Software and semiconductors have become a part of the digital and physical world in such a pervasive way that we just stopped noticing. Chips are used in almost any device or appliance we can think of, including cars, home appliances, infrastructures, or medical equipment.
Microchips also power medium-term projects backed by countries and corporations to ensure their edge in existing industries and new sectors that are still embryonic or nonexistent.
China’s advances in artificial intelligence and investment in supercomputers are a strategic concern to the United States, setting up new restrictions on exports of chips “and related items” to China from any American company. If societies in developing economies are suffering the struggles of disrupted supply chains, why should the US Administration undermine its long-term position by assuring the functioning of the integrated global supply chain of microprocessors?
Under the new rules, American companies must cease selling chips, equipment, or technology to produce advanced chips. But Biden’s block may be taking effect too late if reverse engineering and technology licensing pay off follow their momentum in Chinese government-promoted efforts (China is already the biggest producer of semiconductors, accounting for a quarter of all chips produced on the planet.
China’s long-term game: more intellectual property
In May 2015, China announced its Made in China 2025 program, which arrived before Donald Trump’s presidency and explicitly announced the country’s intentions of decoupling from Western technology: China wanted to create a new type of mercantilism, pivoting from a model based on economies of scale to another based on high-value products and services, both to sell abroad and to lead its growing domestic market.
Despite the announced State-planned decoupling, China relies on other advanced countries to source the world’s most advanced microchips to power high-end smartphones, laptops, workstations, supercomputers, and new-generation cars. China’s mercantilism has been unable yet to compete with American, Japanese, South Korean, or Taiwanese producers (such as Taiwan Semiconductor Manufacturing Company, TSMC, the biggest world producer) to overpower the likes of Apple or Tesla.
China’s military aggressivity around US-backed Taiwan can be read in several ways. One of them is access to advanced microchips to power the next generation of consumer, military, and research appliances. And, with the announced ban, the Biden Administration confirms the dawn of a post-free trade era in which the US tries to ensure its relevance.
The undercover commercial battle between the US and China further expands the sanctions that already affected the telecom giant Huawei, blacklisted by the Trump Administration in 2019, and banned since from buying components and technology it had allegedly been spying and reverse-engineering. The openly confrontational and nationalist “America First” doctrine promoted by Donald Trump’s intellectual aids (such as Peter Navarro) might be on the other extreme of the political spectrum regarding Bernie Sanders. Yet, they agreed early on on the threat that China’s rise represented to US interests.
Decoupling supply chains on stuff that matters
What was easy in the first era of State-backed mercantilism —to decouple intermingled supply chains and replicate entire markets reverse-engineered from other world power—is less so in the contemporary world, which relies on integrated supply chains and advanced technologies that condense more value in less material. China’s top economic planning agency, NDRC, is promoting an agenda of global dominance in “strategic industries,” from nuclear power to Space and military operations, to biotechnology, even if the country’s efforts mean cutting corners in copying proprietary technology of transistors or lacking basic security measures in virology labs.
As the US rhetoric morphs into regulation, then into action, American companies have begun to question how to proceed with such “technological decoupling“: can companies have it both ways, by complying with sanctions while simultaneously profiting from production and sales in China?
Apple already played this complex corporate soft power gamble when Steve Jobs was alive, though now the company designs its own advanced microchips, first applied to smartphones, then to tablets and computers; though Apple also relies on Taiwan’s TSMC to produce its proprietary semiconductors, the Cupertino-based giant could eventually decide to change contractors or even build its own factory (at a huge operation expense, that is). However, other companies may not have the muscle not weight of Apple to do, especially during troubling times.
But there’s another troubling analogy between today’s emerging economic nationalism and the State-promoted mercantilism during the Era of Discovery, back when countries didn’t dare to promote pirates (see Francis Drake attacking Spanish galleons) to fund their own mercantilism: it’s becoming increasingly difficult to disentangle military and civilian uses of high-end chips, and governments see companies such as Huawei as agents planting digital backdoors to their countries essential infrastructures. Is that certitude a proof of concept that the practice is more extended than the public knows?
Why does nobody want to produce high-end chips in China?
Japan, South Korea, Taiwan, the European Union, the UK, Australia, and Canada, among others, are stuck in between both superpowers, and, among them, only the EU could possibly develop its own technology ecosystem: as an example, the early GSM network or the past dominance of Nokia, Eriksson, Siemens, or Alcatel in the pre-iPhone/Android cellphone world happened closer in time than we may think, whereas other industries, such as plastic polymers or heavy machinery, still led by European companies.
In the Asia Pacific, Japan, South Korea, Taiwan, and other US allies are as concerned about US weakness in the region as they are about China’s commercial and military rise in international waters, both physically and figuratively. In Taiwan, Morris Chang, chairman of TSMC, knows that the weight of his company in the global semiconductor market assures the island protection from the US if China were to escalate its military threats.
In Japan, microchip makers such as Kioxia (a spin-off of Toshiba’s chip unit) see the technological decoupling between the US and China (one that had already existed between the United States and Western Europe on one side, and the Soviet Union and Eastern Europe on the other during the Cold War); in South Korea, SK Hynix is concerned about an “unprecedented” slowing demand for high-end chips due to sanctions and dysfunctional markets.
Lorenzo Flores, vice-chair of Kioxia, has analyzed the impact of the US export controls targetting China. To him, the uncertainty of how Beijing can retaliate against Washington is equally troubling. Nand flash memory makers such as Kioxia from Japan or Micron from the US could benefit from the effect of these sanctions over their Chinese rival Yangtze Memory Technologies (YMTC).
First era of global mercantilism
We are told that history is written by the victors. More than fact-driven, our perception of history depends on the interpretation of the dominant powers of each era, which in turn declare themselves the legitimate heirs of a long saga of superpowers.
Western prevalence, or so history goes, was played out in the last episodes of the pre-modern world, when mighty civilizations from the East (China, India) were disincentivized to expand beyond their traditional areas of influence despite expeditions such as Zeng He’s, fell behind the aggressive expansion of much poorer European monarchies.
A few decades after Zeng He made an impression in every harbor he visited —the story goes— an Italian mercenary working for the Spanish monarchy stumbled upon the Western Hemisphere despite his ignorance about this very fact. The world wouldn’t be the same since, and the victors (European colonial powers, then the United States) would forget about the world before modernity, when China and India represented much of the world’s population, commerce, and wealth.
The canons of history still consider that when the Ottoman conquest of the Eastern Mediterranean prompted Western European monarchies to seek alternatives and resume commerce with the Far East, Europe transitioned from the Middle Ages to the Modern period.
The so-called Age of Discovery accelerated early globalization: commerce of goods and ideas created new realities, often tragic to non-European populations, that brought peoples and domesticated animals and plants from one corner of the world to another.
But the Columbian Exchange also activated an aggressive competition among European powers to access the lucrative Eastern spice and silk trade. The Spanish Empire opened a transcontinental route from Manila to Mexico and Veracruz to the metropolis, exchanging silver for goods from Chinese merchants.
Empire of spices, empire of semiconductors
Portugal, Britain, and France decided to promote their own routes and ports along the way. Still, they soon were inspired by a leaner, more effective commercial strategy promoted by the Netherlands after gaining independence from the Spanish monarchy, pioneering a direct ocean route from the Cape of Good Hope, the southernmost tip of Africa, to the Sunda Strait in Indonesia, and hence being able to control the production of spices in their origin.
Instead of relying on intermediaries or —even riskier— relying on slow bureaucracies that required time to bypass contingencies (epidemics, shipwrecks, warfare with local populations), the Dutch became an “Empire of Spices” by establishing the most reliable and lucrative long-distance international trade, connecting the spice production of the Dutch East India Company with the most commerce-driven society in Europe at the time.
Only geopolitics and warfare would ultimately disrupt the dominance of long-distance trade by Dutch mercantilism, when Britain and France would impose by their maritime force their own economic nationalism, finding ways to increase exports and reduce imports.
Yet State-promoted commerce, once essential as protection from overwhelming potential contingencies such as weather or crop events, or even State-backed piracy, prevented growth and innovation among the European powers especially strict with the public monopoly of commerce with their colonial territories: while Britain or the Netherlands opted for strategic protectionism of their main industries, Spain prohibited foreign trade with its colonies and restricted local development of sectors such as Castilian textiles.
When protectionism becomes stagnation
Unlike Dutch manufacturers, incentivized by their government to grow their market both internally and abroad, Spanish early protectionism aimed at preventing other countries from accessing monopolized raw materials and elaborated processes in sectors such as Castilian wool. Yet Dutch trade couldn’t ultimately match British mercantilism (protected by the Royal Navy) and French Colbertism (or modern economic statesmanship): surpassed by the military might of Great Britain and France, Dutch merchants faded in global trade.
Fast forward to the contemporary world as it prepares to enter a post-free-market-for-all period, pivoting from a geostrategy of oil to one of semiconductor dominance. Countries redesign their trade policies as distrust rises between China and advanced democracies in sectors considered strategic: advanced plastic polymers, new energy resources, high-end equipment manufacturing, artificial intelligence applied to fields such as drones and driverless cars, or advanced microprocessors.
As if the world were replaying the geopolitics of the beginnings of globalization from the Era of Discovery, the world derived from World War II and the Pax Americana, which had relied on one single economic superpower, was propelled into a further economic integration after the collapse of the Soviet Union. There was a reason the United Nations was headquartered in New York, with international institutions like the World Bank relying on the inner workings of American cultural and economic soft power.
But the fall of the Iron Curtain transformed world relations: a new confidence in a “flat world” once historical materialism seemed to have come to an end prompted the United States and its allies to welcome developing countries as equal trading and manufacturing partners. China, which had begun to reform its economy in 1978, was poised to experience the biggest and fastest transformation in humanity’s known history, with hundreds of millions of peasants moving to the cities and abandoning a life of subsistence for prosperity blended in hyper-capitalism.
Having it both ways
Domestic trade, privatization, and investment have propelled China’s economic growth since the 1980s. Then, China’s agreement with Western countries within the World Trade Organization to allow free trade between the then-most populated country and developed economies set out the world we live in now.
From the moment China signed “permanent normal trade relations” with the United States in September 2000 to now, China has returned to a position of economic dominance it only had before the Age of Discovery, in a very different world. Conversely, China has achieved so without making significant advances in democracy and human rights, the primary justification for granting the country free trade status within the WTO.
China’s “socialist market economy,” a blend of covert protectionism and economic neo-mercantilism through State control and administrative opacity, has transformed the world’s economy and affected the way consumer goods are manufactured, as advanced economies allowed their companies to move their production to countries with lower worker protection, wages, or environmental concerns.
Over two decades later, China has evolved from a tech-dependent manufacturing powerhouse to an economic system exporting its own soft power to the developing world while becoming essential in several strategic sectors due to their supply chain integration.
Formosa to Taiwan
The US is also concerned about its perceived international weakness as the country’s internal politics become more entrenched and polarized. Its dependence on Taiwan is also a matter of anxiety. Eric Schmidt, former Google CEO and artificial intelligence advisor suggests that decoupling from China wouldn’t be enough:
“The US was “very close to losing the cutting edge of microelectronics which power our companies and our military because of our reliance on Taiwan.”
Meanwhile, the technology sector in the European Union should wonder why Morris Chang was capable of bringing TSMC to world dominance after founding the company 35 years ago with only two strategic assets: start-up capital from the Taiwanese government; and licensing semiconductor technology, then considered already dated, that had been developed by Philips, a Dutch company.
The tables have been turned since the Dutch secured a leadership position in world trade with aggressive mercantilism and long-haul trade in the 17th and 18th centuries. Now it’s Taiwan’s mercantilism, old Formosa (with former Spanish —north of the island— and Dutch —south of the island— colonies), what’s poised to bend geopolitics.