Past Is Prologue: Evaluating the US-China Tech war Through the Lens of Time
The AmCham China Quarterly spoke to Nina Xiang, author of “China: US-China Tech War: What Chinese Tech History Reveals About Future Tech Rivalry”, about the current US-China tech environment, the history of how we got to this point, and what happens next.
Your book uses China’s history as a framework to contextualize the current tech clashes between the US and China today. What have been the most significant flashpoints over the years between the two sides?
Nina Xiang: The narrative in the US that was popularized during the Trump administration that China’s technological rise was a result of forced technology transfer and IP theft was misplaced. Forced technology and IP theft did take place in China, as it did in many other countries throughout history and presently, but it was far from being the primary driver of China’s tech achievements.
The most fundamental engine of China’s tech progress during the past four decades was China’s integration into the global supply chain and the global economy, just as Japan and South Korea did before China. These countries entered the global supply chain from the lowest-value segment, and through learning, tech transfer, accumulated know-how, and persistent investment, they were able to rise toward the higher end of the supply chain.
Different from Japan and South Korea, the process of China’s moving up the global supply chain was interrupted roughly mid-way by a US clampdown. In addition, the US’s strict export control of core high-end tech to China also hindered China’s tech progress. Japan and South Korea were able to move up the value chain much easier without such strict controls by the US.
In terms of policy, what have been the most influential decisions – either positive or negative – that have led us to the present situation?
Nina Xiang: In the US, it’s the ZTE and Huawei sanctions. Leading up to the sanctions, the Trump administration produced numerous reports to justify the trade tariffs and the sanctions. These reports created and popularized the idea that China “stole” its way to the top – of course, whether China is really “top” technologically depends on where you look. Nevertheless, these narratives were so deeply planted in public discourse that it has been the default explanation of China’s tech development in the US. It also contributed to the general US public’s deteriorating opinion towards China, which further worsened bilateral relations.
How inevitable is it that the malaise in the bilateral tech relationship will bleed over into other parts of the relationship? Is it realistic to draw lines and treat different issues or sectors differently?
Nina Xiang: Ironically, even though the quoted reasons for the Trump administration’s tech clampdown on China was incorrect, or perhaps that the “theft” idea was just used as a pretext, Trump accurately recognized that China’s technological rise posed real threats to the US’s strategic positioning. Had Huawei’s 5G equipment been widely installed across the Western hemisphere, China would have secured itself strong leverage against the US. Were the US to weaponize its tech strangleholds against China, China would have a powerful tool with which to hit back.
The US-China tech conflict is mixed up with geopolitical power struggles, with ideology and morality issues thrown into the mix, too, so it’s sometimes hard to tell which field is bleeding into which. But it’s definitely possible to draw lines and for both countries to try to work through many of their differences and conflict of interests. The US, for example, should restrain from levying more sanctions against Chinese tech companies using its operating systems such as Android or chip architecture like x86. Both should try to clear the channel for Chinese companies to list in the US again.
Of all the separate issues within the tech sector, what would you highlight as the most important one to watch over the coming years and how do you foresee things playing out in that area?
Nina Xiang: Semiconductors, operating systems, and tech regulation. Chips sit at the center of the current tech rivalry, and how China tries to build up a sanction-free semiconductor supply chain will be the most important thing to watch. I expect China will achieve certain success in mature nodes like 45nm, or one to two generations more advanced than 45nm, within five years. But it depends on US policy and how third-party countries act under pressure from the US.
Chinese companies are gaining momentum in chip design. If the US decides to place EDA software out of the hands of Chinese companies, then this whole segment of the Chinese semiconductor industry would face several years of severe disruption, like chip manufacturing faces today.
Speaking of semiconductors, you talk in the book about how China’s strategy has been affected by short-term thinking. How exactly has that hindered China?
Nina Xiang: Policymaking in China may be long-term, but policy execution is in fact short-term. Government officials in charge of executing policies need concrete and quick political achievements for their own purposes. This is one reason why policies in China often fail to meet their objectives.
As you look towards the future, how optimistic are you that the two sides can have a healthy and competitive rivalry, without things spilling over into something more destructive?
Nina Xiang: It depends on who will be the next US President. If Xi continues to hold his leadership position after 2022, as is widely expected, then the biggest variable in bilateral dynamics is the next US President. Someone like Trump would add significantly greater uncertainty and unpredictability into bilateral relations. If it’s someone similar to Biden, there is a better chance that any conflicts could be kept within a reasonable range. The probability of relations returning to a “healthy” state is quite small.
Do you believe decoupling will strengthen or cripple China’s local semiconductor development? Is China’s dominance over the rare earths supply chain an important factor here?
Nina Xiang: China’s attempts to build a sanction-free semiconductor supply chain is an important aspect of this partial tech decoupling between the US and China. Whether Chinese tech can become stronger post-decoupling depends on where you look. In certain areas like 5G applications, AI applications, smart cities, and IoT, China will continue to be strong and will really lead in the future. But in other areas like chips, airplane engines, advanced manufacturing, and advanced materials, China will remain dependent on foreign tech for some time to come.
The difference with China’s dominance over rare earths is that this supply is replaceable without great difficulty. The US’s dominance over the semiconductor sector, however, is not replaceable. Therefore, the US leverage against China is potent, while China’s leverage against the US on rare earths is not.
What does all of this mean for the major foreign players in the semiconductor space?
Nina Xiang: Major foreign players will face pressure from the US to cut business relations with China, but almost all major foreign players across the semiconductor supply chain are US allies, so they will probably yield to the US.
The Chinese government would prefer capital only flow into certain parts of the tech sector like semiconductors, AI, and robotics. What do you think are the major risks associated with this type of industrial policy for China’s tech sector? Does it encourage or hinder foreign investment?
Nina Xiang: The challenges for this kind of Chinese industrial policy is that it often leads to the establishment of duplicated low-quality projects across the country, as all provinces and cities follow central government policy to launch similar incentives to these encouraged sectors. One proponent of this strategy argues that, even though such repeated efforts lead to a massive waste of social and monetary resources, it can achieve the policy objectives effectively in a shorter period of time via this “whole nation” or “brute force” model.
EV and solar are often quoted as examples of success in this area. But whether these sectors did achieve the intended success needs more study and evaluation. Often, underneath the prosperity, scale, and market share advantages, these sectors fall short of migrating toward the higher-end value chain or achieving technological advantages and leverage in the supply chain. China’s recent policies have tended to favor domestic firms in many tech areas, in response to US policies. These will definitely hinder foreign investments in China.
On the domestic front, we’ve seen pressure on China’s major tech firms and entrepreneurs to “give back”. What effect do you think this will have? Could it help address structural inequality issues? Conversely, will this type of pressure have a stifling effect on Chinese innovation?
Nina Xiang: Tech firms announcing big projects for “common prosperity” shouldn’t be viewed as a “tax” or as pure “expenses” to their businesses. These initiatives are often in collaboration with these tech firms’ main businesses. Alibaba’s initiative to assist the build-up of smart communities and improving rural healthcare on the cloud can be combined with its e-commerce and cloud units. These initiatives often marry social equality campaigns with their business operations. The ideal result might be what we can call a “win-win-win” for the government, the tech firms, and the public.
In what ways could the new data security and privacy laws jeopardize Chinese companies’ overseas activities? As more Chinese companies go global, how can they tread the tightrope of global regulations and laws?
Nina Xiang: This has already created complications for Chinese firms’ listing overseas. It could also hinder foreign firms investing in Chinese startups if they can’t go public outside of China. Chinese companies operating overseas – and foreign companies operating in China – will face hurdles for cross-border data transfers. It remains to be seen how the compliance will be implemented in reality. Also, local data storage requirements and privacy protection requirements would add compliance costs and hinder innovation if data flows become less fluid.
Finally, what advice would you give to US companies in China in the tech space? Where do you see the areas of greatest opportunity?
Nina Xiang: US companies operating in China need to hire more lawyers and data engineers, as well as good government relations personnel. The operating environment is becoming more uncertain, unpredictable, and with much greater legal complexity for US companies in China. Areas such as 5G applications, AI applications, consumer tech, healthcare tech, and fintech will continue to thrive in China. In areas where risks can be properly mitigated, foreign companies will still be able to find great growth opportunities in the decades to come.