US-China Tech War: Price of Confrontation

Islamabad:

President Biden, contrary to expectations, has accelerated economic, trade and technology wars with the world, especially with China. First, it revived the Obama administration’s Pivot of Asia and China containment policies. He worked with allies to introduce initiatives such as Build Back Better World and the Partnership for Global Infrastructure and Investment to address the Belt and Road Initiative (BRI). Second, it intensified the Trump administration’s policies of tariffs, confrontation, and sanctions. Third, he further strengthened these measures through legislation such as CHIPS and the Science Act, among others.

These actions have earned Biden a reputation as an anti-China politician. As a result, President-elect Trump, who built his political career on anti-China rhetoric, now feels pressure to outdo the Biden administration. As a result, it has begun flexing its muscles to launch a new wave of restrictions, sanctions and confrontational policies.

However, historical trends reveal that sanctions have limited utility. A study by the Institute of International Economics found that during the 1970s and 1980s, sanctions worked less than one in five times. While major economies such as China are in a better position to reverse sanctions, few attempts have been made to fully understand the cost of such measures to the US economy itself.

During Trump’s first term, when a wave of tariffs was imposed, institutions and organizations tried to assess the impact on the American economy. A study by the Federal Reserve Bank of New York and Columbia University found that the trade war reduced the market value of publicly traded companies by $1.7 trillion between 2018 and 2020. The overall impact was even more profound, as it reduced the rate of growth , put pressure on producers, and caused heavy losses to farmers. Meanwhile, consumers were forced to pay higher prices. While some companies tried to shield consumers from these costs, most ended up compromising on wage increases or cutting jobs to cope.

China also felt the impact of the sanctions, but absorbed the shock to a greater extent, minimizing the negative consequences for its citizens. The analysis shows that the Chinese economy continues to grow despite sanctions and restrictions, demonstrating resilience and determination to achieve sustainable progress.

Despite the heavy price paid for sanctions, the US has doubled down on its confrontational policies. The Biden administration introduced the concept of “uncoupling” and launched a new wave of sanctions, mainly targeting technology sectors such as CHIPS, semiconductors, automobiles and ICT.

Among them, the CHIPS and semiconductor sectors were prime targets. The US aims to check China’s progress in these areas to maintain its global leadership. It is a hard fact that the US and its allies currently lead in CHIPS and semiconductors. The US has the most advanced CHIPS and semiconductor design systems, while the Netherlands is a world leader in the production of photolithography machines, which are vital to semiconductor manufacturing. South Korea and Taiwan (part of China) have also mastered the art of semiconductor manufacturing. Meanwhile, China is trying to match this know-how and currently has the ability to design and manufacture CHIPS above 7nm.

The automotive sector is another key target. The US recently raised tariffs on electric vehicles (EVs) from China by 100%, realizing that it cannot compete with China in this sector. Increasing tariffs appears to be the preferred method of addressing this competitive disadvantage.

As Biden nears the end of his term, he has stepped up restrictions, adding 140 Chinese tech companies to the updated list of sanctioned entities. The US hopes these measures will cement its dominance while pressuring allies and partners to follow suit by cutting business ties with China.

However, there is broad consensus that US-led Western sanctions will ultimately fail and have negative consequences for the West itself. For example, China is a major buyer of Dutch photolithography machinery, and the sanctions have negatively affected the company’s revenue. Similarly, US companies such as Qualcomm and Lam Research rely heavily on China for their sales – over 60% in the case of Qualcomm – leading to significant revenue losses of up to $2.5 billion for Lam Research.

China has significant leverage in the raw and refined materials needed to make CHIPS and semiconductors. It has the world’s largest reserves of rare earth metals, accounting for over a third of the world’s resources. In addition, China leads the mining of rare earths, with a 60% share of global production, and dominates the processing of these materials with a global share of 85%. It also holds 90% of the market for making high-strength rare-earth permanent magnets, which are vital for advanced technologies such as batteries, medical devices and energy infrastructure.

In addition, China is investing heavily to strengthen its capacity for innovation and technological leadership. President Xi Jinping has implemented a gradual policy to achieve this goal. First, China has focused on human capital development by creating a high-quality education system that produces top STEM graduates. This investment in talent has begun to yield significant returns, allowing China to rapidly close the gap with Western nations. Many experts believe that it is only a matter of time before China breaks the 7nm barrier in CHIPS. Ironically, sanctions and restrictions may be accelerating China’s pace of innovation.

China also began diversifying its economic ties and export markets years ago, anticipating US hostility. Initiatives such as the Belt and Road Initiative have helped China build sustainable global partnerships. It has also established technology exchange platforms to help developing countries develop their capabilities. As a result, China is deeply embedded in the global system and actively shares the benefits of innovation and technological development.

In conclusion, the evidence suggests that Western efforts to contain China’s technological progress are unlikely to succeed. The rhetoric of disengagement lacks economic logic, and instead serves as a political slogan to appease the domestic public and the military-industrial complex. Policymakers in the US and the West appear to be using sanctions as a scapegoat to hide their inability to address domestic challenges or promote sustainable economic growth.

Instead of pursuing unsustainable confrontation, US leaders should focus on promoting cooperation and peaceful coexistence. Such an approach could help address America’s challenges while promoting positive development outcomes worldwide.

THE AUTHOR IS A POLITICAL ECONOMIST AND VISITING RESEARCHER AT HEBEI UNIVERSITY, CHINA