Chinese Think Tanks on US Chip Policy + NSS
"The essence of US-China strategic competition is a struggle between economic development and domestic governance rather than a traditional hegemonic or military-security struggle."
The following translations are by Thomas des Garets Geddes, creator of the new Sinification substack. Check it out!
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 completed in September, 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.
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.
Speaking of translation, I’ll be at an in-person event Saturday afternoon November 12th in San Francisco for the launch of the Center for Strategic Translation. Would be great to see you there!
The following are all direct quotations from the Fudan Development Institute report.
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.
Chinese experts react to the U.S.’s National Security Strategy
On 14 October, the influential Chinese think tank Shanghai Institutes for International Studies (SIIS) brought a panel of its experts together to comment on the US’s newly released National Security Strategy. Below is a selection of their opinions:
Shao Yuqun (邵育群) – Director of the Hong Kong, Macau and Taiwan Institute at SIIS:
The China-related sections of the National Security Strategy is a reflection of the Biden administration’s overall approach to [the US’s] China strategy and policies since coming to power. Thus, there is a fair amount of content that we are already very familiar with. There are nevertheless some new formulations and policy nuances in the report that deserve our attention.
The first is the reference to ‘out-competing China’.
The second is the use of the term ‘decisive decade’. The Biden administration has made it clear that the next ten years will be a crucial phase in the US’s competition with China and will determine whether or not the US can win this competition … This timeframe is important for us in terms of gauging the US’s short- to medium-term policy trend vis-à-vis China.
Wang Guoxing (王国兴) – Distinguished research fellow at SIIS:
This report is merely a summary and refinement of the national security strategy (including its strategy towards China) implemented by the Biden administration since it took office.
[The US] wants to unite its allies and partners, but at the same time it wants to be the boss of everything and claim all the benefits of the 21st century. These contradictions are the reason why, despite its determination, it is unclear whether the US’s objectives will be achieved.
Wang Zhongmei (王中美) – Director of the Institute for International Economic Studies at SIIS:
The core of the US’s economic policy towards China is becoming increasingly clear. It exhibits two obvious objectives: The first is to curb the development of key industries in China … The second is both to restrict China's ability to improve its standing within its regional economy (在地区经济领域), while accelerating the reshaping of supply chains based on ally-shoring.’
Su Liuqiang (苏刘强) – Assistant research fellow at SIIS’s Institute for International Strategy:
The US’s new National Security Strategy largely inherits the strategic vision of the past two US administrations, with its strategic objective still being to preserve US hegemony.
Sun Haiyong (孙海泳) – Associate fellow at SIIS’s Institute for Comparative Politics and Public Policy:
With regard to Sino-foreign cooperation in science and technology, the Biden administration's first National Security Strategy greatly emphasises the so-called geopolitical threat posed by China and significantly increases its strategic readiness to ‘compete’ with China.
In the medium to long term, this strategic orientation taken by the US will, on the one hand, inject more momentum into the Chinese tech industry’s push towards independent innovation, while on the other, the US will suffer the backlash effects of its tech-related bullying strategy.
Zhao Long (赵隆) – Deputy director of the Institute for Global Governance at SIIS:
In terms of [its Russia-focused] objectives, the two main priorities of ‘weakening and isolating’ and ‘deterring and dividing’ [Russia] have been reinforced. [The National Security Strategy] proposes to enhance the US’s integrated deterrence capabilities, to use the US’s alliance network to continuously weaken Russia and to try to turn the Russian government and people against each other.
Zhang Yinghong (张迎红) – Director of the Centre for European Studies at SIIS:
First, the US [now] considers the systemic competition between democratic and authoritarian states as one of the main trends in international relations.
Second, the United States emphasises the linkage between Europe and the Indo-Pacific region and the construction of a large Eurasian security block.
Third, the United States is set to strengthen NATO. [As a result,] Europe's strategic autonomy will be seriously affected. In the next ten years, Europe will become mired in the long-term geopolitical conflict opposing the US and Russia. The long-term energy shortages and long-term economic recession will lead to Europe's heavy dependence on the US in terms of security, energy, trade and international governance. The confidence and ability of Europe to pursue its strategic autonomy is likely to be severely undermined.
Liu Zongyi (刘宗义) – Secretary-general of the Centre for China-South Asia Cooperation at SIIS:
The Biden administration's new National Security Strategy is a summary of its domestic and foreign policies of the past two years, with relatively little that is new.
From both a geopolitical and a geo-economic perspective, ASEAN is [now] at the heart of the struggle between the US and China. Vying for the moral high ground through public opinion and information warfare is one of the main aspects of this competition.
Zhou Yuyuan (周玉渊) – Deputy director of the Centre for West Asian and African Studies at SIIS
[The US hopes to] focus on rule and standard setting and to establish a comparative advantage over China [in Africa] by setting new standards, adopting new discursive methods and [trying out] new approaches.
[However,] the US has also indicated that it will cooperate with other protagonists [in Africa] – including rivals – in addressing Africa's development challenges such as food security, epidemics, terrorism and humanitarian crises.
Mao Ruipeng (毛瑞鹏) – Deputy director of the Center for the Study of the Americas at SIIS
The US’s new National Security Strategy reinforces its strategy of both competing with China and strengthening its international alliances, arguing that strategic competition between major powers over the [current] international order has become a new feature of the times.
According to the report, the US will increase its participation in international organisations and will seek to strengthen its system of alliances in a variety of different fields in order to be able to dominate international rule-making.
And now for some AI art…
All of the following images I made with midjourney.
A useful reminder that Chinese analysts are at least as prone to slanting things favorably as their American counterparts:
These quotes consistently underestimate how much value, IP, and technological capability is still within American hands when it comes to the development and fabrication of chips.
They overestimate goodwill towards and dependence on China in Taiwan and the Netherlands, doubly so in South Korea, whose sitting government seems to remember the Lotte debacle well, and triply so in Japan.
They obviously misunderstand the reality that the GOP will be more than willing to follow CHIPS up with further direct subsidies to industry, even if perhaps dressed up as tax cuts.
They still proclaim that state-led allocation of capital is more conducive to bleeding-edge technological development than market-led.
Most importantly, however, they continue to delude themselves that the US strategy plays into the hands of China's "strengths," namely its investment-led development model. For the last 3-4 years, I've seen Chinese policymakers and think-tankers desperately grasping for a reason as to why that model will continue to be world-beating, instead of already being a decade past its expiration date.
They *know* that the Party lacks the institutional capacity to shift China out of the channel that a legacy of rapid development has carved in the bedrock, and they understand that even if the Party had the capability, Xi's conception of comprehensive national power will not brook any such attempt. So everyone whistles past the graveyard, hunting for a rationale as to why it's actually a *good* thing that investment is 45% of GDP in 2022, when Wen Jiabao said consumption should take a leading role in 2011.
Let's see how that goes; I think Pettis is more or less on-point when he says the hangover from existing overinvestment has already ensured China faces a Japan-style Lost Decade (or two), but if they continue down this road further I think the collapse of the Brazilian military regime in the crisis of the 1980's is a more relevant model.
I was wondering if a "super strong dollar" policy, if it could be pursued discretionarily on purpose, is a part of the US' economic warfare v China toolkit? A lot of the supply chains which China claims to be heavily integrated into are likely low margin supply chains, and for China's economy to maintain its earnings, would necessitate RMB devaluation in step with other suppliers like ASEAN S. Korea etc. And then, given that the US would be exporting inflation to the global South with it's rate hikes and super strong dollar, would require/test price-increase power among the supply chain links, at a time of US import disruption. Not to mention the debt crises that might unfold for the heavily leveraged, overseas.
However, this strong dollar policy is drawing blood in the OECD countries and home in the US as well!