Coping with a Tech War

May 5, 2023

The United States has dispelled any doubts about its intentions to squeeze China’s rise as a technology superpower. Starting with a mid-September 2022 speech by National Security Director Jake Sullivan that laid out the broad parameters of the case against China, the Biden Administration and the US Congress have taken a series of actions in the Sino-American tech war that go well beyond the early skirmishes sparked by the Trump Administration.

America is taking dead aim at the most advanced segments of China’s tech aspirations, like artificial intelligence and quantum computing, that, in turn, are essential to the nation’s push for indigenous innovation and productivity enhancement. That is even more important in the face of China’s stiff demographic headwinds that leave China with no choice other than to lever innovation for productivity enhancement.

Yet China has managed to cope with all this reasonably well. As was the case during the initial phase of the trade war dominated by Trump’s tariffs, there has been some tit-for-tat retaliation. China has signaled its intention of restricting Micron Technology’s operations in the mainland; Micron is America’s largest memory chip producer, and the Chinese market currently accounts for about 11% of Micron’s global sales. While China’s action is hardly inconsequential, it pales in comparison to the measures the US has imposed on China in the past six months. I have been surprised at the limited scope of Chinese retaliation and suspect that there is more to come.

China’s counter-offensive focuses on homegrown tech optionality. Huawei, China’s leading technology company and first to get hit by tough US sanctions in 2019, is a case in point. Denied access to the US chips it required for its once globally dominant mobile phone business, Huawei moved aggressivity to develop an in-house work-around. It not only redirected its supply chain away from the US toward Taiwan and Japan, but it turned to its domestic semiconductor subsidiary, Hi-Silicon, to  produce a new smartphone, the Mate 3.0, made without any US components.

Contrary to the profusion of America’s false narratives about Huawei’s predatory thievery of US technology, the company’s success has long been driven by its focus on research and development. While there has been an accelerated injection of government subsidies in recent years, Huawei’s massive R&D efforts are largely self-funded, hitting approximately $25 billion (USD) in 2021, more than double the combined budgets of Alibaba and Tencent, which have the second and third largest R&D programs among Chinese tech companies. Reflecting its R&D-intensive strategy, Huawei has been especially effective in developing domestic alternatives to US sourcing of both software and hardware, with notable breakthroughs in electronic design automation and lithographic chip-making  tools.

Chinese tech companies also appear to be benefitting from a second-best approach to chip processing speed. While denied access to the fastest processors of Nvidia and AMD, both Silicon Valley suppliers still offer lower-speed alternatives to a Chinese market that is very important to their businesses. Significantly, this option does not appear to compromise AI-related tasking—at least, not yet. That day will come—possibly ten years from now. But by then, Chinese and Western chip-making prowess could well be near parity.

The dual meaning of the Mandarin word for crisis, wēijī (危機), captures the spirit of China’s response to America’s tech-war — danger mixed with opportunity. US actions underscore the danger China faces if doesn’t seize the opportunity for indigenous innovation. Time will tell if China’s coping strategy ultimately bears fruit.

You can follow me on Twitter @SRoach_econ

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