The Tech War that Backfired

Jun 20, 2024

Apparently, it hasn’t dawned on Washington that America’s anti-China tech strategy has failed. The more we try to limit Chinese access to western technology through tariffs, sanctions, and the arm-twisting of our allies that we call friend-shoring, the greater the incentives for China to develop indigenous alternatives of their own. Unwilling to accept the unintended consequences of a major strategic blunder, Washington is creating  the very conditions that virtually guarantee the ascendancy of China as a tech superpower.

That is certainly the lesson of America’s attempted “assassination” of Huawei, as The Economist recently put it. Washington tried everything to destroy China’s leading technology champion—from tariffs, to blacklisting it as a featured target on the “entity list,” to designing special sanctions aimed at squeezing its suppliers, to even indicting the founder’s daughter (aka its CFO). How did Huawei respond? Far from surrendering, the firm literally reinvented its production process, replacing foreign-made components—from chips to operating systems—with products of its own. And it pulled off this miraculous transformation in just three years. Instead of being pushed out of the smartphone business, it has introduced the Mate60 Pro+—with 70% of its components made in China—that is virtually indistinguishable from Apple’s state-of-the-art 5G counterparts.

Ignoring the lessons of the Huawei experience, Washington is now trying the same approach with semiconductor lithography machines. Long viewed as the ultimate choke point for advanced chip production, the US is putting pressure on its allies to limit Chinese access to this highly sophisticated technology. A senior Commerce Department official has been dispatched to the Netherlands, the home of the leading lithographer producer (ASML), and to Japan, the home of the world’s second leading lithography producer (Tokyo Electron). The hope is to convince the governments of both nations to join arms in waging America’s tech war with China.

Who are we kidding?  The Chinese currently account for 49% of total ASML sales. While that excludes the most advanced ultraviolet lithography machines, China still owns plenty of ASML’s very sophisticated immersion DUV lithography hardware—the Dutch company’s second most advanced product line. The same is the case for Tokyo Electron, where China accounts for fully 47% of the firm’s global sales revenues. It is ludicrous to believe that the largest customer of the world’s two leading lithography producers can’t turn its technologists loose to reverse-engineer their existing stock of ASML and Tokyo Electron products to develop workarounds that would circumvent US sanctions.

I am hardly an expert on sophisticated lithography technology. But I think this a fair question that Washington needs to address. Here, the lessons of the Huawei experience seem to be very relevant. While Huawei’s new smartphone does not have the 4nm chip of the iPhone 15, it does have a 7nm chip that provides perfectly functional 5G capabilities. It is a second-best solution that offers Chinese consumers an outstanding product. Moreover, there is every reason to believe that Huawei’s  research and development team—some 114,000 workers (or 55% of its total 2023 workforce) operating with a $23 billion annual budget (or 23% of total revenues)—will make every effort to push extremely hard at developing next generation products. Just like Apple.

The same can be said for the potential of China’s indigenous lithography production. There are already reports of a local Chinese lithography company, Naura Technology Group, that has produced a work-around to ASML’s most advanced extreme ultraviolet tools. The Chinese company has apparently come up with a new technique dubbed self-aligned quadruple patterning (SAQP) that etches multiple lines on silicon wafers, thereby enhancing both the density and performance of chips. I am well out over my skis on this point, but this has a strikingly familiar ring: If you squeeze Chinese technologists hard enough—precisely what Washington is now doing in lithography—they will redouble their efforts to solve a tough problem. Just like Huawei.

Think about how far China has come in a remarkably short period. In the mid-1970s, a backward, poor nation was in the final stages of a wrenching Cultural Revolution. Bicycles were the preferred mode of transportation. Today, less than fifty years later, China is connected with the largest, most sophisticated network of high-speed trains in the world. The Chinese drive cheap, state-of-the-art electric vehicles, and recent tests suggest China’s space program is on track to land astronauts on the moon before 2030.  And, by the way, I couldn’t help but note the blue sky when I was in Beijing in late May, underscoring the effectiveness of China’s technology-intensive alternative energy strategy. In none of these cases were the Chinese first-movers in inventing new technologies. But in all these cases, China excelled in adaptation, production, and scale—delivering at a pace never before seen in modern history, as underscored by the chart below.

And now, of course, Washington wants to stop Chinese technology dead in its tracks. Fearful of the rise of China, our politicians make stuff up to scare a confused and insecure US citizenry. Commerce Secretary, Gina Raimondo, spins a Hollywood-like tale of Chinese EVs that could become weapons of mass destruction on US highways. FBI Director, Christopher Wray, insists that China’s “Volt Typhoon” hackers have put American infrastructure at risk. The Pentagon warns that Chinese-made cargo loading cranes could be spy tools hiding in plain sight.  Congress insists that TikTok has taken control of American teenage brains.  “Serious people,” to borrow a phrase from Paul Krugman, are now flooding the bookshelves with anti-China tomes. It’s all about perils of dual-use Chinese technology, claim national security experts who have long harbored the view that China’s advanced systems could be converted from civilian to military use by the simple flick of a switch. It’s also all about the unsubstantiated conjectures of circumstantial evidence, imputed motives, and paranoid fear of vulnerabilities at home.

There’s far more to America’s worrisome outbreak of Sinophobia, but I digress … sort of. Ultimately, it boils down to an inarguable reality check: Notwithstanding a worrisome tendency toward de-globalization, we still live in an open-architecture world that provides instant access to state-of-the-art technologies. An AI-enabled boost to such technologies will magnify that access many times over. Yet however hard we try and whatever motives we fabricate, China won’t be stopped. Rest assured, the harder we push, the more China will counter, and the conflict between us will become deeper and more intractable. Our only hope is engagement, enforceable rules, and, ultimately, collaboration. And don’t forget the pixie dust of trust—without which the Sino-American tech war will never end.

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