result in losing a “high single-digit percentage” of its revenue—a potential multibillion-dollar hit.

The move against Micron wasn’t a one-off but the latest in escalating economic spats between the United States and China, with tit-for-tat moves on products such as microchips. An entire cottage industry is meant to wean the United States off Chinese-supplied rare earth minerals. Meanwhile, U.S. Navy ships routinely transit waters Beijing claims. Taiwan looms large in the background. The Micron decision shows that any efforts to “thaw” relations, as U.S. President Joe Biden recently predicted would happen, will be easier said than done.

“Even if the Biden administration and everybody in the United States tomorrow says we want a thaw in relations, China’s policy will not change,” said Shehzad Qazi, the chief operating officer of data at advisory firm China Beige Book. “There could be a cosmetic thaw, but underneath the surface, it will be difficult to ease tensions.”

Top Biden administration officials, including Treasury Secretary Janet Yellen and National Security Advisor Jake Sullivan, gave high-profile public speeches this spring that sought to downplay a rivalry with China. And U.S. officials have sought, usually in vain, meetings with their Chinese counterparts. But Biden is facing pressure from China hawks and top Republican lawmakers over the merits of extending an olive branch to Beijing.

“It’s time to stop chasing them—it makes the U.S. look weak and desperate,” said U.S. Sen. Jim Risch, the Senate Foreign Relations Committee ranking member. “I am very concerned that the Biden administration—between running after China for meetings and holding back on competitive actions targeting China’s bad behavior—is falling back into old engagement habits for engagement’s sake.”

China is smarting from Western sanctions and export controls that have squeezed its industries. U.S. technologies, such as the most advanced chips and the equipment and know-how needed to make them, are out of bounds for Beijing. The country that made such a great leap forward in the 1950s is trying to do the same with its domestic production of semiconductors and other sensitive technologies that have run on Western inputs.

So far, the United States and many of its allies, including Japan, Taiwan, and European countries with sizable tech industries, have the most control over those supply chains and technology and, consequently, most of the leverage over Beijing. But that could change in the coming decades as Beijing seeks to wean itself off dependence on the West. Or not—China’s industrial policy program to boost domestic output of key technologies has been a slow learner.

“China’s ability to retaliate, the options are minimal for them. When you look at most technologies' supply chain and value chain, these are produced by American, European, or Japanese companies,” Qazi said. “China depends very heavily on these inputs. They can’t do what we can do yet.”

China’s decision to ban the import of Micron wares may be a harbinger of future things. The decision drew sharp rebukes from U.S. Commerce Secretary Gina Raimondo, who said that Washington “won’t tolerate” what she described as China’s “economic coercion.”

That notion has formed the backbone of the Biden administration’s recent engagement with its allies in Europe and Asia. The Micron announcement came a day after the G-7 Summit in Hiroshima ended, during which China’s economic coercion was a major talking point. Micron was also a big feature of that gathering, making multiple announcements, including a $3.7 billion investment to bring advanced chipmaking technology to Japan. That and the company’s status as one of the United States’ leading chipmakers could be, in part, why China chose to go after it. But it’s also been a long time coming.

Washington has been swatting China’s tech sector with such measures as an export control package last year, which barred U.S. companies and citizens from working on some of China’s advanced semiconductor efforts, and the CHIPS and Science Act, which sought to bring semiconductor factories back to the United States and ultimately create a friendlier, China-free supply chain for the critical technology.

“There is a tremendous amount of pent-up frustration in the industry in China, and there was clearly some pressure on authorities to show toughness on these issues and hit back in a way that is seen as credible,” said Paul Triolo, the senior vice president for China and technology policy lead at the Albright Stonebridge Group.

China is signaling in more ways than one that it’s not quite ready to play ball with Biden’s plan for a so-called thaw in tensions. It followed the Micron announcement by rebuffing U.S. requests to arrange a meeting of the two countries' top defense officials at the Shangri-La Dialogue in Singapore this weekend.

“There’s always a way to turn the temperature down, but it takes both parties to bring that outcome to fruition,” said Emily Benson, a scholar at the Center for Strategic and International Studies.

The fourth meeting of the U.S.-EU Trade and Technology Council in Sweden this week provided another example of the balancing act that Washington is trying to play concerning China. A joint statement called out China’s “non-market economic policies” but stopped short of sharper rebukes.

“None of us are looking for a confrontation, none of us are looking for a Cold War, and none of us are looking for decoupling,” Secretary of State Antony Blinken said at that meeting before rolling out what has become the administration’s go-to phrase to describe its approach to its main strategic rival. “On the contrary, we all benefit from trade and investment with China. But, as opposed to decoupling, we are focused on de-risking.”

Even China’s Ministry of Foreign Affairs is taking the rhetoric with a grain of salt. “De-risking is becoming a buzzword lately. Before discussing de-risking, one needs to find out the risks,” ministry spokesperson Mao Ning told reporters on Thursday. The spokesperson cited “a new Cold War” and the “politicizing” of trade and technology issues. China has considerations of its own, chief among them its effort to convince the world that it is open for business again after two years of zero-COVID restrictions and government meddling in business ventures as Chinese leader Xi Jinping tightens his authoritarian grip on the country. So there’s a balancing act going on in Beijing, as well. Even as it tried to make an example from Micron, China rolled out the red carpet for the newly reinstated world’s richest man this week. Elon Musk, whose electric carmaker Tesla operates one of its biggest factories in Shanghai, met with senior Chinese officials, including the foreign and commerce ministers. He also wasn’t the only big name in town. J.P. Morgan CEO Jamie Dimon and Starbucks CEO Laxman Narasimhan also visited this past week, with Dimon calling for “real engagement” between Washington and Beijing.

“American business is still trying to push back against hawkish U.S. policy,” said Qazi.

It’s only going to get hawker. The 2024 presidential election campaign is gearing up, and candidates are vying to bash pandas to woo voters.

“We have to respond appropriately and with heavy pressure on China and show the [Chinese Communist Party] that its attempts at economic coercion won’t work,” Risch said. Risch, who represents Idaho, where Micron is headquartered, rebuked China’s ban on Micron as a ploy for “purely political reasons.”

Rhetorical olive branches aside, the Biden administration has also tried to enlist European and Asian allies to help it counter the worst of Chinese economic coercion. Last year’s export controls were followed by months of negotiations with countries such as Japan and the Netherlands—home to companies producing the most advanced chip lithography machines—to get on board. Beijing’s restrictions on Micron have led to U.S. pressure on South Korea—which counts China as a top trading partner and whose biggest semiconductor firms have factories there—to refrain from taking Micron’s Chinese market share. And even though the U.S. and EU touted their “convergence” on how to deal with China in Sweden this week, European officials reportedly sought to remove some mentions of China from early drafts of the joint statement.

Like the Romans, the Chinese are adept at dividing and conquering. France and Germany do a lot of business in China—French President Emmanuel Macron even went cap in hand o Beijing earlier this year. “China is trying to drive a wedge between Western allies,” said Xiaomeng Lu, a director of the Eurasia Group’s technology practice. South Korea, she added, is in “the worst situation among all the countries stuck between the two giants.”

But the way things stand, detente is as unlikely as a shooting war. Additional measures, such as long-rumored U.S. curbs on outbound investment in China, are still on the table.

 

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