New Fudan Report: US-China Chip War
Fudan Development Institute, one of China’s most highly rated think tanks, has just published a new study entitled “From ‘Prevention’ to ‘Containment’: A Report on the Securitisation of the US’s Semiconductor Industry Policy”. Its authors are Shen Yi (沈逸) and Mo Fei (莫非). The former is a controversial professor of international politics and the director of the Centre for International Cyberspace Governance at Fudan University. With a following of almost two million on Weibo as well as regular videos and opinion pieces discussing international relations, he has become a well-known public intellectual in China. Shen has previously written about his experience of being interrogated by the FBI and having his US visa revoked back in 2018. The second author, Mo Fei, is a PhD candidate at Fudan University’s School of International Relations and Public Affairs and a research assistant at the aforementioned Centre for International Cyberspace Governance.
This report appears to have been written, or at least completed, in September, in other words, prior to the US’s most recent high-tech export controls. The authors, however, were aware that “the Biden administration plans to further strengthen export controls on China in the areas of artificial intelligence and chip manufacturing, and that it was considering establishing a system within the US government that would give it the power to directly block US entities from investing in China and require information disclosure.” The following summary and excerpts should therefore be read keeping this background in mind.
On a side note, I may occasionally post special editions such as this one in addition to Sinification’s weekly format if and when I feel that a particular study is noteworthy, topical and too long to share as a thread on Twitter.
Key arguments from this report:
The US is making a strategic mistake in channelling most of its energy into outdoing China in the tech sector. Semiconductors only constitute a small part of the US-China rivalry.
The US’s chip manufacturing capacity lags far behind that of East Asia. The CHIPS Act is unlikely to provide enough funding and incentives to change this.
US allies will not be willing to sacrifice their own interests for the sake of America’s.
China has the financial firepower, unrivalled capacity for government-industry coordination and absolute determination to accelerate the development of its chip industry, come what may.
On the drivers and dynamics of the US-China chip war:
“China's fundamental national strategy is to strengthen its national power, improve the standard of living of its citizens and enhance its international status through peaceful economic development. The US’s strategy towards China is to 'lock up' China's rise, curtail its international influence and increase its dependence on the US in the international system. Therefore, the essence of the strategic competition between the US and China is a struggle between economic development and domestic governance rather than a traditional hegemonic or military-security struggle.”
“The US, however, has rather simplistically focused on the nature of the strategic competition between the US and China as being a 'technological battle', and then even more simplistically determined that a series of [tech-related] policies will be able to successfully block the strategic challenge posed by China in a relatively short period of time and at a relatively low cost.”
“The US has [now] put anti-China national security concerns ahead of such economic interests as ‘cost’, ‘efficiency’ and ‘market’.”
“Advanced semiconductors have become an outlet for the US to release its security-related anxieties about China and have been turned into a symbol … demonstrating the US’s superior strength and its gradually winning in the context of US-China rivalry. At the same time, in the absence of one single effective ‘tool’ to contain China's technological rise and as one of the very few holds the US [still] has in the economic sphere that can effectively handicap China, any action that can widen the gap between China and the US in advanced semiconductor technology will have the psychological effect of ‘easing the anxiety’ and ‘increasing the smugness’ of US policymakers. Each [US] crackdown on China's advanced semiconductor technology will release the US’s security-related anxiety about China in stages. [But] when new security-related anxieties reach a certain level, it will once again drive the US to take further restrictive measures against [the development of] China’s advanced semiconductor technology.”
“At the [current] stage of the strategic stalemate between the US and China, the US can only add to the semiconductor technology embargo compulsively and frequently to demonstrate that it still has considerable coercive power and strategic advantages over China.”
“But the fact is that advanced semiconductors only constitute a small part of the strategic competition between the US and China.”
On the difficulty for the US to rebuild a chip manufacturing base at home, gain the backing of its allies and shut out China:
“Global economic integration, the formation and consolidation of global supply chains, and China’s deep roots in the global economic system make it almost impossible for the US to replicate its Cold War strategy against the Soviet Union in its strategic competition with China.”
“History repeats itself but never in exactly the same way. The United States today does not have the same strategic capabilities as it did thirty years ago, and China is now already highly integrated into both the new international division of labour and the world’s science and innovation cycle. Even in the area of semiconductors, where the US is in a position of power and China is at a disadvantage, the US is no longer in a position to [simply] remove China from the supply chain of advanced semiconductors. The inherent vulnerability of the Biden administration's chip strategy leaves room for China's semiconductor industry to break out of the US’s siege. More specifically:”
“The Biden administration's semiconductor strategy runs counter to the global semiconductor industry’s development pattern and lacks an adequate domestic semiconductor manufacturing base to support it.”
“US semiconductor manufacturing capabilities lag far behind those of East Asian countries. [This is explained by] the wave of de-industrialisation that began in the late 20th century in the US, coupled with the fact that most American IC companies have opted for a 'Fabless' operating model, focusing on design and outsourcing manufacturing.”
“The US’s heavy reliance on East Asian semiconductor production capacity exacerbates the risk of disruption to the US chip supply chain, while also increasing the US's vulnerability in the context of its strategic competition with China.”
“Now, for national security and geostrategic reasons, the US is planning to bring semiconductor manufacturing back to its shores … However, such a systemic change will be very difficult to achieve with just a single ‘chip bill’.”
“The US’s current approach has seen it use mainly federal funding to invest domestically in high-tech R&D … to train new talent and to attract foreign firms to set up factories in the US. However, … if the US wants to restructure the [current] layout of the global semiconductor industry, US$50+ billion from the federal government will clearly not be enough to solve this issue.”
“In September 2022, the Center for a New American Security released [a report] … which stated that the US CHIPS Act is designed to close the cost gap between producing chips in the US versus in East Asia, but that current financial support and related incentives were still far from sufficient to close the cost gap across the industry.”
“The actual effectiveness of the CHIPS Act may differ quite significantly from the optimistic estimates (in favour of the US) that are now being made in a large number of studies; one cannot exclude a scenario in which the buzz is followed by business as usual.
“Frankly speaking, although we still need to wait for [these measures] to be put into practice … it is arguably the ‘pull’ by the end customer that will prove more important than the ‘push’ by the US government’s industrial policies. If the end-consumer market proves unwilling to pay a premium [for these high-tech products] … the Biden government's semiconductor strategy … will not be able to [fully] restructure the [current] layout of the global semiconductor industry.”
“The US’s influence within its chip alliances is not sufficient to convince its allies to follow the Biden administration's semiconductor strategy on the premise of ‘America First’ and ‘each country has to pay its own way [i.e. with no help from the US]’.”
“[In reality,] the core of the US’s semiconductor strategy, is, on the one hand, to siphon off resources from Taiwan, Japan, South Korea, the Netherlands and other relevant semiconductor companies to make up for the technological shortcomings in its own semiconductor manufacturing sector. On the other, to convince its allies and partners, using its position of power in the high-tech world, to stop semiconductor technology deals and manufacturing cooperation with China.”
“The Biden administration is [effectively] strengthening itself at the expense of others … thus increasing the vulnerability of the Biden administration's semiconductor strategy. In other words, US allies and partners have their own semiconductor strategies and are not willing to sacrifice their own interests in order to serve the US’s semiconductor strategy.”
“[For example,] South Korea cannot [simply] decouple from China, just for the sake of cooperating with Washington in building up the US’s [new] supply chain, without taking into account the fact that China is South Korea’s largest semiconductor market … South Korea is ambivalent about the ‘CHIP 4’ alliance currently being assembled by the US.”
“Taiwan, on the other hand, still has illusions about [the effectiveness of] its ‘Silicon Shield’ and does not want the US semiconductor industry to develop in the direction of self-sufficiency for national security reasons.”
“There are deep-rooted conflicting currents in the underlying logic of Taiwan's semiconductor strategy with the US. Politically, Taiwan is investing in US factories to curry favour with the US on geopolitical issues. Economically [however], Taiwan's semiconductor industry … does not view the US ‘chip strategy’ favourably.”
“In addition to [the Netherland’s] ASML, the Biden administration has also tried to pressure Nikon, a Japanese DUV equipment manufacturer, to stop exporting such equipment to China, but the Japanese have also refused. This shows that, when it comes to the technological embargo imposed on China, although the ‘public-private’ alliance formed by the US will cooperate with the US’s strategy, there is a limit to such cooperation. This can be explained by two factors: the pull of the Chinese market and a concern for US technological hegemony [among its allies].”
On the US’s tech crackdown on China and the the medium-to-long term prospects for both the US and China:
“The specific technical details involved in the semiconductor industry are complex enough to ensure that [only] a small group of elite politicians in Washington can monopolise the content and future direction of these discussions, thereby making it easier to gain indulgence and support for their contrarian actions both at home and abroad.”
“Take the latest US chip sanctions against China on 1 September as an example … The ban presents a remarkable internal paradox. It was initially intended to create additional barriers to the development of China's high-tech industry. However, it may well end up having the opposite effect. Ironically, in the medium to long term, US pressure is set to ‘force’ China's high-tech industry to develop a more solid industrial base as well as [its own] core technologies. Objectively speaking and from the US’s perspective, this will lead to [the emergence of] a more challenging, comprehensive, and thus more-difficult-to-contain, powerful adversary.”
“In the short term, US tech-related policies targeting China will indeed create a window of opportunity. That is to say, a window during which China will be seeking to fix the adverse consequences caused by the US’s technology crackdown. For the US, this window will mean that the US is given more time to develop itself in a number of key and emerging technologies, including advanced manufacturing and artificial intelligence, so as to gain the upper hand over China … But such a turn of events is far from being a given. In other words, in addition to restricting technology exports to China, the US government will also need to implement effective domestic policies to support and guide its efforts in these areas. However, if we look at the US’s performance on related issues since the 1980s, the picture is not particularly promising. Of course, the recently passed CHIPS Act provides some room for imagination. However, … in terms of the type of governance capacity required to steer and organise such large-scale strategic industries, the US government is not currently in a position to provide a convincing answer to observers.”
“In the short term, the most immediate and tangible effects of the Biden administration's tech-crackdown on China will be: (i) to create real obstacles for the development of related industries in China; (ii) to generate a public opinion wave of pro-US and anti-China rhetoric; and (iii) to use ‘hurting the US’s strategic rival’ as political leverage during the upcoming US mid-term elections and the presidential elections two years later.”
“In terms of [economic] weight, the US economy is still the largest in the world, but its lead over the second-placed has narrowed to the point where it is within sight and able to be overtaken. The US still has an overall advantage in terms of cutting-edge technology, but this advantage does not ensure that its use will simply lead to the continued development of its strengths and consolidation of its superiority. It will [probably] not be possible for the US to maintain its overwhelming technological dominance over the rest of the world. In other words, there is a lack of certainty surrounding the US’s ability to make further technological breakthroughs. Its traditional strengths are shrinking or even [already] lost, and its toolbox lacks an obvious ‘magic bullet’ like the US’s containment strategy during the Cold War, which could simply ‘solve the problem once and for all’ vis-à-vis the US’s main strategic rival. In fact, the anxiety that is spreading in Washington's policy-making circles is constantly forcing the US government to look for, and subsequently try out, any type of tool that can produce short-term results. Thus, for policy makers at least, it is a way of justifying domestically that ‘something has already been done’ and avoiding simply looking on [helplessly] at the gradual erosion of the US’s hegemonic powers.”
“The specific condition [to the US’s success] is that the target of such a weapon [export controls] must have a sufficiently weak political will to abandon its intention to develop the industry in question immediately after the US’s strike … [However,] China has both the will and an unmatched capacity for industrial policymaking to drive and guide the development of its own alternative technologies [替代性能力]. Chinese companies and industries have long since begun the production of related products but are [currently] in the uncomfortable position of being constrained by the superior and more mature products of US companies. The subtlety of US bans is that it is the US government, rather than the Chinese government, that has helped these companies to achieve the effective exclusion of their competitors from the [Chinese] market [i.e. this will, according to the authors, allow Chinese companies, in the medium-to-long term, to grow even faster and invest even more in R&D].”
“In terms of China's [overall] development, the development of its technologies, the development of its industries as well as a number of other dimensions, this [i.e. pressures from the US/West] does not really constitute a [catastrophic] threat akin to ‘the sky is falling’. Objectively speaking, the discomfort caused by the bans will be the best possible impetus to stimulate and push forward the upgrading of alternative industries and technological capabilities [in China]. China's [past] experience shows that once this short-term discomfort has been overcome and alternative capabilities and industries have been developed, what will follow is a complete rewriting of the rules of the game by China by virtue of the country’s superior production capacity. The potential outcomes of such a scenario are truly exciting.”
“For [Chinese] policy analysts [政策观察者], it is important to maintain a greater degree of composure, resilience and patience when dealing with US policy decisions, and to analyse more systematically the [potential] discrepancies between policy intentions, policy content and, ultimately, policy effectiveness. For the Chinese government, the more pressing issue is to build [more] effective and refined countermeasures against US [policies], while maintaining the trend of opening up to the outside world and encouraging globalisation, so that the Chinese market and the benefits gained by US companies in China can be used more fully as leverage and, when necessary, a strategic weapon in China's competition with the US. This is a crucial and necessary part of expanding and improving [our] capabilities in the context of China’s rise.”
Zhu hao (祝好),
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