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- On May 21, against the backdrop of bumpy negotiations in the US-China trade war, the US Department of Commerce added Huawei and its affiliates Entity List [https://www.federalregister.gov/documents/2019/05/21/2019-10616/addition-of-entities-to-the-entity-list], effectively barring the export of American goods to the Chinese company. Most importantly, this move forbade the export of advanced microprocessors, critical to Huawei’s products. Although Huawei has reportedly stockpiled chips in anticipation of the ban, [https://www.bloomberg.com/news/articles/2019-05-17/huawei-built-at-least-a-three-month-stockpile-ahead-of-trump-ban], this move represents an existential threat to the future of the company.
- Casual observers may report this as nothing more than yet another spat in the ongoing trade tensions between the two countries – yet another chip on the table alongside trade balances, tariffs and IP law. But this move is different in two key ways. On one hand, it does not address any substantial economic interest of the United States; the rationale appears to lie instead in a revealingly expansive interpretation of national security. And on the other, the targeted embargo puts a key American technology monopoly into strategic play, a move that carries serious long-term risks for the United States.
- The public aims for the trade war, from the American side, are framed in terms of decreasing the trade deficit and reviving American manufacturing. The pledges being floated as part of a trade deal make sense in these terms – tariffs and pledges to buy American products to reduce the trade imbalance, renegotiating joint ventures to slow the transfer of intellectual property to slow China’s ability to compete in high-value-added manufacturing. Banning chip exports, however, accomplishes neither of these. It cuts into American chip manufacturers’ sales at the expense of their Korean or Taiwanese counterparts. And it targets a single company with limited US sales, notably bypassing other Chinese smartphone makers, such as Oppo, Xiaomi, and vivo, each of which are closing in on Apple’s share of the global smartphone market. [http://www.lachtoday.com/the-rise-of-huawei-from-nowhere-to-dominate-the-world/]
- If economics is not the rationale, national security is a more likely candidate, centering around Huawei as a leading manufacturer of 5G network infrastructure. Years after the Snowden revelations, it’s now common knowledge that major technology companies are political captives to their national governments. From that perspective it’s no surprise that the US may wish to exclude foreign-manufactured network equipment as a security risk.
- But for this narrow goal, a chip export ban is overkill – the same goal could have been achieved by simply banning Huawei networking equipment from being used in national infrastructure. In the runup to the ban, American lobbying was also able to prevent Huawei network equipment from entering countries in the closely allied Five Eyes intelligence sharing group. Notably, however, such lobbying was unsuccessful on the European continent; Germany, France, the Netherlands, and Switzerland refused to exclude Huawei from bidding on infrastructure projects. [https://www.dw.com/cda/en/eu-leaders-we-wont-follow-trumps-huawei-ban/a-48768000 https://www.npr.org/2019/03/20/704818011/despite-u-s-pressure-germany-refuses-to-exclude-huaweis-5g-technology]. Following the ban, with Huawei struggling to stay viable as it tries to find an alternative to American chips, it will be difficult to make credible, long-term commitments to service European networks in the long-term. Such bids will more likely fall to companies such as Ericsson and Nokia, headquartered in countries that fall more within Washington’s orbit.
- Thus, the likely rationale behind the chip ban was a realization that American lobbying was failing to regain control of decision-making in EU countries. The chip ban, then, far from being a routine bargaining chip in the ongoing trade war, represents a vital national interest in maintaining control of not only the network infrastructure of the US and its key intelligence-sharing allies, but more broadly in its sphere of influence.
- On one hand, this move demonstrates the coercive potential that America still retains in its control of the high-technology supply chain. Even as hardware manufacturing leaves Silicon Valley, America and its allies retain monopolies over key, capital-intensive industries such as semiconductor manufacturing. Centrality in technological networks operates the same way – although many countries have the technical skill to produce novel operating systems, for example, it is quite a different matter to replicate the stack of optimized hardware and the ecosystem of software published for that OS. Powers wishing to retain autonomy not only need to maintain the military prerequisites for sovereignty, but also a level of technological autarky that is staggeringly expensive even for a near-peer rival.
- But in the long run, using this monopoly to cripple a national champion has significant long-term costs. America with its semiconductor monopoly is playing a strategy analogous to OPEC in the 1973 oil crisis: able to leverage a dominant market position for short-term geopolitical goals, but only at the expense of galvanizing the target country towards developing self-sufficiency. In the wake of the oil crisis, this adaptation took the form of automobile efficiency regulations and expanded drilling to domestic frontiers such as Alaska. Now that China has received the sharpest possible reminder of its dependence on semiconductors, it will inevitably accelerate its drive towards domestic chip manufacture, through the same sort of industrial policy that has allowed Samsung and TSMC to climb to the top of the value chain.
- It’s true that developing the semiconductor industry has always been a talking point in the past, with “new information technology” as one of the ten target industries of the Made in China 2025 initiative[http://isdp.eu/content/uploads/2018/06/Made-in-China-Backgrounder.pdf]. But bold-sounding initiatives have not always translated to policy; there are signs that the Belt and Road initiative, for example, has been significantly hijacked by state-owned enterprises and provincial governments working off incentives at cross-purposes to its underlying geopolitics [https://scholars-stage.blogspot.com/2019/05/the-utterly-dysfunctional-belt-and-road.html]. But this is not a contest over infrastructure pork, it’s an attack by a geopolitical rival on a national champion, revealing a vulnerability in innumerable domestic companies. Becoming self-sufficient in semiconductors requires extraordinarily expensive investments, and likely difficult, loss-making purchase agreements by domestic companies along the way. But this is the sort of concrete threat that allows greater political consensus than would otherwise be possible. If semiconductor self-sufficiency was political boilerplate before, it’s a strategic imperative now, and there is no indication that China will be unable to follow where other East Asian tigers have already blazed the trail. [Footnote 1]
- The Huawei chip ban, then, is best seen as an escalation in response to the failure of previous American lobbying to prevent the Chinese company from becoming part of the infrastructure for European countries. This strategic imperative is itself revealing – American domination of 5G hardware gives to espionage and counter-espionage in Europe is considered worth trading away a comfortable monopoly in cutting-edge semiconductors. Almost regardless of the outcome of future trade negotiations, the die has now been cast; Huawei will likely be hamstrung in the 5G race for several years, by which time it’s hoped that the first wave of 5G infrastructure will have already been deployed by American-aligned companies. Meanwhile, China has received the strongest possible impetus to accelerate its drive to become independent in the manufacture of semiconductors. It is another small step towards a world in which China and other post-liberal states create parallel financial, diplomatic, and technological power, one in which neither country will hold the same level of coercive potential that the United States now enjoys.
-  (Indeed, with Moore’s law arguably in suspended animation[https://spectrum.ieee.org/semiconductors/devices/the-status-of-moores-law-its-complicated], with nanometer sizes largely reflecting incremental improvements and marketing spin, this is perhaps the best time to undertake the effort.)
- It is notable that Chinese policy in blocking social networks like Facebook and Google can thus be seen in a new light – neither reactive social repression nor as cronyist protectionism for domestic incumbents, but as the internet version of the sort of industrial policy that has been successfully applied throughout East Asia, with a side benefit of maintaining autonomy in crucial industries that might have otherwise been used in a similar strategic move. [https://medium.com/@byrnehobart/lessons-from-the-east-asian-economic-miracle-5f8d0f2354d9]
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