Can you elaborate on the evolution of tech policies in both China and the U.S. over the last few years, and what would you identify as their principal goals?
The Biden administration over the past two years has moved rapidly on the technology policy front. This has been a two pronged strategy that includes both onshoring advanced technology manufacturing such as semiconductors, and improving R&D, and implementing new controls around a set of advanced technologies such as semiconductors, artificial intelligence, and quantum computing. A critical part of this strategy is sweeping legislation, including the CHIPS and Science Act, and the Inflation Reduction Act, designed to incentivize onshoring of advanced manufacturing in the US. In addition, the US government has implemented policies designed to reduced dependence on China for key inputs to green technology supply chains and diversify supply chains in key technology areas across the board. China has continued to push broader industrial policies to support key technology sectors, but has revamped policies in the semiconductor industry, primarily as a result of pressure on its domestic industry from increasingly restrictive policies coming from the US and allies. Beijing’s technology related policies have evolved considerably, and included a three year technology regulatory rectification campaign targeting large platforms such as Alibaba and Tencent, and an effort to divert investment and focus of the tech industry and investors towards “hard” or “core” technologies such as semiconductors and advanced manufacturing.
Looking forward to the next decade, how do you foresee the tech sector rivalry between the U.S. and China unfolding?
The US and China technology rivalry over the next decade will evolve along several axes. First, for advance computing technologies, including semiconductors, AI, and quantum computing, the competition will remain fierce, with significant impact on allies and global industries and supply chains. The US will continue to try to restrict China’s development of advanced computing systems, particularly on the hardware side, and Beijing will increasingly support its domestic industries in these sectors. There will be spillover of the competition to other key markets, such as the Global South, where China will have an advantage, while the US and its allies will increasingly dominate technology development in advanced economies. While there will not be a complete bifurcation of the technology stack, there will be considerable separation of key parts of the stack between the US and China and the economic blocks that both support and influence. This will make it very difficult for technology companies to ensure access to a global market, and require rejiggering of supply chains and business models.
Reflecting on the early 2000s – a time of fewer barriers, globalization in full force, and business as usual – do you think we could revert to such an era? What catalysts would need to emerge for us to revisit this seemingly golden age?
Given current geopolitical trends, it is hard to see a return to the heady days of globalization, and the freer flows of capital, talent, and goods across borders that was the hallmark of that era. The securitization of the technology domain means that the US China competition across technology domains will remain intense, and is unlikely to change unless the US China rivalry cools, or a new government emerges in China that is more aligned with global best practices in trade, data governance, and digital economy development. A worst case scenario would see globalization set back even further, for example in the wake of a military conflict over Taiwan that involves significant damage to the semiconductor industry on Taiwan, and leads to major sanctions and export controls targeting China, solidifying a more fully bifurcated set of technology domains, the antithesis of globalization. Short of a worst case scenario, the technology world could also become less globalized if there is an attempt by the US and its allies to keep China out of global standards bodies and out of discussions on key regulatory issues such as AI governance.
With respect to countering China’s ascent in the high-tech realm, how would you compare the approach of Biden’s administration to that of Trump’s? Could you highlight the key distinctions between these two administrations’ strategies?
The Biden administration has largely continued to pursue the Trump administration polices with respect to China and technology, particularly the increased use of export controls and other policy measures to attempt to blunt China’s technology development in key sectors such as semiconductors and AI. One big difference is that the Biden administration, for the first, has articulated a broader strategy on technology policy, which was missing during the Trump administration. The so-called Sullivan Doctrine as laid out by National Security Advisor Jake Sullivan and other senior US officials, involves having the US attempt to maintain an absolute leads over China in key technology domains, pursue a “small yard high fence” approach to technologies with military applications, and treat advanced compute, biotechnology, and green technology as “force multipliers” of key national security interest to the US. The articulation of this approach has huge policy consequences, and has resulted in US measures such as the 7 October 2022 controls, a sweeping set of restrictions targeting China’s semiconductor industry. The Biden administration policy, which it has attempted to be more coherent and consistent than the Trump practice of targeting individual Chinese companies for alleged national security related problems, has also had much broader implications for US allies. For example, the 7 October controls has dragged Japan and the Netherlands into the US policy debate, and forced these and other countries to take sides in the US China tech competition process. The Biden administration, unlike the Trump team, has expended considerable effort on attempting to enlist the support of allies in its efforts to contain China’s development in key technology domains, with mixed success.
Can you provide insight into how Japan and South Korea, as well as the South-East Asian countries, are responding to the tech rivalry between the U.S. and China?
As noted, Japan has been drawn into the rivalry as a result of pressure from the Biden administration to align on the 7 October 2022 export controls, particularly for semiconductor manufacturing equipment. Japanese firm’s have major market positions in China, and pushed back on some of the proposed new controls. The Japanese government remains concerned about potential retaliation against Japanese companies in China as a result of the new licensing regime Tokyo has implemented that Beijing has sharply criticized. In general, Asian countries are very reluctant to be drawn into the US China technology Cold War. South Korea remains concerned about the China based operations of some of its largest companies, such as Samsung and SK hynix, which are heavily impacted by US export controls. Those facilities in China, with heavy capex investment, are now prevented from being upgraded with the most advanced manufacturing tools as a result of US pressure on the sector, and South Korean government officials have argued that the firms’ China facilities are important because they generate revenue that will allow Samsung, for example, to build manufacturing facilities in the US under the CHIPS Act.
In your view, how would you assess the progression of the U.S. and Europe in establishing their semiconductor and battery supply chains?
We are in the early stages of the process of the EU and US attempting to onshore key pieces of both semiconductor and EV battery supply chains. The economics are a very tough obstacles here, as costs in the US and EU are high, and companies in Asia, including in China and Taiwan, already have considerable advantages in terms of cost and scale. The situation is very different for each sector. For semiconductors, particularly the most advanced, the goal of onshoring is to reduce dependence on Taiwan, over concern about the impact of the eventual unification of Taiwan with China, either via force or peacefully. The dependence on Taiwan for advanced semiconductor is sizeable, at over 90 per cent, and even if all the advanced fabs are built in the US and EU over the next decade, this dependence will be only reduced slightly, which the costs will be high. The jury is still out over whether this will a policy that can be termed successful. On EV battery supply chains, Chinese companies maintain a high level of dominance of the entire end to end supply chain for critical minerals, including lithium, graphite, cobalt, and nickel. It will be very difficult for the US and EU to develop alternative supply chains that cover the entire range of key elements, such as mining, processing, and the IP required to produce finished products. As technology advances, there may be breakthroughs that work to undercut the dominance of Chinese firms, but this is unlikely to happen over the next decade, and it is not clear that the US or EU has a clear strategy to reduce dependence on China across such a wide range of critical minerals. It will be difficult to incentivize the private sector to invest across EV battery supply chains, given the dominance of Chinese firms and their ability to control price and operate at scale.
If given carte blanche to design an industrial policy for the U.S., what would be the blueprint you’d propose?
This is pretty complicated, and is not a very good hypothetical, given the general US aversion to too much industrial policy. The better question may be, how can the US sustain even its limited industrial policy initiatives, such as the CHIPS Act and IRA, in a complex political environment where there can be a change of government every four years. A Republican government in 2024, for example, could be much less supportive of US industrial policy, and attempt to roll back key provisions of industrial policy related legislation. The US system thus works against having a long-term approach to industrial policy, of the type required for industries like semiconductors and EVs and batteries.
How do you perceive the importance of standard setting within the high-tech industry? Is its significance being overstated or is it truly critical?
Standards setting is critical in some areas and less in others. For global standards bodies like 3GPP, which sets standards for mobile communications, global cooperation is critical to avoiding having multiple standards that work against seamless global roaming, for example. Any moves by the US and allies to try and exclude Chinese firms from standards setting for 6G will run into serious opposition from industry, which has welcome the participation of Chinese firms in the merit based process. There has certainly been an overstated concern around the participation of Chinese firms in the industry led process, because it is very difficult for any one firm or country to unduly influence the standards setting process. This is also the case in other standards setting bodies. Other areas, such as the use of Chinese equipment across Belt and Road Initiative countries, where the issue is less standards and more the establishment of Chinese company equipment and processes that become a de facto standard, are a different issue than global standards bodies, but have become mixed up in the debate around standards. Here, market dominance can mean a particular country’s approach to technology deployment becomes more influential, but even here, Chinese firms would largely be conforming to global standards in most cases, and are actively participating in all global standards setting bodies.
What do you envision for the future of Chinese high-tech companies conducting business in the U.S. and the EU?
It will become increasingly difficult for Chinese technology companies to operate in US and EU markets, particularly those involved in data collection. Already hardware companies such as Huawei and ZTE are largely barred from these markets, though less so in the EU, where Germany remains a major market for Huawei. Chinese cloud companies are already largely barred from doing business in the US, and could come under more pressure in EU markets around data issues, as could social media companies like Bytedane/TikTok. However, Chinese EV and battery companies are already expanding in the EU, and will likely also have access to the US market, and this will be an area of major contention in the coming years, given that EVs and AVs carry a lot of sensors, collect data, and deploy AI algorithms for autonomous driving. There is currently no clear regulatory path for the US in particular to bar Chinese auto companies from the US market.
Paul Triolo is Senior Vice President for China and Technology Policy Lead at Albright Stonebridge Group. He was a Managing Director of the Geo-Technology practice at Eurasia Group. Previously, Mr. Triolo spent more than 25 years in senior positions in the U.S. government, analyzing a broad set of technology-related issues.