US-China tech war: Price of confrontation

Biden, Trump's policies highlight growing costs, futility of economic decoupling

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ISLAMABAD:

President Biden, contrary to expectations, accelerated the economic, trade, and technological wars with the world, particularly with China. First, he revived the Obama administration's Pivot of Asia and China containment policies. He worked with allies to introduce initiatives such as Build Back Better World and the Partnership for Global Infrastructure and Investment to counter the Belt and Road Initiative (BRI). Second, he intensified the Trump administration's policies of tariffs, confrontation, and sanctions. Third, he strengthened these measures further through legislation like the CHIPS and Science Act, among others.

These actions have earned Biden a reputation as an anti-China politician. Consequently, President-elect Trump, who built his political career on anti-China rhetoric, now feels pressure to outdo the Biden administration. As a result, he has started flexing his muscles to launch a new wave of restrictions, sanctions, and confrontational policies.

However, historical trends reveal that sanctions have limited utility. A study by the Institute for International Economics indicated that during the 1970s and 1980s, sanctions produced results in fewer than one in five cases. While large economies like China are better positioned to nullify sanctions, there have been few efforts to fully understand the cost of such measures on the US economy itself.

During Trump's first term, when a wave of tariffs was imposed, institutions and organisations sought to assess the impact on the American economy. A study by the Federal Reserve Bank of New York and Columbia University found that the trade war cut the market value of listed companies by $1.7 trillion between 2018 and 2020. The overall impact was even deeper, as it reduced the growth rate, put pressure on producers, and inflicted heavy losses on farmers. Meanwhile, consumers were forced to pay higher prices. While some companies tried to shield consumers from these costs, most ended up compromising on wage increases or cutting jobs to cope.

China, too, felt the impact of sanctions but absorbed the shock to a greater extent, minimising negative consequences for its citizens. Analysis indicates that the Chinese economy continues to grow despite sanctions and restrictions, demonstrating resilience and determination to achieve sustained progress.

Despite the heavy price paid for sanctions, the US has doubled down on its confrontational policies. Biden's administration has introduced the concept of "decoupling" and initiated a fresh wave of sanctions, primarily targeting technology sectors such as CHIPS, semiconductors, automobiles, and ICT.

Among these, the CHIPS and semiconductor sectors have been primary targets. The US aims to check China's progress in these areas to maintain its global leadership. It is a hard fact that the US and its allies currently lead in CHIPS and semiconductors. The US boasts the most advanced systems for designing CHIPS and semiconductors, while the Netherlands is a global leader in producing photolithography machines, which are crucial for semiconductor manufacturing. South Korea and Taiwan (part of China) have also mastered the art of semiconductor production. Meanwhile, China is striving to match this expertise and currently has the capacity to design and manufacture CHIPS above 7nm.

The automobile sector is another key target. The US recently increased tariffs on electric vehicles (EVs) from China by 100%, realising it cannot compete with China in this space. Increasing tariffs appears to be the preferred method for addressing this competitive disadvantage.

As Biden nears the end of his term, he has intensified restrictions, adding 140 Chinese tech companies to the updated list of sanctioned entities. The US hopes these measures will solidify its dominance while pressuring allies and partners to follow its lead by cutting business ties with China.

However, there is widespread consensus that US-led Western sanctions will ultimately fail and have negative implications for the West itself. For example, China is a significant buyer of Dutch photolithography machines, and sanctions have adversely affected the company's revenues. Similarly, US companies like Qualcomm and Lam Research rely heavily on China for their sales—over 60% in Qualcomm's case—leading to substantial revenue losses of up to $2.5 billion for Lam Research.

China holds significant leverage in the raw and refined materials required for CHIPS and semiconductor manufacturing. It possesses the largest global reserves of rare earth metals, accounting for over one-third of global resources. Moreover, China leads in rare earth mining, with a 60% share of global production, and dominates the processing of these materials with an 85% global share. It also commands 90% of the market for manufacturing high-strength rare earth permanent magnets, which are crucial for advanced technologies like batteries, medical devices, and energy infrastructure.

In addition, China is investing heavily to enhance its capacity for innovation and technological leadership. President Xi Jinping has implemented a stepwise policy to achieve this goal. First, China focused on human capital development by creating a high-quality education system that produces top-tier STEM graduates. This investment in talent has started to yield significant returns, enabling China to rapidly close the gap with Western nations. Many experts believe it is only a matter of time before China surpasses the 7nm barrier in CHIPS. Ironically, sanctions and restrictions may accelerate China's pace of innovation.

China also began diversifying its economic linkages and export markets years ago, anticipating US hostility. Initiatives like the Belt and Road Initiative have helped China establish sustainable global partnerships. It has also created technology-sharing platforms to assist developing countries in building their capabilities. As a result, China is deeply integrated into the global system and actively shares the benefits of innovation and technological development.

In conclusion, the evidence suggests that Western attempts to contain China's technological advancement are unlikely to succeed. The rhetoric of decoupling lacks economic logic, serving instead as a political slogan to appease domestic audiences and the military-industrial complex. Policymakers in the US and the West appear to use sanctions as a scapegoat to obscure their inability to address domestic challenges or foster sustainable economic growth.

Instead of pursuing unsustainable confrontation, US leaders should focus on fostering win-win cooperation and peaceful coexistence. Such an approach could help address America's challenges while promoting positive development outcomes globally.

THE WRITER IS A POLITICAL ECONOMIST AND A VISITING RESEARCH FELLOW AT HEBEI UNIVERSITY, CHINA