Never before have two great powers confronted each other with such asymmetric strengths and weaknesses. The U.S. Commerce Department banned China’s access to high-end computer chips along with the tools and software to make them on October 7, a blow comparable to the 1941 American oil boycott against Japan, as Harvard’s Graham Allison observed. At risk is China’s transition from the smokestack economy of the Deng Xiaoping era to the digital economy that Xi Jinping envisions as China’s future. An all-out tech war threatens to shatter the global division of labor that gave us ever-faster and ever-cheaper data processing in history’s longest spurt of noninflationary growth.
Is it still possible to avert a destructive tech war? And if it comes, how will it play out?
Although U.S. chip manufacturing has atrophied to just 12 percent of the world total, the U.S. dominates the top of the semiconductor pyramid, with leadership in electronic design automation, key manufacturing equipment, and intellectual property used by semiconductor equipment manufacturers around the world. China has an infant equipment industry that is years away from supplying the needs of its manufacturers, who can only produce chips several generations behind Taiwan and South Korea. It dominates the bottom of the chip pyramid, namely the packaging and assembly of chips, and controls key raw materials. But China graduates six times as many engineers each year as the United States, and boasts 20 of the world’s top 50 engineering schools. The U.S. has a decades-long head start in key technology, but China has an overwhelming advantage in human capital. China now spends as much on R&D as the U.S. and publishes more highly cited scientific papers.
In his October report to the 20th Congress of the Communist Party, Xi called for “self-reliance and strength in science and technology” five times, and denounced—without mentioning the U.S.—”decoupling” and unilateral sanctions. “To meet China’s strategic needs, we will concentrate resources on original and pioneering scientific and technological research to achieve breakthroughs in core technologies in key fields,” Xi declared.
China has no way to go but forward. Only a steady rise in productivity can offset the effects of an aging population and shrinking workforce, and that means the digitization of China’s economy—advanced robotics, autonomous vehicles, automated warehouses, the Internet of Things and other Fourth Industrial Revolution technologies. Artificial intelligence, the ability to process exponentially growing volumes of data, drives all of this. But there is no AI without ever-faster semiconductors, which China can’t yet produce and now can’t buy under the American ban. That’s not an inconvenience but an existential threat to China’s future. It would be foolhardy to expect China to take this lying down.
The U.S. claims that the hard stop on sales of advanced chips and the things that make them was necessary to prevent China from gaining a military edge through AI applications. But the effect of the new U.S. sanctions is to prevent China from applying AI to the whole of its economy. Present military systems run on older chips. The computer that guided the Apollo spacecraft to the moon had 16,800 transistors; a state-of-the-art 5 nanometer chip has nearly 60 billion. The computers that run today’s guided missiles and fighters use older technology. But AI is needed for smartphones, 3D facial recognition, autonomous and high-speed transportation, digital banking, logistics, automated factories, smart batteries, and more. Without AI, China can’t modernize, and without advanced chips, it can’t achieve its AI goals.
The danger is that the modernization of China may slow drastically. China can work around some but not all of the restrictions, and not quickly. Unemployment may increase, especially for the educated, with consequences for social stability. China might find cracks in the U.S. blockade, for example, sourcing semiconductor equipment from Japan.
But the consequences in the worst case will be damaging: China might retaliate. In the extreme case it could seize Taiwan, which fabricates most of the world’s chips. But it has many other options. China packages and assembles half the world’s chips into finished form, including the new Nvidia chips that it is not allowed to buy. This is the bottom of the tech pyramid, but it is not easy to find substitutes for China. If China can’t buy chips, it can at least deny chips to the U.S. and its allies.
China could cut off export of the raw materials that are indispensable for the chip-making process. This may involve shutting down parts or all output of factories in China that supply the U.S. and its allies. It could penalize U.S. corporate giants like Apple, Telsa, and GM, which depend on Chinese manufacturing. Or it could block some of the $600 billion of trade with the U.S. each year, including countless industrial components that U.S. manufacturing can’t replace.
If the U.S. chip boycott deteriorates into trade war—let alone hot war—the damage to the world economy will be enormous.
Ultimately, China will reproduce Western expertise, just as France and Germany found ways to manufacture porcelain in the 18th century, breaking a longstanding Chinese monopoly. No technology leader in history has succeeded in holding back competitors for long with export controls. The U.S. attempt to strangle China might create a lot of pain in the short run, but the pain will be mutual. Ultimately it will be of no avail.
The United States has every reason to want to keep its technological lead, but it can only accomplish this by progressing faster than China. When the United States led the world in digital technology, the federal government spent a full 1 percent of GDP on subsidies for development, or the equivalent of $230 billion. Today federal development spending is about 0.30 percent of GDP. Only 7 percent of our university undergraduates major in engineering, compared to 33 percent in China. The $52 billion provided by the CHIPS Act is a baby step in the right direction, but it’s off by a zero.
We can’t hold others back while letting our own R&D, educational resources, and manufacturing base stagnate. That’s a formula for a mutually destructive tech war that we are likely to lose in the long run.
Handel Jones president of International Business Strategies and the author of When AI Rules the World: China, the U.S., and the Race to Control a Smart Planet. David Goldman is Deputy Editor of Asia Times and the author of You Will Be Assimilated: China’s Plan to Sino-form the World.
The views expressed in this article are the writer’s own.