Wednesday 20 September 2023

America Can’t Stop China’s Rise

And it should stop trying, say Tony Chan, Ben Harburg, and Kishore Mahbubani:

There’s little doubt that the American government has decided to slow China’s economic rise, most notably in the fields of technological development. To be sure, the Biden administration denies that these are its goals. Janet Yellen said on April 20, “China’s economic growth need not be incompatible with U.S. economic leadership. The United States remains the most dynamic and prosperous economy in the world. We have no reason to fear healthy economic competition with any country.” And Jake Sullivan said on April 27, “Our export controls will remain narrowly focused on technology that could tilt the military balance. We are simply ensuring that U.S. and allied technology is not used against us.”

Yet, in its deeds, the Biden administration has shown that its vision extends beyond those modest goals. It has not reversed the trade tariffs Donald Trump imposed in 2018 on China, even though presidential candidate Joe Biden criticized them in July 2019, saying: “President Trump may think he’s being tough on China. All that he’s delivered as a consequence of that is American farmers, manufacturers and consumers losing and paying more.” Instead, the Biden administration has tried to increase the pressure on China by banning the export of chips, semiconductor equipment, and selected software. It has also persuaded its allies, like the Netherlands and Japan, to follow suit. More recently, on Aug. 9, the Biden administration issued an executive order prohibiting American investments in China involving “sensitive technologies and products in the semiconductors and microelectronics, quantum information technologies, and artificial intelligence sectors” which “pose a particularly acute national security threat because of their potential to significantly advance the military, intelligence, surveillance, or cyber-enabled capabilities” of China.

All these actions confirm that the American government is trying to stop China’s growth. Yet, the big question is whether America can succeed in this campaign—and the answer is probably not. Fortunately, it is not too late for the United States to reorient its China policy toward an approach that would better serve Americans—and the rest of the world.

America’s decision to slow China’s technological development is akin to the folly revealed by the old cliché: closing the barn door after the horse has bolted. Modern China has shown many times that China’s technological development can’t be halted.

Since the creation of the People’s Republic of China in 1949, several efforts have been made to limit China’s access to or stop its development in various critical technologies, including nuclear weapons, space, satellite communication, GPS, semiconductors, supercomputers, and artificial intelligence. The United States has also tried to curb China’s market dominance in 5G, commercial drones, and electric vehicles (EVs). Throughout history, unilateral or extraterritorial enforcement efforts to curtail China’s technological rise have failed and, in the current context, are creating irreparable damage to long-standing U.S. geopolitical partnerships. In 1993 the Clinton administration tried to restrict China’s access to satellite technology. Today, China has some 540 satellites in space and is launching a competitor to Starlink.

The same principle played out with GPS. When America restricted China’s access to its geospatial data system in 1999, China simply built its own parallel BeiDou Global Navigation Satellite System (GNSS) system in one of the first waves of major technological decoupling. In some measures, BeiDou is today better than GPS. It is the largest GNSS in the world, with 45 satellites to GPS’s 31, and is thus able to provide more signals in most global capitals. It is supported by 120 ground stations, resulting in greater accuracy, and has more advanced signal features, such as two-way messaging. Other nations have also previously tried and failed to block China’s technical rise. In the 1950s and 1960s, when the USSR withheld nuclear weapons technology from China, China launched its own “Manhattan Project” in the early 1960s and succeeded in testing its first nuclear weapon by 1964. Russian nuclear leverage over China ended that day.

Many of the measures taken by the Biden administration against China were also executed without factoring in China’s capacity to retaliate. While China does not physically construct many truly irreplaceable components of the American technology stack, they are keenly aware of the importance of their raw materials inputs (rare earths) and demand (revenue generation) in fueling the American innovation ecosystem and are now using them as leverage. In the current tit-for-tat dynamic, China will start squeezing these two critical ends of the value chain in response to American technology and capital export restrictions. China’s July ban of the gallium and germanium exports was merely an opening shot across the bow to remind America (and its aligned allies) of China’s dominance in the rare earths and critical metals space. The country has a near monopoly in the processing of magnesium, bismuth, tungsten, graphite, silicon, vanadium, fluorspar, tellurium, indium, antimony, barite, zinc, and tin. China also dominates in midstream processing for materials essential to most of America’s current and future technology aspirations such as lithium, cobalt, nickel, and copper, which are critical for the rapidly developing EV industry globally.

While America and other neutral countries have mineral reserves of many of these materials, it would be naïve to believe that one can simply flip a switch on mining and production. It will take at least three to five years just to build the requisite extraction and processing infrastructure. This is to say nothing for recruiting and training skilled labor, or receiving requisite operational and environmental permits for such activities. Both could prove impossible. The processing of rare earths is a highly toxic and environmentally destructive endeavor. It’s unlikely such approvals will be granted. If Arizona is struggling to find qualified workers for its TSMC fabrication facility, and to address domestic union opposition to importing foreign skilled labor, it’s unlikely that America can develop similar capabilities for material processing. Along the way, China gets to play kingmaker in how it doles out access to its processed materials, likely restricting supply to American technology and defense giants. The failure to factor in China’s retaliatory capacities indicates that the United States doesn’t have a well-thought-out and comprehensive approach to dealing with China.

American measures to deprive China access to the most advanced chips could even damage America’s large chip-making companies more than it hurts China. China is the largest consumer of semiconductors in the world. Over the past ten years, China has been importing massive amounts of chips from American companies. According to the US Chamber of Commerce, China-based firms imported $70.5 billion worth of semiconductors from American firms in 2019, representing approximately 37 percent of these companies’ global sales. Some American companies, like Qorvo, Texas Instruments, and Broadcom, derive about half of their revenues from China. 60 percent of Qualcomm’s revenues, a quarter of Intel’s revenues, and a fifth of Nvidia’s sales are from the Chinese market. It’s no wonder that the CEOs of these three companies recently went to Washington to warn that U.S. industry leadership could be harmed by the export controls. American firms will also be hurt by retaliatory actions from China, such as China’s May ban on chips from US-based Micron Technology. China accounts for over 25 percent of Micron’s sales.

The massive revenue surpluses generated by these sales to China were ploughed into R&D efforts which, in turn, kept American chip companies ahead of the game. The Chamber of Commerce estimates that if the United States were to ban semiconductor sales to China completely, U.S. companies would lose $83 billion in annual revenues and would have to cut 124,000 jobs. They would also have to cut their annual R&D budgets by at least $12 billion, and their capital spending by $13 billion. This would make it even more difficult for them to remain competitive on the global scale in the long run. American semiconductor firms are painfully aware that U.S. actions against China in the chips arena will harm their interests more than Chinese interests. The U.S. Semiconductor Industry Association released a statement on July 17, saying that Washington’s repeated steps “to impose overly broad, ambiguous, and at times unilateral restrictions risk diminishing the U.S. semiconductor industry’s competitiveness, disrupting supply chains, causing significant market uncertainty, and prompting continued escalatory retaliation by China,” and called on the Biden administration not to implement further restrictions without more extensive engagement with semiconductor industry representatives and experts.

The Chips Act cannot subsidize the American semiconductor industry indefinitely, and there is no other global demand base to replace China. Other chip producing nations will inevitably break ranks and sell to China (as they have historically) and the American actions will be for naught. And, in banning the export of chips and other core inputs to China, America handed China its war plan years ahead of the battle. China is being goaded into building self-sufficiency far earlier than they would have otherwise. Prior to the ZTE and Huawei components bans, China was content to continue purchasing American chips and focusing on the front-end hardware. Peter Wennink, the CEO of ASML, stated that China is already leading in key applications and demand for semiconductors. Wennink wrote, “The roll-out of the telecommunication infrastructure, battery technology, that’s the sweet spot of mid-critical and mature semiconductors, and that’s where China without any exception is leading.”

A sleeping giant was awoken by short-sighted American protectionist policies. America now faces the short-term threat of loss of critical revenue that fueled the R&D that made it an innovation leader and the long-term inevitability that China will build its own full scale semiconductor ecosystem. The ability of Huawei to launch the Mate 60 Pro, a new smartphone powered by a domestically produced 5G chip and operating system, despite severe American sanctions on the firm illustrates how unwise American policies have been in trying to stop China’s technological growth and development.

Since America is unlikely to stop China’s technological growth and development (and, indeed, is unlikely to stop China’s emergence as a peer global power), there is a more enlightened approach to engagement. It is best illustrated by Aesop’s fable, “The North Wind and the Sun.” In the story, the North Wind blows hard and fails to remove the traveler’s cloak. It is, rather, the warm rays of the sun persuade the traveler to remove his cloak.

It’s now widely held among American policymakers that America’s five-decade-long policy of engagement with China has failed. As Kurt Campbell and Ely Ratner candidly state in their recent Foreign Affairs article, “Nearly half a century since Nixon’s first steps toward rapprochement, the record is increasingly clear that Washington once again put too much faith in its power to shape China’s trajectory. . .China has instead pursued its own course, belying a range of American expectations in the process.”

Certainly, if the policy of engagement was intended to transform China’s internal system of governance, it has failed. Yet, if this was the goal, it was an act of remarkable hubris for a 250-year-old Republic (with one-quarter of China’s population) to believe that it could transform a 4,000-year-old civilization to its liking. However, if the goal of American policy was to encourage the emergence of China as a “responsible stakeholder” (to use the words of Robert Zoellick), the policy may well have succeeded. A comprehensive study done by the National Committee on American Foreign Policy (NCAFP), the American Friends Service Committee, and four independent researchers has documented that China’s behavior was altered by various policies of engagement, particularly as it pertains to reducing climate change, improving public health, and global financial stability. Former State Department official Susan Thornton, who oversaw the study as director of the Forum on Asia-Pacific Security at NCAFP, said: “This audit of U.S.-China diplomacy shows that we can make progress through negotiations and that China follows through on its commitments. The notion that engagement with China did not benefit the U.S. is just not accurate.” Indeed, the record shows that there is wisdom contained in the moral of Aesop’s “The North Wind and the Sun”: “Gentleness and kind persuasion win where force and bluster fail.”

One fundamental problem is that domestic politics in America are forcing American policymakers to take strident stands against China instead of pragmatic positions. For instance, sanctions preventing the Chinese Defense Minister, Li Shangfu, from traveling to the United States are standing in the way of U.S.-China defense dialogues to prevent military accidents. Yet, the hands of the U.S. government are tied. It cannot lift sanctions, even if they have proved to be ineffective at securing American policy goals.

This is why the time has come for America to do a major reevaluation of the methods it uses to secure foreign policy goals. Its go-to tactic of imposing sanctions has failed to either halt China’s technological development or influence China’s behavior in any significant way, and most countries do not find that it is in their interests to go along with them. Are there more effective alternatives to sanctions?

In a statement explaining the Biden administration’s approach to China, Anthony Blinken said in May 2022: “we’ll compete with confidence; we’ll cooperate wherever we can; we’ll contest where we must.” We agree with this approach. Rather than undermining its own interests and fortifying a geopolitical and economic competitor, America should practice a more enlightened technology policy. The focus must be placed on initiatives that sustainably support and extend America’s innovation leadership, while surgically removing specific national security threats.

In lieu of a zero-sum framing of the U.S.-China technology competition, a sustainable structure for collaboration is beneficial to both countries and humanity. Most Western emissions reductions targets cannot be met without participation from China, who hold many of the patents and core inputs for solar, wind, and electric battery power. Joint research programs, clinical trials and data sets are critical for solving chronic global health issues like cancer. Decoupled technology ecosystems not only impede advancement, but also create other endemic risks resulting from parallel development and unilateral regulation. Unchecked growth in potential doomsday technologies like artificial intelligence or nuclear immediately comes to mind. Continuing to welcome scientific talent from China to study, work and settle down in the United States is beneficial for the scientific progress of both countries as well. These scientists can act as a bridge towards scientific collaboration between the United States and China.

The American government should also consider rebooting in full all the high-level dialogues that had been initiated by the Bush administration, continued by the Obama administration, and ended by the Trump administration. A resumption of high-level dialogues, together with the establishment of a high-level science and technology dialogue bringing together the top scientists from both countries, could well result in more positive outcomes for American long-term national interests.

Initially, this great power collaboration could be focused on areas where both sides have common long-term interests (like climate change, pandemic preparedness, global economic stability, education). When basic levels of trust are established, dialogue and cooperation can be expanded step by step. None of these moves will result in a diminution of American power and standing in the world. Indeed, America’s prestige and standing could well rise as the rest of the world sees America pursuing reasonable policies that are serving both American and global interests. America will remain the most admired country in the world, if it pursues a wiser course with China.