How China can counter US militarised mercantilism
- As Washington increasingly turns to industrial policy, trade restrictions and sanctions to target China, Beijing should reciprocate by opening more of its domestic markets
Call it decoupling, industrial policy or plain old mercantilism, the Chips and Science Act just signed into law by US President Joe Biden is all that. While there is nothing wrong with the United States trying to rebuild an industrial base for its crucial semiconductor industry and its research and development at home, it will restrict private companies and research institutes from investing in China. That will be especially the focus should the Republicans retake Congress in the November midterm elections, a prospect that now looks increasingly likely.
So much for Ronald Reagan’s famous “top nine most terrifying words in the English Language are: ‘I’m from the government, and I’m here to help’.”
The act provides roughly US$280 billion in federal funding to ramp up domestic semiconductor design, research and manufacturing capabilities, as well as for research and development in such hi-tech fields as artificial intelligence, quantum computing, alternative energy and biotechnology. Of these, about US$53 billion will fund domestic semiconductor production with new fabrication plants.
It comes on the heels of the US-initiated Chip 4 Alliance, a partnership envisioned to include South Korea, Japan and Taiwan, and to isolate China from gaining access to advanced chips.
Under the act, subsidy recipients are barred from expanding production in China beyond “legacy semiconductors”, that is, chips made with 28-nanometre process technology or older, for 10 years. The new law aims to lure chip talent and investments into the US and to discourage global chip giants such as Taiwan Semiconductor Manufacturing Co and Samsung Electronics from expanding their capacity in China if they receive US funding.
The law as it stands states that a company can only receive a grant for a project in the US. But a memo critical of the act has been circulated by hardline Republicans, titled “Chips for China”. Their strong position is that the act is not restrictive enough. For them, recipients – companies and research institutes – should generally not do business in China at all. Should the Republicans win back Congress this year and the White House in 2024, that may be the direction in which the law will be applied.
This will pose a real dilemma for US companies, especially multinationals such as Apple, Tesla and Pfizer. Many will have to choose between US federal grants and China. Should Pfizer open new vaccine facilities in China? What about Tesla?
The electric car pioneer had for years zero net earnings. But after its Shanghai factory went into production, fiscal 2021 earnings came in at US$5.5 billion, a nice surprise to investors. Its current fiscal 2022 earnings are projected at US$9.1 billion. The Chips and Science Act will have a direct impact on the auto industry, which has been suffering from a semiconductors shortage. But it especially affects an auto giant like Tesla, for which the battery is the soul of the vehicle, rather than the traditional internal combustion engine.
Its advanced battery accounts for one-third of the cost of the vehicle. China is estimated to control up to 80 per cent of the materials used in making the lithium battery cathode, such as nickel and cobalt ore extraction, as well as packaging and distribution.
China’s state media and trade institutions have angrily denounced the new US law as part of a plot by Washington to undermine China’s technological development and global supply chains, especially in high value-added hi-tech fields.
Well, there is no point getting upset at an adversary who has made no bones about deliberately sabotaging your ambitions in building hi-tech industries. Get over it.
We live in an upside-down world. If the US wants to abandon its own free-market principles and spend hundreds of billions of taxpayers’ money picking winners and losers, China should counter by opening up its markets to welcome foreign investors and innovators.
Turning inward will only further decoupling, which is bad for the country and bad for the world – and play directly into America’s hands. Let Washington abandon its long-professed faith in laissez-faire capitalism and market efficiency, and see how far it can dictate private industries.
