Technological escalation | Krzysztof Tyszka-Drozdowski

O#7 October, the cold war between the United States and China has entered a phase of technological escalation. The Biden administration has announced new export restrictions that would cut off the Middle Kingdom from the most valuable parts of the US semiconductor supply chain. “The United States”, according to an analyst observed“forcefully decouples the entire supply chain from advanced technologies before China internalizes it.

It was President Trump who first responded to the CCP’s neo-mercantilist position by trying to restrict access to American technology. Faced with aggressive state-backed technology espionage and intellectual property theft, impermeable barriers to market access and dumping, the Republican President introduced the Export Control Reform Act. Government agencies were focus on previously limitless technologies: these include supercomputers and AI, and all the tools and elements needed to develop them. Now the Biden administration has introduced export controls on the latest cutting-edge chips, software needed to design their and the manufacturing equipment needed to produce them. Restrictions also apply to US personnel associated with China’s advanced semiconductor industry.

Why are do the new measures go that far? Before, they or they only covered technologies and companies that worked directly on military projects. Advanced semiconductors, supercomputers and AI, however, are not neutral technologies, but rather conditions of possibility for modern weapon systems. Jake Sullivan, Biden’s national security adviser, referred at their as “force multipliers”. Simply banning the sale of chips and equipment directly to institutions or entities affiliated with the Chinese military was ineffective for two reasons. First, the Chinese had established a network of shell companies that allowed their to circumvent these restrictions. Secondlyand more importantly, the Chinese tech sector operates under a framework of “civil-military fusion”, which means that the line between commercial technology and military technology is blurred, as private players are under the control of the Communist Party. In this environment, the only option for the Biden administration seemed to be to cut off access to their the entire advanced semiconductor ecosystem.

While many essential tools needed for chip manufacturing and design software their remain in the hands of the United States, a large part of the components of the supply chain are located in other countries. The unilateralism of the US initiative may well prove to be its weakest point if non-US companies realize that they or they can gain a much larger share of the Chinese market through the withdrawal of their American competitors. If the United States fails to convince its allies to join in the restrictions, in the long run these efforts may prove less successful than expected. When Biden proposed the chip 4 alliance, the Korean government was already reluctant to the idea (after all, 48% of Samsung’s chip exports go to China.) In the face of technological escalation, finding the “win-win solution”, mentioned recently by the head of the semiconductor division of Samsung, seems more and more improbable.

China has had a mixed performance in the semiconductor sector

Commenting on the US announcement of new export controls, Chinese expert Tanner Greer noted that technology is key to fulfilling the Party’s historic mission to “make China great again”. Semiconductors are a vital element without which this ambition cannot be achieved.

With Xi’s rise to power, technological development has become the top priority. At the party 2At the 0th Congress, its leader stated unequivocally that China “must consider science and technology as the first productive force, talent as the first resource, [and] innovation as a number one driver”. He has previously placed particular emphasis on “technological autonomy”, seeing the pursuit of sovereignty in this area as the most important task at a time of growing decoupling between the United States and China. Xi named Liu He his “economic czar””, oversee the semiconductor industry. Previously, Liu was involved in other sensitive areas, leading attempts to fix China’s financial sector and representing his country in trade talks with the Trump administration. In the face of export restrictions, he is expected to oversee the chip industry’s adoption of the so-called “whole nation system”.”. It is a resource mobilization mechanism, which was used in the Mao era for rapid industrializationand later for the construction of the atomic bomb. “For our country, technology and innovation are not only a matter of growth“, Liu declared. “It’s also a question of survival.”

Despite its prioritization, China has had mixed results in the semiconductor sector. Its champions lag behind Taiwan’s TSMC, failing to break into the advanced chip category, and their production is concentrated in older generation semiconductors. When it comes to foundriesWhere complex factories with very subtle manufacturing processes where the chips are made, the two largest Chinese companies in this sector total only seven percent of the market. In the category of logic semiconductors, which includes central processing units (CPUs) and graphics processing units (GPUs), the share of Chinese companies is even lower. They are far behind the market leaders in lithography tools, without which the most advanced chips cannot be built. Biggest Breakthroughs have Happened in Semiconductor Design: Here Are the Companies in the PRC have managed to make a real leap forward and only the United States remains ahead of them. China’s share in this segment has increased from 30.6% in 2004 almost 43 percent in 2019.

Specialization in the semiconductor supply chain is so complex and difficult to duplicate that the pursuit of self-sufficiency in this area is rightly taken as seriously by the CCP as the nuclear program development effort. Nevertheless, no country has achieved chip autonomy. gue the complexity of the sector, it is probably unachievable. The ambitious “Made in China” technological independence plan 2025″, provided that seven0 percent of domestic demand would be met by domestic manufacturers. At present, Chinese companies only cover about 20 percent of it.

China has many advantages, such as cheap capital and cheap labor. Otherwise, their the market is huge. Although China produces several times more STEM graduates per year than the United States, it faces a shortage of engineering talent. The CCP is aware of this and is launching university programs dedicated to electrical engineering with a a particular focus on semiconductorsbut the tacit and practical knowledge that Taiwanese engineers have accumulated over generations cannot simply be copied. There is already a talent war: Chinese companies are trying to recruit engineers from Taiwanese and Western companies. In order to counter poaching attempts targeting engineers, Taipei has installation a special investigation office. Perhaps these talent shortages will be filled by the return of Chinese from the United States to their country. As tensions between the two powers escalate, we are witness of a reverse the brain drainwhile “more than 1,400 Chinese scientists in the United States have returned to China in 2021, one 22% increase over previous year”.

Will the CCP treat this movement as an existential threat?

The are two facets of American strategy. On the one hand, it involves efforts to cut China off from the tools and resources that would allow it to excel in advanced chips. The second aspect concerns the American potential in this area. The much-needed boost for the US semiconductor industry was supposed to be the CHIPS Act, although the scale of this initiative is considered by some to be insufficient. Like David P. Goldman Remarks“With its huge population and vast pool of talent, China is a far bigger challenge than Russia ever was, but the United States is spending a small fraction of our 1980s commitment compared to the size of the American economy.” In addition, the CHIPS Act has been taken over by various lobbies. Instead of being a step toward rebuilding America’s manufacturing base, it ended up with welfare for businesses and subsidies for incumbents. Pressure from the latter has reshaped the bill beyond recognition, allowing the funds to be used not only for future share buybacks, but also for investments in China, such as Julius Kerin has underline.

How will China react? After the bans that crippled Huawei, the retaliation was pretty negligible. Yet the blow the Biden administration has dealt to the very heart of China’s tech ambitions is of a much different magnitude. The consequences of these new regulations will only appear after a few months.and Beijing will most likely wait to see the results before deciding on a response.

There is speculation that Washington will not stop there and introduce a review mechanism to monitor investments by American companies, with the aim of restricting the deployment of American capital in China. This would bring down other strongholds of decoupling resistance, such as Blackrock, Sequoia Capital or Apple. As China can have less and less to lose, his reaction could be unpredictable.

Much is said about the chilling effects of export restrictions, but they or they prove efficient where are you going they or they prove to be “limited and manageable”, as General Manager of TSMC affirms? Will the CCP treat this attempt to delay its technological development as an existential threat? Will he move the calendar to Taiwan? It is said that when Zhou Enlai, the first prime minister of the PRC, was asked how he assessed the impact of the French Revolution, he replied: too early to tell. It may be too early to pass judgment on what Washington’s latest measures will entail. There is no doubt that they or they will, however, retain the attention of future historians.