China and the US battle for high-tech supremacy

High-tech innovation is one of the main fields of competition between China and the United States.

Rivalry in the semiconductor industry is a significant point of tension where the continued interference of Washington bureaucracies in the industry is a source of contention between the superpowers.

For Beijing, closing the technological gap with the most advanced countries is seen as a pathway to recovering great power status or the “Chinese Dream.”

As the geopolitical context surrounding it becomes increasingly hostile, technological upgrading could guarantee China’s greater strategic autonomy by decreasing its dependence on more advanced countries.

Semiconductors have become a prime example of China’s search for technological independence.

Chip production has increasingly shifted away from the Integrated Device Manufacturer model, which involves vertical integration at every phase of production, to the Fabless-Foundry model, where companies specialize in different production phases.

It has moved towards a geographical specialization in which the major chip design companies are located in California and Taiwan. There are high barriers to entry, heavy R&D investment, and efficient innovation systems.

Strategic rivalry

These characteristics present unique challenges for upgrading the chip capabilities of new players. The dual-use applications of semiconductors and their significance in digital infrastructure have also increased their strategic relevance and amplified competition.

As a result, semiconductor manufacturing becomes a factor in strategic rivalry and any possible damage to the US domestic industry can be considered a threat to national security.

For Beijing, the turning point in the semiconductor sector came in 2014, when the State Council set a goal of becoming a global leader by 2030. In 2015, the Made in China 2025 project was launched, aiming for greater technological self-sufficiency.

The first goal was to foster the creation of national champions in the industry that could compete on a global scale and supply China’s voracious appetite for semiconductors.

The second objective was to acquire foreign technology through strategic acquisitions of technologically advanced foreign companies or private Chinese companies operating abroad.

But the grade of chip sophistication and design is beyond China’s technological capabilities at the moment. So, China is forced to depend on semiconductor imports.

Assembly is the only phase of production, the one with the lowest added value, in which Chinese companies manage to carve out a slice of the market.

The largest US federal agencies have moved on national security grounds to block many strategic investments or acquisitions in the industry.

Export controls

This is thanks to the strengthened powers of the Committee on Foreign Investment in the United States (CFIUS) and the imposition of export controls on Chinese companies through the Entity List maintained by the Bureau of Industry and Security (BIS).

The wide discretion enjoyed by these apparatuses is due to the flexible notion of ‘national security.’

These agencies have demonstrated that they can also intervene against foreign companies.

This is shown when CFIUS blocked the acquisition of German Aixtron by China’s Fujian Grand Chip Investment Fund in 2016 and the pressure exercised by the BIS to block TSCM chip sales to Huawei.

All this activity has been codified by the Foreign Investment Risk Review Modernization Act (2018) and the Foreign Direct Product Rule of the Export Administration Regulation (2020).

This has strengthened the legal power of these agencies by allowing them to take action against any firm using US technologies that are not easily replaceable.

It is US technological superiority that allows them to control the most strategic nodes in global semiconductor value chains to block Chinese technological upgrading.

In addition, the other economies most involved in the industry – Taiwan, South Korea and Japan – are all strategic allies of the US who are committed to the containment of China’s geopolitical ambitions.

They must balance their Chinese economic interests with their US geopolitical interests. South Korea has managed to maintain the most neutral approach.

Foreign firms

The impact of the US strategy depends on the ability to engage foreign firms without giving them excessive incentives to create foreign value chains to do business with China.

The ability to intervene in these value chains must be applied in a surgical manner to avoid diminishing foreign trust when doing business with US companies. Given the current Chinese technological gap, excessive intervention would only have counterproductive effects.

Niky Brugnatelli is a PhD candidate at the University of Catania.

This article is republished from East Asia Forum under a Creative Commons license. Read the original article here.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.