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US-China tech rivalry defies simple 'Cold War' metaphors

Semiconductors reveal depth of superpower co-dependence

Source photos by Reuters

In the words of Zhou Bo, fellow at the People's Liberation Army Academy of Military Science, disentangling the ties that bind the U.S. and China may be akin to removing blood capillaries from the human body. In the field of high-tech trade, it is already clear that self-harming as a strategy to punish others can have a limited appeal.

Semiconductors provide a case in point. It seemed last year that the U.S. was limbering up to use chips -- where it has unrivaled superiority -- as a cudgel with which to beat back China's high-tech advance.

A ban imposed by Washington on U.S. exports of components to ZTE, a Chinese telecoms equipment company, showed what a devastating weapon the restriction of chip exports can be. ZTE was forced to cease operations before the Donald Trump administration sprang a reprieve by replacing its sanctions with a $1 billion fine. Export controls have also brought Chinese chipmaker Fujian Jinhua to the brink of collapse.

But the mood in Washington these days has turned more circumspect. An understanding of how crucial Chinese demand is to the sustainability of America's capital-hungry chipmakers has percolated through Capitol Hill. Slashing exports to China in order to stymie its advance could jeopardize the health of the entire U.S. industry, several experts in Washington said.

The rise of Intel, the biggest American chipmaker, reveals the dynamic in play. During several phases in its development, Intel's bosses had to "bet the company" by devoting most of the profits from selling one generation of chips into developing the next generation, said Rob Atkinson, president of the Information Technology and Innovation Foundation, a U.S. think tank.

"You have to put an enormous amount of money into R&D and design," Atkinson said. "And then to build the fab you need $10 billion to $15 billion."

The hefty outlays that are required to stay ahead of the competition means that restricting exports to China -- which for some U.S. chipmakers accounts for more than half of global sales -- could deprive American players of the capital they need to stay ahead.

This reality may curb the use of broad controls on chip exports. If semiconductor sales to China are to be restricted, the impact could be confined to a thin segment of cutting-edge technology, said James Lewis, director of the technology policy program at the Center for Strategic and International Studies, a Washington-based think tank.

Such instincts toward self-preservation are also evident among U.S. allies. Washington has met with mixed responses to the pressure it has applied on Japan, the U.K., Germany, Canada, Australia, New Zealand and other Western nations to ban Huawei Technologies, the Chinese telecoms equipment giant, from their 5G networks.

Some, such as Australia, have banned Huawei outright. Others, like the U.K. and Germany, have adopted more nuanced positions that could pave the way for Huawei's limited participation in 5G, a superfast service that is set to spawn a series of interactive appliances called the "internet of things."

But here too commercial imperatives militate against political pressure. Huawei's 5G equipment is said by industry insiders to be considerably cheaper than that offered by European competitors Ericsson and Nokia, while giving away nothing in performance. Even in the U.S., which has banned Huawei from its 5G networks, the Chinese company maintains a foothold in many rural communities, where small carriers use its equipment on their cell towers.

Perhaps emboldened by schisms in the Western alliance, Guo Ping, deputy chairman of Huawei, took aim at the U.S. last week. "The U.S. government has a loser's attitude," Guo said as the company announced record profits for the 2018 calendar year. "They want to smear Huawei because they can't compete with us."

Nevertheless, the commercial resistance that the U.S. is encountering in its tech tussle with China does not mean that Washington is toothless. Far from it. Its order last month to a Chinese company to sell off the popular gay dating app Grindr shows the resolve behind America's investment review process. Chinese acquisitions of U.S. tech companies have plummeted to virtually nil over the past year.

Washington is also understood to be preparing to crack down on the transfer of intellectual property from U.S. scientific laboratories and large corporations as part of "talent programs" run by the Chinese government.

In another emerging area of action, U.S. legislators are urging greater scrutiny over which Chinese companies are receiving investments from U.S. funds. The fact that two of America's biggest public pension funds were found to own stakes in Hikvision, a Chinese company that supplies surveillance technology to detention camps in China's Xinjiang region, has caused outrage among some lawmakers on Capitol Hill.

In this co-dependent world, offensives often rebound to hurt the aggressor. Perhaps the U.S. and China are engaged in a "Blowback War."

James Kynge is editor of Tech Scroll Asia, a newsletter on technology in Asia that combines the best reporting from Nikkei and the Financial Times. He is also the FT's Global China editor, writing about China's growing footprint in the world, and won the Wincott Foundation award for the U.K.'s Financial Journalist of the Year in 2016. His prizewinning book, "China Shakes the World," was translated into 19 languages.

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