Author: Doug Fuller, City University of Hong Kong
More than a year into the Biden administration, many are disappointed by its China tech policy. The China hawks are disappointed by the lack of any movement towards decoupling, while globalists are disappointed by the lack of reversal of many of Trump’s trade and investment policies. Within the administration itself, there are representatives from each policy camp.
We typically bemoan bureaucratic infighting, but there are times when it should be celebrated, or at least the policy outcomes it brings about. The Biden administration has stumbled upon a subtle middle ground between decoupling and reversion to inadvertent abetting of China’s rising technological dominance. Like all happy policy accidents, its survival is in doubt as the consensus behind it is frighteningly fragile.
The genius of Biden’s accidental policy is that it keeps business allies, including those hidden in China, on board for narrow and targeted sanctions against certain Chinese organizations, allowing the United States to achieve clearly defined policy goals. Keeping both these formal and informal allies acquiescent, if not happy, is critical to sustaining US technological advantage. By constraining the scope of sanctions and enhancing their predictability the Biden administration has created its own United Front with state and business actors, fostering support for US technology and acceptance of its own foreign policy.
As US technology controls targeting China evolved during the Trump administration, they focused on three areas: Huawei, human rights and China’s military-industrial complex. These controls targeted China’s ability to design and manufacture semiconductors. Without access to chips, Chinese firms were hobbled. The policy question for the Biden administration was whether to broaden its controls beyond these three areas.
The Biden administration has steered a moderate and generally predictable course of maintaining narrow controls that cut off firms from accessing American semiconductor technology in the form of chip-design software and chipmaking equipment, even if that equipment is outside of the United States.
Firms that have found themselves subject to these controls have run afoul of the United States by supplying Huawei, China’s military-industrial complex or a public security apparatus that impinges upon human rights. The United States Commerce Department, for example, is reportedly investigating the Chinese joint-venture partner of a key US chip design software provider, Synopsys, which allegedly allowed Huawei to gain access to US software.
Restricting the scope of controls has limited further fallout for key chipmaking equipment suppliers from Japan and the Netherlands. Japanese firms have taken advantage of US controls by making a pitch to Chinese customers that their products represent less regulatory risk than those of their American competitors. And while Netherlands-based ASML agreed not to deliver advanced extreme ultraviolet lithography equipment to targeted Chinese firms, they are still carrying on a booming business in the previous generation of deep ultraviolet machines.
The United States needs to keep its formal allies and friendly Chinese business foes on the side because these two groups, alongside US semiconductor firms, are key players in determining whether China can reduce its dependence on US technology. In 2020, as US and foreign semiconductor capital equipment makers assessed the likelihood of export controls expanding beyond Huawei-related business, producers were already strategizing work-arounds for potentially onerous controls.
The CEO of KLA, the third largest producer of semiconductor capital equipment, suggested that the firm might seek to de-Americanise its products to put them beyond the long arm of US export controls. American producers went so far as to war-game how quickly an advanced fabrication plant could be built without American content. Using de-Americanised equipment alongside Dutch ASML equipment was deemed the quickest route with a timeframe of four to six years.
China itself has doubled down on investment in semiconductor capital equipment with the second tranche of its China Integrated Circuit Investment Industry Fund and 14th Five Year Plan. And yet, targeted firms such as Huawei have found themselves effectively cut off from semiconductor production in proscribed technologies while business booms for everyone else.
The narrow scope of export controls has maintained an international coalition of businesses that effectively undermines China’s attempts to create alternatives on its own. The world is still reliant on US technology for designing and manufacturing chips and Chinese firms still have a very healthy appetite for US equipment that belies pledges to support onshoring of its semiconductor supply chain.
But the international coalition is fragile. Proposed legislation from Congress to block wider swathes of Chinese industry from access to technology threatens to undermine it. As do similar proposals emanating from the National Security Council for tighter multilateral controls of semiconductor technology and a new semiconductor alliance with Japan, South Korea and Taiwan. These proposals have met with little enthusiasm and much passive resistance from South Korea and Japan.
A short-term policy victory for the China hawks might prove pyrrhic. China currently has few allies and little hope in its fight for silicon supremacy. Even its own consumers and chip designers are reasonably content with reliance on international suppliers. Pushing broader controls will ultimately push Chinese and foreign businesses to develop an alternative semiconductor supply chain, to the benefit of China’s quest to escape technological dependency on the United States.
Doug Fuller is an Associate Professor of Asian and International Studies at City University of Hong Kong.
This article appears in the most recent edition of East Asia Forum Quarterly‘Asia’s Digital Future’, Vol 14, No 2.