Jordan Schneider is a senior analyst at the Rhodium Group and the founder of the ChinaTalk podcast and newsletter.
Earlier this month, the Biden administration introduced controls to limit exports of U.S. semiconductors and associated technology to China. Through moves like these, combined with policy efforts to boost domestic industry and innovation, the U.S. is doing whatever it can to preserve and expand its edge in critical technologies. The CCP’s deep commitment to technological self-reliance, however, puts the two nations at loggerheads. These new export controls, then, solidify a major shift in U.S.-China relations that will define the trajectory of this relationship for years to come.
For decades, U.S. policy encouraged the PRC to upgrade its technology. Xi Jinping actually made his first trip to the U.S. as part of a military delegation in 1980, shortly after the normalization of relations. Serving as secretary to a senior People’s Liberation Army (PLA) general, Xi joined meetings discussing how to deepen cooperation with the Pentagon, including on topics like supercomputers, ICBMs and missile development.
Through the Carter administration and into the early Obama years, the U.S. posture toward China’s economy and its science and technology ecosystem was bipartisan and consistent. Development, Washington assumed, would ultimately lead China to modernize its economy and align its political system more with Western liberal norms.
However, starting in the late Obama years, continuing through Trump’s tenure and culminating in the Biden administration, this posture changed. There are a number of causes for this — Xi’s illiberal turn, with his handling of Xinjiang and Hong Kong as well as his decision to remain in power indefinitely, most prominent among them. China’s aggressive behavior on the international stage — pushing territorial claims abroad, using inflammatory rhetoric and frequently turning to economic coercion — played a role. Finally, frustration with China’s obfuscation about the origins of COVID also contributed.
Domestic changes in U.S. politics had an impact as well, including a growing appreciation of the impact of Chinese imports on U.S. manufacturing and a general disenchantment with globalization, combined with Trump’s comfort with breaking from Washington Consensus shibboleths on trade policy. At the same time, China’s technological rise snuck up on U.S. policymakers. China, perceived by many policymakers as little more than a source of cheap labor, had suddenly incubated firms like Huawei, DJI and TikTok, whose international success Washington viewed as a national security threat.
The response built slowly. The Trump administration applied the Foreign Direct Product Rule on telecom companies ZTE and Huawei, limiting both firms from purchasing goods and services that are a direct product of U.S. technology. However, as analyst Ben Thompson put it, “The Trump administration’s moves against ZTE and Huawei were the U.S. putting its hand on the door, foreshadowing its closing but leaving open the possibility of continued engagement.” While actions on Huawei were devastating to its business, the Trump administration did not follow this up with actions to degrade or constrain its domestic competitors, so other Chinese handset manufacturers like Oppo and Xiaomi quickly stepped in and took their market share.
In the end, Trump’s heart didn’t really seem in it. For instance, immediately following the Commerce Department’s actions on ZTE, Trump tweeted that this move led to “too many jobs in China lost” and “instructed” Commerce to “get it done!” Maintaining a good personal relationship with autocrats like Xi Jinping always seemed more important to Trump than going after Chinese tech firms for human rights violations or their contributions to China’s military. In fact, though many of his appointees advocated for a more strategic and aggressive approach to tech competition, the off-and-on attention Trump paid to China played more to a domestic political audience than to any grand geopolitical vision of sustained competition.
In the early Biden years, it was unclear just what line the new president would take on China’s technological rise. Following the Trump administration’s botched effort to force Bytedance to divest from TikTok, the Biden administration hasn’t taken any significant action to resolve the situation. While the Commerce Department had added a handful of firms to the entity list for human rights and civil-military fusion considerations, none made the sort of splash that Trump’s Huawei action did. Overall, the Biden administration seemed to be of multiple minds on the situation, resulting in what one Politico report deemed “a kind of vaporware China economic policy.” Indeed, this report pointed to debates within the administration between techno-national security hawks and more economic-minded policymakers worried about the impact of further actions on inflation and the chip shortage.
Janet Yellen warned in Congressional testimony in 2021 that “if we are too broad in our policies in terms of how we approach [technological decoupling] we could lose the benefits that come from having globally integrated technology systems where advances in one country benefit countries worldwide. The globe has benefitted substantially from spillovers of technological developments.” Other advisers, like White House Chief of Staff Ron Klain and National Economic Council Director Brian Deese, also feared that a more hawkish China policy could spill over and impede the president’s domestic policy agenda.
Over the past few months, these debates seem to have been resolved in favor of the position captured in the administration’s National Security Strategy: China is the only country capable of reshaping the international order, and Xi Jinping wants to do so in a way fundamentally incompatible with U.S. interests. Where there are some areas, like climate change and public health, where it would be nice to cooperate, the U.S. ultimately needs to out-compete China across “technological, economic, political, military, intelligence, and global governance domains.”
National Security Advisor Jake Sullivan’s speech this past September clarified how this strategy will apply to technological competition:
Computing-related technologies, biotech, and clean tech are truly “force multipliers” throughout the tech ecosystem. And leadership in each of these is a national security imperative. …
On export controls, we have to revisit the longstanding premise of maintaining “relative” advantages over competitors in certain key technologies. We previously maintained a “sliding scale” approach that said we need to stay only a couple of generations ahead.
That is not the strategic environment we are in today.
Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.
Now that a centrist Democrat president has committed himself to a high level of intense competition, the Overton window on U.S.-China tech policy has definitively shifted, closing the potential for a more conciliatory approach for a long time to come. A GOP House in 2023 and possible Republican president two years later would almost certainly ramp up restrictions on U.S.-China tech interaction.
The recent export regulations around semiconductors are the most dramatic manifestation of that vision that we have seen to date. In brief, Commerce limited Chinese firms’ ability to import ultra-high-end chips and the supplies to make them, prohibited U.S. firms and U.S. persons from helping upgrade Chinese manufacturing capacity beyond the leading edge and streamlined the path for firms to end up on its entity list. Exports, re-exports and in-country transfers of goods and services to companies on the entity list require firms to apply for licenses subject to U.S. government approval. These applications will operate on a “presumption of denial,” ensuring that U.S. officials will not look kindly at requests to import IP and tooling beyond the limits it has set.
There may be some disruptions in the near term. U.S. companies subject to these restrictions will have to renegotiate contracts, and Chinese companies — many of whom have U.S. nationals in the C-suite — will restructure management. But the impact will play out in a lasting way in the coming years, considerably delaying the technological upgrading of China’s fabrication capacity.
Chinese firms like SMIC may have been able to produce small runs of 7nm chips in the past year, but without American tech, doing so at scale will be impossible for perhaps a decade or more. The hundreds of billions of dollars of R&D invested over decades, not to mention the network effects and positive feedback loops for improving both design software and tooling, mean that the chokepoints the Biden administration aims to hold onto will prove durable into the medium term. Eric Breckenfeld, a former DARPA adviser now at the Semiconductor Industry Association, says that the advanced lithography chokepoint alone would have a significant impact. “Even a well-funded competitor operating without the support of the U.S./Japan/EU suppliers and customers would probably need a decadal effort to stand up their own EUV that functions at scale and with good yields … and still there would be a high chance of failure.” In an explicit acknowledgement of this difficulty, industry media in China is already encouraging firms to forego the pursuit of the leading edge and concentrate instead on more commoditized lagging edge capacity, which relies on older and easier-to-master technology, using Chinese software and tooling.
The Chinese system appeared to be blindsided by these moves. Ministry of Industry and Information Technology officials seemed uncertain and confused during meetings with leading Chinese chip executives in the wake of the new regulations, Bloomberg reported, citing anonymous sources familiar with the discussions. The officials “stressed the domestic IT market would provide sufficient demand for affected companies to keep operating,” according to the report. The instinct to artificially boost demand is a sign of muddled thinking on the matter, as Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics, pointed out — the problem is on the supply and technology side. The Chinese chip ecosystem no longer will have access to frontier tech and even at the lagging edge will struggle to replace and service their current stock of machinery.
Adopting the assumptions of the early Obama era, one might hope that the new export controls would prompt the CCP to rethink its approach to tech, curb industrial policy and state-led capitalism more broadly and perhaps draw cleaner lines between civilian and military firms. In fact, no-one has a good answer to how this all resolves. I doubt that the policy President Biden is aiming for — to simultaneously be, as Secretary Blinken termed it, “competitive when it should be, collaborative when it can be, and adversarial when it must be” — is not a tenable steady state equilibrium for the long-term relationship.
This past weekend, Xi demonstrated absolute mastery of the CCP through his Standing Committee and broader CCP leadership appointments. The strident tone of the Party Congress Work Report gave no indication of interest in backing down from international confrontation or reversing imperatives around military-civil fusion. As U.S. policy also seems locked in for years to come, U.S.-China relations are likely to only grow more fraught over time.
How Will Beijing React?
Why does China want to achieve leading-edge chip manufacturing capacity in the first place? The requirement to subsidize the industry to the hilt indicates that semi fabrication is clearly not a comparative advantage for the PRC. China has been pouring hundreds of billions of dollars into semiconductor firms, injecting so much money into the ecosystem that the cash has flowed into multi-billion dollar scams and very rickety national champions. The lack of progress has reportedly disappointed Xi Jinping, resulting in the recent arrests of some of China’s most senior officials.
Every other country in the world besides Taiwan, South Korea and the U.S. lacks advanced chip manufacturing capacity, and (with the exception of the EU) is content to rely on a globalized supply chain for their microelectronics needs. What’s more, Commerce Department regulations, at least for the duration of the Biden administration, would still allow for Chinese commercial firms to access high-end computing via data centers abroad. They would also allow Chinese manufacturers to purchase finished chips below the specified thresholds and semiconductor manufacturing equipment that does not facilitate the making of frontier technology.
But for Beijing, relying on the Commerce Department’s goodwill to access critical technology is an unacceptable outcome and an anathema to current CCP ideology. The roots of the CCP’s fixation on developing homegrown technological capacity run deep, going all the way back to the early days of the USSR, when Lenin blamed Russia’s loss in WWI on technological backwardness. “It is necessary to master the highest technology or be crushed,” he declared after signing the Treaty of Brest-Litovsk that marked the end of Russia’s involvement in the war.
As Mao fell out with the Soviet Union, he was scarred by the experience of losing Soviet support for his nuclear program, a development which delayed China’s bomb by years. His ultimate success in developing self-reliant military capacity with his ‘Two Bombs One Satellite’ campaign developed into a model for future leaders. “The Maoist techno-security state is viewed by subsequent generations of Chinese leaders, from Deng Xiaoping to Xi Jinping, to have been extremely successful in large part because of its track record in the development of strategic weapons capabilities,” Professor Tai Ming Cheung argues in his book “Innovate to Dominate.” “As a result, key aspects of this model have been incorporated into the post-Maoist Chinese national and defense science, technology, and innovation systems.” These include emphasizing self-reliance and state-directed cooperation between civil and military R&D.
China’s leaders post-Mao have embraced a vision of, as scholar and current NSC director Julian Gewirtz calls it, “actionable futurism — a futurism that required a response from the state and indeed shaped a wide range of important S&T policies.” In 1979, senior leaders Hu Yaobang, Hu Qiaomu and Deng Liqun said in conversation with Deng Xiaoping that “rapid development” of technology meant that “if we do not grasp the opportunity and catch up, our gap with developed countries in the economic and technological domains will grow larger” — a sentiment that Sullivan’s statement echoes. Just last week, Xi Jinping said in his Party Congress speech that “to meet China’s strategic needs, we will concentrate resources on original and pioneering scientific and technological research to achieve breakthroughs in core technologies in key fields.”
As such, the Biden administration, by explicitly attempting to contain Chinese technological development, hits a nerve for the CCP. The more likely outcome from a domestic science and technology policy perspective is retrenchment: an increased role for the state in the industry alongside the redoubling of state support and doubling down on industrial espionage, until perhaps a financial crisis puts hard limits on just how much China can invest in high technology while maintaining social stability.
Risk Of Escalation?
Though Beijing may be tempted to strike back, without a true technological chokepoint, its leverage is weak. If China were to, say, restrict its exports of rare earth elements to U.S. firms or stop packaging chips for U.S. firms, after a few months to a year of disruption, capacity for both would likely come online elsewhere in places like Vietnam, Malaysia, Australia and India. These new buildouts of mines and factories would harm Chinese industry’s long-term prospects and global market share. More vulnerable are consumer-focused companies like Apple and Tesla, who have peer Chinese competitors and could face a consumer boycott or disruption in production.
Despite some mistrust of the car’s surveillance capabilities, Chinese government officials have allowed Tesla to manufacture and sell cars in China because they believe that the firm’s presence would further domestic policy goals around industrial upgrading and decarbonization. A change in Biden’s policy doesn’t obviate those initial aims. The production lines that serve Apple employ millions, and given the shaky state of China’s macroeconomy, officials are loathe to take any action that would lower growth in the current context of the Zero-COVID policy, which is already dramatically suppressing economic activity.
The goals of the Biden administration’s tech policy are two-pronged. On the one hand, it’s trying to promote domestic manufacturing and innovation by investing in businesses, technological infrastructure and R&D through the Inflation Reduction Act and the CHIPS And Science Act. On the other, it seeks to protect the areas where the U.S. has a sustainable technological edge over China through export controls and investment screening. Ultimately, President Biden’s tech policy will be judged on two things: did it allow the U.S. to retain its edge in critical technologies? And did its policy moves put the U.S. and China down a path to conflict in Taiwan — a possible threat, since cutting off Chinese firms from the Taiwanese semiconductor ecosystem means China has less to lose economically from a blockade.
On the former, at least in the case of microelectronics, the fabrication chokepoints will likely hold up into the medium term. Whether that will really matter for the overall balance of power in the long run is an open question. China may be able to illicitly procure enough chips to run the models it needs to improve its ballistics. Rapid recent improvement in the efficiency of training AI models may even leave behind computing as a limiting factor in development altogether. However, for other critical technologies like biotechnology, it’s far from clear whether there are any key chokepoints, leaving the balance of work to be done on the “promote” side of the ledger to preserve America’s edge.
When it comes to the risks of war, it is incredibly difficult to say. Regardless of changes on the margin on how much the mainland is reliant on Taiwanese semiconductor manufacturer TSMC, in any scenario of extended conflict, the Chinese economy would suffer upwards of a 30% GDP hit due to global trade disruptions and the inevitability of severe Russia-style sanctions. Perhaps enforcing regulatory controls on microelectronics could play a substantial role in preventing the PLA from convincing itself that it is capable of successfully invading Taiwan.
One thing Chinese decisionmakers must know is that invading to “take the chips” is a complete fool’s errand. Kinetic activity would cause hundreds of billions of dollars of damage to manufacturing equipment, which has been tuned so exactly today that even the impact of rumbling from nearby highways is minimized to the maximum extent possible. Much of the semiconductor talent still in Taiwan has turned down offers to double their salaries to work on the mainland. It’s farfetched to assume that these people would be happy with whatever state-owned enterprise gets handed the keys to their current employer. And even if the PRC somehow took over Taiwan without leaving a scratch on the equipment, Taiwan and the PRC together would still be intensely dependent on global imports, which the world would surely heavily restrict.
Ultimately, the Biden administration’s actions have locked the U.S. and China on a course for years of vigorous tech competition. However, the quality of America’s execution of its strategy is very much in the air. Unfortunately, as Carnegie Mellon’s Erica Fuchs writes, “the intellectual underpinnings to inform technology strategy at the national level are limited.” State-of-the-art research on innovation cannot even settle on a definition of critical technology, much less help policymakers figure out which levers to pull. The U.S. must invest in giving policymakers a deeper understanding of both the Chinese science and technology policymaking ecosystem, as well as analytical foundations like possible technological futures and the ins and outs of critical supply chains. That will give the U.S. and its allies the best chance of maintaining their technological edge and securing the regional stability that lies at the heart of the Biden administration’s aims.