by István Kopácsi
Politics and technology are closely linked as the starting points for development, social change and the protection of citizens and businesses. Political support for technology is needed to ensure that innovation is not disrupted, even if there may be drawbacks (e.g. through the spread of unemployment). Technology also supports politics, as it can help a country prosper through innovation, increased welfare and a more educated population. Just as John F. Kennedy and Bill Clinton had to deal with automation and its effects,[1] their successor, Joe Biden, now has to deal with the political tensions in the field of semiconductors and microchips, mainly in the context of the global competitive market, with reference to national interests (e.g. national security), under which the US has announced several restrictions on trade in high-tech chips to China last autumn[2] and this year.
On 25 July 2023, the Senate voted to amend the 2024 National Defence Authorization Act to include the proposed Outbound Investment Transparency Act, which expands the range of technology areas to include hypersonic, networked laser scanning systems and satellite communications. The amendment does not prohibit investment in these sectors. However, it does require notification 14 days before a transaction is completed. Next month, on 9 August, the Biden administration issued an executive order on outbound investment to fill a gap in the control system. Inbound screening allows for the review of transactions on national security grounds, while export controls apply to outbound items, technology and software. There is therefore an obvious lack of ability on the part of the US government to ensure that US capital - both financial and know-how - is not being used to advance foreign military capability. The order directs the US Treasury to establish a programme for the oversight of a new instrument for the review of foreign investment in critical sectors.
The US Treasury issued an advance notice of proposed rulemaking seeking public comment on the creation of these rules at the same time as the executive order. The rules will likely be implemented in 2024, covering M&A, private equity, venture capital, greenfield, joint venture, and certain leveraged finance transactions.[3]
The order authorises the US Treasury Secretary to prohibit or restrict US investment in Chinese entities in three sectors: (i) semiconductors and microelectronics, (ii) quantum information technologies, and (iii) artificial intelligence systems, in order to prevent US capital and expertise from helping China develop technologies that could support its national military modernisation and undermine US national security.
The focus is on investment in Chinese companies that develop software for the design of computer chips and tools for their manufacture. Traditionally, the US, Japan and the Netherlands have dominated these fields, but the Chinese government has been pushing to develop domestic competitors. US officials have sought to underline that the bans are intended to address the "most acute" national security risks for the US, rather than to separate the two countries' highly interdependent economies, but this explanation does not seem to have convinced Beijing.[4]
Since the US imposed export bans on high-tech semiconductors, relations have soured. Not only banned Beijing the use of US company Micron's chips in critical infrastructure[5] and announced new licensing restrictions for gallium and germanium, two inputs for semiconductors[6] but it appears to be using its legal tools to delay and block mergers between companies that have a presence in China and require Chinese competition watchdog approval for acquisitions. Intel's acquisition of Israeli company Tower Semiconductor dragged on for more than a year and a half without a decision, until Intel finally withdrew its offer. The cancellation of the acquisition, which demonstrates the global nature of the battle, is also a drawback for Germany, which is trying to become a European chip manufacturing centre. The planned merger could have boosted this ambition, because Intel would have guaranteed an increase in capacity in Germany in exchange for €10 billion (!) in aid from Germany, and Intel would have acquired know-how through the Tower acquisition that would have been a huge step towards high-tech chip production by increasing capacity. The long delay in the administrative procedure, which is equivalent to a ban, is also surprising because Intel was one of Beijing's most prominent partners in the semiconductor market, and yet it has been the victim of export restrictions in the chip war.[7]
In addition to such moves, Beijing has gone full steam ahead to strengthen its own large-scale chip manufacturing programme. The first sign of this is the injection of around $2 billion into the budget of its largest manufacturer, YMTC, which will enable the company to make a huge catch-up move with its regional competitors, especially South Korean firms.[8]
As to why this situation, labelled as a war, has evolved in the chip industry, I think it is sufficient to explain that this industry is expected to reach $1 trillion in annual sales by 2030, while the shortfall caused by the pandemic has still not been made up (so there is room for fundraising), and manufacturing growth is predicted to be slow until at least 2026, despite huge funding allocations.[9]
How this war could, or even should, be won, obviously, there is no consensus in the US either at the political or expert level. There is also a debate on the usefulness of the measures taken, but the Biden administration seems to accept the view that there is a need to move towards more intensive trade between like-minded nations – of which Taiwan's and South Korea's spending on semiconductor equipment generally shows that their advance is still growing – and a sharp reduction in dependence on adversaries for critical supply chains and technologies. To win the tech war against China, however, the US must seek to make it attractive for friendly states to participate in this emerging trade network and should ensure that reliable and broadly ideologically compatible trading partners, such as the current foreign industry leaders Taiwan, South Korea and Japan, supply its imports of finished semiconductors and key inputs in the supply chain. A key player in the global team in achieving this goal could be Taiwan's TSMC, which is building plants in several G7 countries, including the US, Germany and Japan.[10]
Supporters of recent restrictive measures say that the US should pursue efficiency and growth through trade and increased market access within this friendly network. At the same time, it should invest in a significant new effort to rebuild US domestic semiconductor manufacturing, from design to production. As part of a long-term global competitiveness agenda for critical technologies, the US should implement comprehensive, market-oriented industrial policies. To achieve strategic autonomy through technological and economic leadership, these policies should invest in US research capabilities and in both applied engineering and manufacturing activities.[11]
[1]https://www.foreignaffairs.com/reviews/innovation-discontents-technology?utm_source=linkedIn_posts&utm_medium=social&utm_campaign=ln_daily_soc
[2] https://makronom.eu/2023/05/26/chiptorveny-usa-kina-exporttilalom-nvidia-huang-makronom/
[3] https://www.csis.org/analysis/new-national-security-instrument-executive-order-outbound-investment
[4] https://www.reuters.com/world/white-house-detail-plans-restricting-some-us-investments-china-source-2023-08-09/
[5] https://www.nytimes.com/2023/05/21/business/china-ban-microchips-micron.html
[6] https://www.wsj.com/articles/china-restricts-exports-of-two-metals-used-in-high-performance-chips-a649402b
[7] https://mandiner.hu/makronom/2023/08/chiphaboruk-kinai-bosszu-az-intel-ellen
[8] https://makronom.eu/2023/05/31/chip-exporttilalom-kina-usa-kereskedelmi-haboru-makronom/
[9]https://www.mckinsey.com/industries/semiconductors/our-insights/how-back-end-automation-can-be-game-changing-for-chipmakers?cid=aisurge2023-soc--mar-mar--07/23-i1a--bam-ip&linkId=232229701
[10] https://www.euractiv.com/section/industrial-strategy/opinion/tsmc-in-germany-the-successes-and-limits-of-the-eu-chips-act/
[11] https://www.hoover.org/research/silicon-triangle-united-states-taiwan-china-and-global-semiconductor-security
