Self-defeating US tech war represents China’s Sputnik moment

While US technology sanctions have impeded innovation in China, it’s open to question whether they sufficiently suppress China’s rise and at what cost to the US economy
The US’ efforts could stifle domestic innovation and drive away start-ups and tech companies while benefiting other countries and forcing China to become free of American tech

Winston Mok

Published: 1:30am, 13 Oct 2021

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China should be thankful for US Commerce Secretary Gina Raimondo’s frank comments. Instead of hiding behind condescending platitudes, she made explicit America’s agenda to contain China’s technological advancement.

US technology sanctions have certainly impeded innovation in China. The question is whether these efforts can sufficiently suppress China’s rise and at what cost to the US economy.

The United States is waging multipronged economic warfare on China, justified by a litany of alleged Chinese economic misconduct. US-China rivalry will play out primarily in the economic and technology spheres in this decade and the next.

The Aukus pact is a side show. When Australian nuclear submarines come into service by 2040, they may well be obsolete politically – China’s economic scale will have far surpassed America’s. With their relative economic strengths sorted out, the US and China may reach rapprochement. The fellas Down Under will be left holding the bag.

Innovation is a globally connected phenomenon. Apart from how the US “learned” from Europe at the beginning of its industrialisation, the US benefited from talent and technology as a result of the exodus from Nazi Germany.

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For example, US chip maker Qualcomm co-developed its CDMA technologies in partnership with South Korea. Dutch ASML’s machines for making advanced chips are built upon technology and components from Germany, Japan and the US. Neither the US nor China can innovate effectively if cut off from the global technology ecosystem.

Given their complementary and integrated supply chains, US-China rivalry exposes vulnerabilities in mutual dependence that may be perceived, potential or realised. Before the Covid-19 supply chain disruptions, US vulnerabilities to China were mostly perceived or potential.

The US has been nervous about the unproven “Trojan horse” surveillance potential of Chinese telecom equipment. Yet its tech sanctions on China have wrought substantial economic damage and brought to the fore China’s vulnerabilities.

The US wants to maintain maximum leverage on China while curtailing China’s potential leverage, where China is a peer or leader in a broad range of technologies from electric vehicles to drones.

By choking China’s supply of US chips and other technologies, and involving its allies in the policy, the US reinforces China’s need to bolster its industrial policies for survival. All the while, US Trade Representative Katherine Tai has been denouncing China’s “unfair” industrial policies, including the threat of the country’s plan to wean itself off US semiconductors.

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Given that US semiconductor technology is embedded in every modern machine from mobile phones to cars, the US can inflict heavy damage on China. But its political-economic system may limit how coordinated it can be in its long-term race against China.

US companies pursue borderless commercial interests. Meanwhile, US politicians engage in China-bashing to advance short-term political interests, and few have the incentive or capacity to make coherent long-term programmes happen.

Instead, both political parties are obliged to act tough on China, even knowingly against US economic interests.

Suppressing China, a key tech player and a vast market, would cost the US. A US$1.9 billion fund has been earmarked to support rural telecommunications carriers in purging their Chinese equipment. It is unclear what the other cost-effective options are.

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Wide access to high-performance and low-cost broadband networks is essential to the digital economy. The dismantling of AT&T through antitrust actions left the US without a strong competitor to Huawei Technologies Co. But the ensuing competitive telecom networks paved the way for tech giants from Amazon to Google.

By denying itself access to the most competitive 5G technologies, the US disadvantages itself in digital innovation. And it is not as if such an exclusion would help US companies – the other key 5G providers are primarily South Korean and Scandinavian.

US companies from Intel Corp to Qualcomm need access to the vast Chinese market to generate the profits required to fund innovation. With their profits suppressed by government restrictions, competitiveness suffers.

US attempts to thwart China’s industrial policy are a costly mistake

Unlike Chinese companies, US companies’ primary allegiance is to their shareholders. To overcome US sanctions, some American tech companies may relocate selected research and development and manufacturing operations overseas, undermining rather than buttressing the country’s technological edge.

Longer term, company founders would not want to deprive their companies of access to the world’s largest market. As a result, the start-up space may flatten, making “neutral” countries like Singapore more attractive. America’s role as a global innovation hub may diminish.

All these are self-inflicted costs, even before any serious retaliatory Chinese actions.

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Given the economic calculus, it is unlikely that other advanced economies would copy Australia’s “all in” bet against China – a winning economic outcome is difficult to imagine. Just as US agricultural and resource companies have gained market share in China at the expense of Australia, European and South Korean technology firms can seize the opportunities in China vacated by American firms.

There is no question that the US can obstruct China’s technological progress but that cannot be the end in itself. The ultimate aim is to maintain US dominance, and the whole exercise becomes self-defeating if it ends up hurting the US more than China.

US technological sanctions will realistically decelerate innovation for both China and the US while inadvertently advancing the economic interests of the likes of Germany, Japan and South Korea. They should let the US continue.

Unlike Australia, these US allies will be much more clear-eyed about their national interests. They will cooperate with the US where their interests align – and compete otherwise.

America’s technological suppression represents China’s Sputnik moment. Raimondo has thrown down the gauntlet, and this will strengthen Beijing’s resolve to free itself from the US chokehold.

Instead of sharing prosperity in coupled commerce, the US may be threatening its future.

Winston Mok, a private investor, was previously a private equity investor