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Managing U.S.-China Technology Competition and Decoupling

Technological competition between the United States and China is growing, especially in cutting-edge sectors like 5G, artificial intelligence (AI), and advanced semiconductors. As competition intensifies, trade and technology decoupling between the United States and China has also begun accelerating.

Now, all countries face the reality that the Chinese Communist Party (CCP) uses its economic power—particularly its power over global technology supply chains—to achieve its political objectives. Worse, it is willing to use any means necessary to develop the domestic capacity to produce advanced technology.

The question is not whether decoupling should be promoted or not, but how much decoupling is good for the United States in the long term, and how the United States can effectively manage the decoupling process. To answer this question, we should first evaluate the impact of decoupling on both sides, both now and in the future. We must also keep in mind that decoupling is not an issue that affects only the United States. Other countries, such as Taiwan, South Korea, Japan and European nations will be affected by the decisions made by China and the United States during this process. Collaboration with allies will be essential if the United States hopes to achieve its goals, reduce Chinese influence and prevent China from using their economic power repressively to accomplish their political objectives.

The objectives and actions of decoupling

In responding to Chinese economic power, the United States has relied on a variety of policies whose objectives can be separated into two groups: (1) Reducing U.S. reliance on Chinese technology in areas that raise national security risks, and (2) Protecting critical technologies from being transferred from the United States to China. Although these two objectives are interlinked, approaching them as parallel strategies is helpful to evaluate decoupling.

(1) Reducing U.S. reliance on Chinese technology

One way to reduce reliance on Chinese technology is banning the use of Chinese equipment and services. For example, in the 2018 National Defense Authorization Act (NDAA) the U.S. government declared it would exclude five Chinese companies, including Huawei and ZTE, from its 5G telecommunications procurement plans. The government also prohibited U.S. telecom companies from using the Universal Service Fund to purchase equipment from Huawei and ZTE equipment. This resulted in a de facto prohibition on the use of Huawei and ZTE equipment for telecommunication systems in the United States. Other examples of restrictions on Chinese technology include attempts by the Trump administration to ban Chinese mobile applications like TikTok and WeChat.

The reasons for these restrictions were to reduce the risk that China could interfere with U.S. critical infrastructure, and to protect U.S. information from being accessed by the CCP. The risk from Chinese espionage is particularly high due to the Chinese National Intelligence Law, which requires private companies to hand over data to Chinese intelligence services upon request.

Before continuing with more policies like these restrictions, the United States should consider their effects. The first and most important point is the balance between security merit and cost of replacing banned products and services. Take 5G telecommunication equipment, for example. In the United States, many rural telecommunication companies have relied on Huawei and ZTE to provide low-cost infrastructure for their networks. In response to restrictions on these companies, rural service providers have declared that they would struggle to afford the costs associated with shifting to other approved suppliers.

Whether this additional trust and security is worth the cost is a question that both the United States and its partners confront. The answer depends on the risks and economic factors particular to each industry. In some areas like critical infrastructure, including telecommunications, the United States should take care to avoid relying on a strategic competitor like China and keep high self-sufficiency of technology. Another consequence to consider is the potential for reciprocal Chinese measures, which would restrict U.S companies’ access to the Chinese market.

(2) Protecting the transfer of critical technologies from U.S. to China

There are many ways to protect U.S. technology from being acquired by China. These range from strengthening cybersecurity practices to countering espionage activities by Chinese intelligence agencies, or developing stricter rules for academics who receive support from China. Pursuing export controls is one of the most aggressive options. The U.S. Department of Commerce Bureau of Industry and Security (BIS) has already added Huawei to its Entity List, which restricts the export of U.S. technology to the listed companies. Since these controls not only influence U.S. companies, but foreign companies that use U.S. technology, the reach of these measures is broad. Semiconductor manufacturing, where there is a heavy reliance on U.S.-made software and manufacturing equipment has already felt the impact of these measures. A notable example of export controls being used against China is the September 2020 announcement that U.S. companies must seek a license to do business with SMIC, the largest semiconductor manufacturer in China.

For these actions to effectively change Chinese behavior, the U.S. must have advanced technologies, such as advanced semiconductors, which the Chinese desire but cannot produce for themselves. For technologies where the United States and China are similarly positioned, export controls will not have any effect on China. In fact, in the worse case, it could be harmful to the United States if their only result is to encourage Chinese firms to shift from U.S. suppliers to domestic ones.

This highlights the risks that must be taken into account when the United States considers the use of export controls. First, there is a danger that U.S. industries could lose access to the lucrative Chinese market, and other nations could replace the United States’ position within the Chinese supply chain. This could damage the long-term competitiveness of U.S. firms. Second, they could incentivize China to develop advanced technology by themselves. If China is successful at domestically producing the same level of technology, the export controls would be meaningless. This is not something the United States can control, but before restricting exports, policymakers should carefully evaluate the Chinese predicted future capability. Third, China could retaliate with its own export control measures. If there are any essential technologies or resources, such as rare earth metals, which the United States depends on China for, policymakers must consider the possibility of retaliation.
 
Next steps: Evaluate the U.S. actions which are leading decoupling

Control over technology supply chains is becoming an increasingly important tool for achieving geopolitical aims; further, nations that depend on untrusted countries will face heightened risks. Because of this, some degree of decoupling is inevitable. However, as this article has explained, there are many concerns about technological competition and decoupling between the United States and China. From those points of view, the next blog in this three-part series will evaluate recent U.S. actions, especially focusing on 5G and relevant semiconductor regulative actions, impacts, and responses. As policymakers consider how to manage decoupling over the coming years, it will be important that they find a way to balance national security objectives with the need to reduce the resulting economic impact.

Courtesy: CSIS

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