Nov 2022

COUNTERSTRIKE WHOSE TIME HAS PASSED

Counterstrike whose time has passed

Tanya Vatsa reports on US curbs on technology transfer to China, what it might mean for the global economy, and Taiwan’s place in the equation

The 20thcentury Cold War between superpowers the USA and erstwhile USSR happened on the pretext of obtaining nuclear capabilities. Today, a similar atmosphere of mistrust and suspicion seems to have developed between the current global powers, this time the US and the People’s Republic of China. Remarkably, this modern Cold War has emanated from the break-neck speed of technological development, leading to massive disruptions in transport, communication and military frameworks. The enhancement of the existing national and transnational capacities has created a multipolar structure with no prominent leader. Reliance on a globally interconnected supply chain for countries’ mutual benefit, in accordance with respective resources, has done away with the primitive power-camp system. Despite the post-modern multiparty global structure, Washington and Beijing seem to be leading the race, in terms of both military and monetary clout.

 

Donald Trump (inset) and Huawei logo1
CLAMPDOWN: In 2019 the Trump administration denied Chinese tech giant Huawei a US license in network equipment on grounds of national security

In 2019, the Trump administration clamped down on the Chinese tech giant Huawei, denying it US license in network equipment on grounds of national security. President Biden legitimised the move through the Secure Equipment Act in 2021, endorsing the trade war started by Trump. To add to it, the Biden administration announced sweeping measures in October to ban export of US technology to China – a first in its tradition of technology transfer since the 1990s. It bans the export of certain semiconductor chips made anywhere in the world using American technology. Unlike previous sanctions, this is very wide in its ambit and targets multiple leading manufacturers and companies in China. The move is essentially aimed at hampering Chinese technological and military strides. While the measure taken by the US is not entirely surprising, its sustainability on a global platform remains questionable.

Reflection of American insecurity?

The US has long enjoyed unparalleled leadership in technological and military advancement, and it is no news that China is a close second in its domestic capabilities and a competent contender in international markets. The export ban, therefore, comes as an attempt to secure and maintain the American competitive edge. The move validates American insecurity at China’s ever-expanding capacity, which threatens to conquer global markets. It might also seek to perpetuate America’s political clout by attempting to set back Beijing’s manufacturing of crucial defence and security equipment.

Every unilateral action by the US against an international sovereign entity entails an assumption of complicity by the allies. As opposed to an earlier world order, most countries weigh up their interests carefully today, before choosing sides. Hence such a harsh trade disruption carries with it a mild imposition of coercive authority. The ‘mildness’ is due to the diligence of individual nations.

workers in microchip factory in Taiwan
Microchips form the ‘foundational technology’ for most modern machinery

The US administration may have overestimated its clout in an increasingly multipolar world

A global inconvenience

A closer look at the export restrictions reveals the intricacies of the global semiconductor market. It is imperative to consider issues of value and utility, and how restrictions are detrimental to the future of security, economics and military development. These microchips form the ‘foundational technology’ for most modern machinery, including cars, defence carriers, laptops, smartphones. Their production and sourcing are extensive processes distributed among different regions and countries, according to their respective capabilities.

Today’s semiconductor manufacturing is largely concentrated in Taiwan, followed by South Korea.However, the underlying design software remains monopolised by three American firms (85% global share), while the wafer fabrication and scanning are done in the US, Japan and the EU (mostly the Netherlands). The license requirement for foreign-made chips that use American design and software will, therefore, impact almost all manufacturing units which import semiconductor chips to China.

Assembly and testing plants are set up in South East Asia, mostly in Singapore, China and Taiwan, due to cheaper labour costs there. The ban threatens the relocation of these plants to neighbouring countries like Vietnam, India and Bangladesh, which will exacerbate the ongoing talent shortage in this industry. New techniques require re-skilling and up-skilling, which entails heavy costs for the overhaul of the education and skill development machineries in these Asian countries.

Most countries weigh up their interests carefully today, before choosing sides.

Wider implications

The American decision comes at a very fragile juncture, considering the military tensions between China and Taiwan. Nancy Pelosi’s August visit to Taiwan only added to the existing mistrust between the two immensely dependent neighbours. China relies on Taiwan for its microchips in order to promote its technological edge while Taipei has found a huge market in Beijing for most of its products, making the trade war extremely detrimental to their respective economic well-being.

The impact of the ban does not remain limited to these two countries. The semiconductor industry is fragmented across the globe and its operation runs on a healthy supply chain. The ban will directly cause disruption to this well-integrated global supply chain which, according to economists, is bound to cost three to five times the American subsidies.

Apart from enormously increasing the costs worldwide, the ban will put China on a war-footing to achieve self-sufficiency in domestic semiconductor chip manufacturing, despite the initial hiccups. This might brutally backfire at the American intention of slowing down the Chinese race towards becoming a technological and military superpower. Another speculation is that the American administration has overestimated its clout in an increasingly multipolar world. The German premier has already declared that decoupling with the Chinese economy is an absurd idea and does not hold sufficient credibility. There is no guarantee that the rest of America’s allies will oblige, especially when addressing domestic issues has become a national priority in an increasingly populist governance model.

The recurring bitterness between nations as they scuttle to replace the existing powerful ones perpetuates the race, even as the finish line remains unclear. The intricate political and economic connections, supplemented with measures adverse to the national interests of others, create a paradoxical limbo. In this set-up, trying to intentionally harm another is akin to shooting oneself in the foot. The USA’s unprovoked erratic sanctions tend to destabilise the rhythm of trade the world has eased into. A more calculated measure with consensus from its European and East Asian allies might help alter the policy design for a mutually beneficial outcome. The wounded supply chains in the post-pandemic world continue to be ravaged by unforeseen disasters and conflicts. Amidst such circumstances, a trade war is not only diplomatically unsound but also detrimental to political and economic security.

Tanya Vatsa, a law graduate from National Law University, Lucknow and an incoming LLM candidate at the University of Edinburgh, is a former assistant advocate. She is currently a geopolitical analyst with The Synergia Foundation, an India-based think tank. Her writing on international relations has been published by the Diplomatist, International Policy Digest and The Kootneeti

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