Paul van Gerven

31 October

China has always shown restraint in trade conflicts, carefully avoiding escalation and domestic economic harm. So too will it try to seek a truce in the current tech war with the US while pursuing other means to continue its ascent as a global superpower.

We still don’t know a lot about the export restrictions on advanced semiconductor technology imposed by the US. At what level does the US intend to enforce the new rules? Will it allocate the appropriate resources to meet those ambitions? For the moment, let’s assume we’re indeed dealing with a total crackdown on China’s abilities to develop its own leading and trailing-edge semiconductor manufacturing capacity, effectively throwing back China’s semiconductor ambitions years, if not decades.

This level of economic cold war between major powers hasn’t been seen since, well, the Cold War. The obvious question is: how will China respond? Gregory Allen, a fellow at the Center for Strategic and International Studies based in Washington DC, drew a parallel with Imperial Japan, which concluded in 1941 that it was essentially at war with the US after the latter instigated an oil boycott. This was in response to the Japanese occupation of Indo-China. Months later, the Japanese attacked Pearl Harbor. Semiconductors are the oil of the 21th century, and although the newly imposed limitations aren’t as all-encompassing as the oil boycott was, Allen wondered in the New York Times whether China sees it that way. “I kind of doubt it,” he answered his own question.

Although the possibility of an open war between competing superpowers China and the US can never be ignored, if only for the Taiwan situation, the American measures may not have moved the needle much for an armed conflict in the near future. But, as Allen supposes, it does seem that a proud nation, governed by a leader who considers reclaiming his country’s rightful place in the world to be his overarching goal, won’t take this punishment lying down.

Counterpunch

As the world’s largest economy, China would certainly have the means to do it. Trading tariffs and sanctions back and forth, the Middle Kingdom, though certainly not unscathed, is generally considered to have come out on top in the 2018-2021 trade war with the Trump administration. It could play this game again, for example by denying US tech giants access to its huge internal market.

For a massive high-tech counterpunch, China need only leverage its control over critical raw materials, particularly rare earth metals. It has done so before: in 2010, China cut off all exports of these ‘high-tech elements’ to Japan. Additionally, prices went through the roof when China imposed export quotas (that system was abandoned in 2015). Similarly, China strongly influences, if not dictates, market dynamics in more common materials including aluminum, cobalt, magnesium and tin. (Note: rare earths aren’t particularly rare, but, outside China, the facilities to refine them (still) are.)

Tit for tat

And yet, China’s history of retaliation in trade conflicts is one of restraint. When the US in 2020 cut Huawei off from advanced chip technology, “China issued some angry statements but ended up doing nothing despite the fact that these restrictions hobbled one of China’s biggest tech firms. Which was, I think, a pretty striking demonstration of where escalation dominance in this sphere, if you will, stands – that China felt like any sort of retaliation would leave it worse off than not retaliating,” Chris Miller of Tufts University observed in the Bloomberg podcast Odd Lots. Miller authored the book “Chip war: the fight for the world’s most critical technology.”

With current economic growth well below the Communist Party’s target and dissent over the zero-Covid policy growing, Beijing is more likely to stick to more covert measures that won’t deprive China of the technology it can (still) get, that won’t harm its economic growth and that won’t provoke US blowback. Such tactics may include strengthening existing alliances on the global stage and forging new ones, coercing trade partners, acquiring knowledge through talent poaching and corporate espionage, and frustrating Western interests by adopting a non-cooperative attitude on diplomatic and economic forums.

“Beijing is likely to continue avoiding tit-for-tat reprisals against US companies in the near term, while encouraging American companies to invest more in China, on the theory that businesses with a vested interest in the China market will be a counterweight to hostile politicians in Washington,” predicted technology analyst Dan Wang at Gavekal Dragonomics. For now, “China is keen to reach a truce in the tech war, rather than confrontation,” agreed another expert.

Let’s hope they’re right.