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TOKYO – Having just announced a massive US$450 billion investment plan in its semiconductor sector, South Korea is looking deadly serious about raising its tech game. At least, that is one take.
Another is that US President Joe Biden, only four months in office, is giving Asia exactly the kind of US-China conflict the region needs – a tech arms race – and President Moon Jae-in is preparing South Korea for the fallout.
Biden is wasting little time in working to build more tech muscle at home. He’s starting moderately – $300 billion initially – on new research and development so US tech remains competitive in the age of China rising. This kind of industrial policy is a win for all players.
Of course – as Moon’s big move shows – Biden needs to think much bigger to keep pace with President Xi Jinping’s government, which has been honing China’s tech skills since 2012 – but particularly amid the Trumpian chaos between January 2017 and January 2021.
Why Trump’s tech war failed
Ex-president Donald Trump came to office viewing US-China dynamics through a 1985 lens – with Japanese characteristics. In the 1980s, when Trump was a celebrity real estate mogul, he rarely missed a chance to complain Japan Inc had “systematically sucked the blood out of America” and “gotten away with murder.”
Thirty years later, Trump merely replaced “Japan” with “China” and waged his trade war accordingly – with predictably poor results. After years of tariffs on hundreds of billions of dollars worth of goods, Washington’s trade deficit was bigger when Trump left the White House than when he arrived.
Though Trump made many tactical mistakes, here are two of the most consequential.
One, thinking the Group of Seven (G7) nations could snap its fingers and bring Beijing to heel. That is, after all, what the biggest industrial nations tried with Japan in 1985. They had Tokyo rebalance trade dynamics by accepting a higher yen – and in New York’s Plaza Hotel, which Trump once owned.
That world, where exchange rates were the be-all and end-all, no longer exists.
Two, Trump focused too much on wrestling the economic pie away from China, not growing it. This zero-sum worldview has no place in the 21st century. Tech disruption is hastening change and making the rumblings of a bunch of analog-age finance ministers and central bankers obsolete.
Look no further than the digital currency China plans to roll out.
Trump’s brawl was inspired more by Brooklyn mobsters looking for an edge than the Silicon Valley gang changing the face of finance, data, wealth creation and competitiveness right under the global economy’s feet.
The ways Trump’s tariffs stymied supply chains contributed to the semiconductor shortage now boomeranging on automakers in Detroit and traders on Wall Street.
Nor did stalking Chinese tech giants restore America’s competitive advantage. In the case of say, Huawei Technologies, ZTE and others, Trump forced Chinese Big Tech to scramble for components in Europe and elsewhere.
Granted, he threw some sand in the gears of mainland tech. Trump, though, forgot that tech leadership is a game of multitasking. While you’re making life difficult for a rival, you simultaneously must double down on research and development at the home office.
It’s all about the chips
Biden is beginning that multitasking push in earnest. And his fingerprints are all over China’s move to ramp up tech industry subsidies. In 2020, for example, Xi’s government spent a record $33 billion shoring up semiconductors, defense and other sectors pivotal to its tech arms race with the US, reports Nikkei Asia.
That 14% increase year-on-year preceded the advent of Biden, who plans to invest in America’s tech capabilities, not just try to wrest them back from the East.
Biden’s Washington, in response, is mulling ways to increase chip innovation and production in the US via new subsidies. The upshot could be a tit-for-tat in the tech space more typically seen in conventional weapons and nuclear capabilities.
This is sure to worry free-market purists, who caution that this Beijing-versus-Washington subsidy competition will damage fair trade. The World Trade Organization (WTO) bans subsidies aimed at advantaging domestic production or export industries.
Yet done well, prioritizing quality technology over just quantity seems the kind of race the global economy needs.
Or as Elizabeth Economy at Stanford University’s Hoover Institution puts it: “In order to compete we’re going to have to change the way we play the game. China’s not going to adapt to the rules of the road as we structured them, so we have to adapt.”
Analyst Roger Kay at Endpoint Technologies Associates notes that any way past the rancor of recent years would be an unalloyed good.
“There are a lot of intertwined webs that have been disturbed by the war on China, which to me seems badly conceived,” he says. “My view is that free trade is the right trade and we’ve already lost a lot of that through tariffs and other matters, and this [last one] ultimately impoverishes everyone.”
In China’s case, it builds on Xi’s “Made in 2025” ambitions to lead the future of aerospace, artificial intelligence, automation, biotechnology, digital currencies, electric vehicles, 5G advancements, renewable energy, robots, semiconductors and creating tech unicorns.
As of now, IC Insights reckons Chinese-made semiconductors will account for only 19.4% of the market in 2025. Anything Xi does to increase that share is likely to catalyze the US, South Korea, Japan and Taiwan to innovate, too.
Today, China-based production of general-purpose chips remains a top Xi priority. The more it becomes everyone’s goal, the quicker productivity-enhancing and low-carbon technologies will thrive.
Not surprisingly, China’s partially state-owned Semiconductor Manufacturing International Corporation (SMIC), the nation’s top contract chipmaker, was among the biggest recipients of Beijing’s help in 2020.
SMIC, for example, is planning a new $2.35 billion plant in Shenzhen, a city at the core of Xi’s Greater Bay Area project along with Hong Kong, Macau and eight other mainland municipalities.
Xi’s team is also lavishing subsidies on chipmaking equipment manufacturers such as Advanced Micro and Naura. In the defense industry, subsidies are going to Beijing BDStar Navigation, designer of global positioning systems, fighter jet maker Avic Shenyang Aircraft and shipbuilder China CSSC Holdings.
In the Covid-19 age, subsidies are supporting pharmaceutical sector players like CanSino Biologics and Shanghai Pharmaceuticals Holding.
Subsidies, of course, have long been China’s brand. It’s the lifeline on which its sprawling state sector relies. Non-tariff barriers and ultralow interest loans are the backbones of the domestic industries that propelled China into the ranks of the world’s top economies. The support increased during the Covid era.
Yet as China endeavors to build bigger, more vibrant private sectors, the ratios need to change. Even though state-backed companies make up one-third of all listed companies, they receive about 60% of Beijing’s largess.
In Washington, Biden faces a slippery-slope dilemma. Many lawmakers in his Democratic Party favor a China-lite policy: throwing about $50 billion of subsidies at chip companies to increase US-based production.
Biden, with his “build back better” plan, may indeed roll out such inducements. But there’s an argument that this is a recipe for inefficiency and bloat.
Next phase tech war
But again, this marks the US waging the right kind of war against China Inc: the two biggest economies out-innovating each other. America needs to relocate and revive the nation’s innovative mojo.
Sadly, Silicon Valley mostly spent the last five years devising dating apps and better ways to sell smartphone-based advertisements.
The US getting back into the business of technological progress, increasing productivity, investing in education, repairing crumbling infrastructure and getting serious about 5G, high-speed rail and reducing its carbon footprint might further catalyze China to raise its game anew. And vice versa.
This dynamic alone should have Japan slowing plans to distance itself from China, says trade historian Amako Satoshi.
“Decoupling itself is premised on zero-sum game theory, and could weaken the current global balance, which is built on interdependence and non-zero-sum thinking,” says the longtime Waseda University professor.
“In a world filled with interdependent relationships, any structural decoupling could result in a new Cold War structure,” he says.
“The real drive of the United States and other western nations is most likely a desire to win the high-tech arms race with China, thereby avoiding a new international order under Beijing’s control. At the same time, though, China remains a massive market that they do not want to lose,” he adds.
In other words, the more the US and China riff off one another, the greater the global economic pie gets.
No, Xi’s Communist Party is not quaking in Beijing. Four years of Trumpian distraction and chaos gave China ample room to raise its game in making chips, large-capacity batteries, pharmaceuticals and leverage critical materials like rare earths.
But the US is, at long last, multitasking again.
Biden is rolling out a de facto four-year plan that alters G2 dynamics. And if both G2 members get their domestic economies in better shape, compete more than they clash, and inspire Japan and South Korea to join the race, what’s wrong with that?
Yes, Biden must think – and spend – bigger. Even so: Four months in, it’s good to see Biden’s White House limbering up for the true competition with China for tomorrow.