US chip war will end up hurting allies as much as China

The global chip industry was doing perfectly well until the US threw a spanner in the works by offering subsidies it doesn’t need and sanctions that will backfire to contain China’s tech rise.

It’s one thing to sanction for national security, it’s another to use that as an excuse to practise protectionism. But to force your friends to join while knowing full well that it will hurt their economies is an egregious breach of basic trust.

I am, of course, talking about the United States’ semiconductor sanctions against China. But perhaps the worst of all is that most independent experts and industry insiders have already warned they are counterproductive and will likely end up hurting everyone, including the US, without achieving the desired result.

No wonder Washington is facing resistance everywhere, not only from allies, but also its own business leaders and industry insiders.

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Yang Hyang-ja, a former senior Samsung executive and currently a lawmaker in South Korea, has become the latest influential figure in Asia to warn the US to back off on chip curbs.

“The US should abandon its current approach of trying to get something out of shaking and breaking the global value chain,” she told the Financial Times.

“The more the US sanctions China, the harder China will try to make rapid technological progress. China will provide more national support for the goal. Then it will pose a crisis to South Korea, given China’s abundant talent and raw materials.”

A chip engineer, Yang previously headed her country’s Democratic Party committee on enhancing semiconductor competitiveness.

“If [Washington] continues to try to punish other nations and to pass bills and implement ‘America First’ policies in an unpredictable manner, other countries could form an alliance against the US,” she said.

“The US is the strongest nation in the world … It should consider more of humanity’s common values. Appearing to use its strength as a weapon is not desirable.”

China and the US embrace each other’s economic models in new cold war
Last month, Japan started imposing US-directed sanctions. But top executives had already warned that the measures would only upset Beijing without causing lasting damage to the Chinese hi-tech industries.

In December, Sony’s technology head Hiroaki Kitano said he expected the sanctions would only “temporarily impact” China’s ability to procure semiconductors, adding it was “entirely possible” that its advances in artificial intelligence would continue unhindered.

“The driving force of AI [development] in China is that they have access to very large data sets,” Kitano said. “I am not sure what kind of long-term impact [the US export curbs] can have there.”

NEC chief executive Takayuki Morita has expressed similar doubts. “Personally, I feel that while it may be possible for the US-China technology dispute over chips to slow down China’s technology progress, the overall trend will not change,” he said. “It’s not possible to ignore China’s competitiveness in technology, and it will become one of the forces [to reckon with] in the long run.”

In his latest interview with The New York Times, Morris Chang – founder of Taiwan Semiconductor Manufacturing Company (TSMC), who is often called the godfather of the island’s tech industry – observed drily that US firms would lose business and China would still find ways “to fight back” against the US-led sanctions.

Interestingly, US industry leaders themselves have warned against the whole sanctions plan.

The CEOs of Intel, Qualcomm, and Nvidia have all lobbied, albeit unsuccessfully, the Joe Biden administration not to impose any more restrictions on the sales of their products to China. The three tech giants are members of the Semiconductor Industry Association (SIA).

In an official statement, the SIA said: “Allowing the industry to have continued access to the China market, the world’s largest commercial market for commodity semiconductors, is important …”

It’s fascinating how Mike Gallagher, Republican chairman of a House of Representatives committee on competition with China and typical anti-China hawk, immediately blasted the CEOs.

“I’m alarmed that some American CEOs continue to advocate for weaker export controls on sensitive technology,” he said. “The Biden administration needs to tighten our export controls on advanced chips”

I suppose just being the head of a politically driven committee makes him an expert on the business and technology of semiconductors.

Liesje Schreinemacher, the Dutch trade minister, opposed her country joining the US sanctions, only to be overruled by her government. Dutch lithography manufacturer ASML is the dominant player in the market and China is one of its primary markets.

Taiwan’s hi-tech jewel is quietly fighting US industrial capture
Still, it may be argued that yes, the sanctions will hurt everyone, not just China. But maybe it will help the US to reshore and rebuild the domestic chip industry.

But will it? While that has been the dream of America’s industrial nationalists, it doesn’t look that way.

Despite the offers of multibillion-dollar subsidies under Biden’s supposedly groundbreaking Chips and Science Act, which looks a lot like industrial policy from the last Cold War except more badly done this time, the leading chip makers and designers in Europe, Taiwan, South Korea and Japan are busy investing in each other’s backyard because they have already built up efficient production lines and supply chains. Their efforts are being redoubled.

Intel, an enthusiastic recipient of Chips Act subsidies, is on record saying it will be investing more overseas than in the US.

What US politicians refuse to admit is that the global chip industry is doing fine on its own, and that it’s only the sudden shift in US foreign policy to contain China’s hi-tech development that has created the problems US measures such as the Chips Act are supposed to address.

But since Washington is suddenly offering free money, of course those chip companies are going to take it, thereby distorting what is about business and technology into politics, or worse, cold war politics 2.0.

So why does the US do it? Because it can, for one. But also it’s good domestic politics to go to extremes on China, never mind that it’s bad foreign policy, bad trade policy, and could potentially set the world economy back, if not threatening global peace.

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