The US is trying to hold its high ground of dominance of the semiconductor industry via export restrictions and subsidies to increased domestic manufacturing, notably via the Chips Act. Yet experts are quietly warning that this plan to decouple from China may backfire, particularly if pursued too aggressively.

Semiconductors are fundamental to the operation of commerce and consumer communications, so the US believes it has found a key choke point by which it can impede China’s further rise as an economic superpower. But the wee problem with that view is that the US view thought it had an even more powerful choke point with Russia via its supposed dependence on dollar payment systems. We know how that movie is working out.

Admittedly, the US actions against China’s chips industry are not of the “kill the economy” ambitions of its sanctions against Russia. But there’s a weird myopia in not understanding that China has plenty of ways of retaliating if thing were to get ugly, given US dependence on China for many imports, starting with pharmaceutical ingredients and seemingly humble chemicals like ascorbic acid. And as we’ll address soon, a broad analysis of technology leadership by an Australian think tank shows the China to be number 1 in 37 of 44 categories.

We’ll provide a high level treatment today and plan to go deeper in future posts. Let’s return to the various semiconductor protection moves. As far as I can tell, the justifications were to prevent Chinese spying on Americans and impede China from using advanced chips in military applications (although truth be told, armed forces don’t make much use of the super-small chips that are the focus of the curbs). But even experts who are sympathetic with the idea that the US should do more to protect its interests in its dealings with China think that even with obviously over-broad Trump era measures having been rolled back, the new restrictions aren’t well targeted. From Jon Bateman, a senior fellow at the Carnegie Endowment for International Peace, in Politico in January:

America has embarked on one of its most difficult and dangerous international challenges since the Cold War. The task: reversing decades of economic and technological integration with its chief rival, China.

This technological decoupling, if done selectively, will help to preserve America’s military edge, protect key U.S. industries from unfair competition, and push back on Beijing’s human rights abuses. But if decoupling goes too far, it will drag down the U.S. economy, drive away allies, stymie efforts to address global crises like climate change, and increase the odds of a catastrophic war….

Restrictions on Chinese technology make sense when they match the scale of specific threats and buy time for America to bolster its own tech base. But Washington seems intent on a grander crusade — to hobble China at a fundamental level — with little regard for the risks to global stability, the U.S. economy and American alliances.

The Biden Administration first focused on increasing investment in the tech industry, but then started deploying restrictions. Again from Bateman:

Even so, there were growing hints of a more aggressive agenda. First came reports in May that America’s most severe sanctions list — populated with terrorists, drug lords and war criminals — might for the first time target a major Chinese tech firm. Then came the bombshell announcement in October of new export controls on semiconductors and chip-making equipment…

The new U.S. export controls block China from importing high-end foreign semiconductors it needs to train artificial intelligence algorithms. At the same time, Washington sought to stop China from making homegrown versions of such chips, or even the mid-range chips that power the Internet of Things and other lesser devices. It therefore barred Chinese chip-makers from importing advanced manufacturing equipment and from working with U.S. personnel…

Officials cited the fact that advanced processors can help Beijing model nuclear explosions and missile aerodynamics. But these military applications comprise a tiny fraction of the countless important uses for powerful semiconductors and AI. The vast majority are benign: business process automation, e-commerce, cybersecurity, disease diagnosis and much more. Some uses, like climate change research, would actually benefit the United States and the world….

Alan Estevez, a senior official who oversees export controls, captured the gung-ho mood in late October: “I meet with my staff once a week and say, ‘Okay, what’s next? What are we going to do next? Who’s being bad? Where is the technology area that we need to address?” He said that future controls on biotech, quantum technology, and AI software and algorithms are likely.

That triumphalism seems awfully familiar. Foreign Policy sets forth that view in more detail:

To retain its role as the world’s sole superpower, Washington believes that it has to stop Beijing in its tracks…

In this economic war, the United States is unsurprisingly keen to put all forms of economic coercion to good use. The Trump administration imposed tariffs on $360 billion of U.S. imports from China; President Joe Biden has made it clear he is not lifting these…In the financial sphere, U.S. lawmakers are pondering whether to delist more than $1 trillion worth of shares of Chinese companies on U.S. stock exchanges. Congress is also considering barring the Thrift Savings Plan, which manages the pensions of millions of federal government employees, from investing in Chinese companies.

The Chinese economy, however, has grown far too big for Washington to sanction Beijing with its usual toolkit….

Semiconductors are the Achilles’ heel of the Chinese economy. Beijing buys more than $300 billion of foreign-made semiconductors every year, making computer chips China’s largest import, far above oil. This reflects the fact that Chinese factories import 85 percent of the microchips they need to build electronic goods. Most of these semiconductors are manufactured using U.S. technology. For Washington, this makes export controls a seemingly ideal tool to deprive Beijing of U.S. innovation and know-how. Such restrictions function in a similar fashion to financial sanctions: They seek to curb adversaries’ access to U.S.-made staples—the greenback for financial sanctions or computer chip technology for export controls—that have become so crucial that few countries can do without them.

Washington knows that it has a massive trump card to play in the semiconductor sector: Virtually every microchip around the world has some link to the United States, be it because it was designed with U.S.-made software, produced using U.S.-made equipment, or inspected with U.S.-made tools…

U.S. firms manufacture only around 10 percent of the computer chips sold across the world. The world’s leading microchip foundries (as semiconductor assembly lines are called) are located in Asia, mainly in Taiwan and South Korea. However, a handful of U.S. companies control all of the higher, upstream echelons of the supply chain. Given the United States’ dominance over the microchip sector, Washington knows that measures curbing China’s access to U.S. semiconductor technology have every chance to deal a blow to Beijing’s technological ambitions….

In October, the Biden administration dealt an even more severe blow to China’s technological sector: Instead of targeting only high-profile Chinese firms, Washington clamped down on all exports of advanced microchips and semiconductor-making tools to China. U.S. citizens were also warned that without explicit (and unlikely) U.S. government approval, they are breaking U.S. law if they choose to work for Chinese technology firms.

Other experts are warning that the loss of the Chinese market will hurt the profits and even more so the R&D spending of key players. From Anjani Trivedi at Bloomberg:

China accounts for over a quarter of sales for chip equipment manufacturer Tokyo Electron Ltd., where they’ve been growing sharply over the past five years. For Nikon Corp., a maker of lithography machines, it’s around 20%, while Advantest Corp., which produces testing machines, depends on China’s evolving computing market for its customers, too. The country accounted for over a quarter of global billings — a gauge for demand — at the end of last year. Along with Taiwan and South Korea, China has been the top destination for capital spending for the past two years for the largest semiconductor equipment companies….

Here’s the rub: These firms don’t just invest in China, they sell equipment across the world, including to the US and Europe. That keeps the virtuous cycle of technology transfer and development humming along. If they’re hamstrung because major sources of revenue get cut out, then ultimately industrial innovation will struggle. Even if the US manages to stay ahead in terms of technological advances in lab projects and patents, it won’t be able to scale them.

Scaling is a key point. Some commentators, including NC readers, have opined that a major focus of the China-hawkish measures is to reduce the dependence of US chip designers on Taiwanese fabs and build up capacity in the US. The problem is the big-sounding numbers on that front don’t go all that far. From Yu Zhou in Issues.org:

The CHIPS and Science Act authorized $52 billion for domestic semiconductor chip manufacturers with the aim of enhancing the global competitiveness of the US chip industry, improving the security of the supply chain, and countering China’s ambitions in the sector.

While increasing investment in semiconductor research and development is welcome, whether it can improve US global competitiveness and prevent the rise of China is uncertain. In 1990, US companies manufactured 37% of semiconductors produced globally, but by 2020 that share had shrunk to 12%…

In this notoriously capital-intensive industry, the CHIPS Act’s $52 billion investment is relatively small. For example, in 2022, just one company, TSMC, announced new capital investments of over $40 billion, building on $30 billion invested last year. Samsung plans to invest $355 billion in its semiconductor and biopharmaceutical technologies over the next five years. Since the semiconductor industry is the single most important global niche held by South Korea and Taiwan, government and commercial conglomerates in those countries are likely to do whatever is necessary to maintain their supremacy. The CHIPS Act thus signals the start of a high-stakes global race, leading to more public and private money in the semiconductor industry.

A race to invest in manufacturing will ultimately flood the market with chips, which is likely to drive down the price and profit margin for all players—as is already being seen with memory chips. Given that such slumps are almost inevitable, it is unclear how American chip makers, with their long-standing focus on quarterly earnings, will deliver on promises of expanding capacity. Asian corporate structures, by contrast, are far more tolerant of temporarily low profit margins.

Yours truly is old enough to remember when the US was a serious semiconductor producer, and earnings of its very capital intensive big players were cyclical, on the order of boom-and-bust-ish.

A wee problem with this picture is that it leads the US public to think the US can cut China down to size with its chips curbs, when tech-wise, the US and China live more in a world of mutually assured destruction. We first mentioned years ago that 80% of US pharmaceutical ingredients, including some finished drugs, come from China.

A more even-handed, and sobering, view comes via a new paper, ASPI’s Critical Technology Tracker, from the Australian Strategic Policy Institute. Philip Pilkington provided an overview on Twitter:

We’ll stop here for a second. All but the very few truly bicultural Chinese would hit a glass ceiling in US companies and would have good odds of returning to China either dispatched by their US employer (and they might jump ship when back home) or on their own. The new open hostility towards China is sure to reduce how much Chinese “talent” comes to the US. And before you declare than means China is depriving itself of access to science-and-technology leading US schools, think again. The paper lists top academic institutions in the various technology categories, showing Chinese leadership in research generally corresponds to a strong real-world position.

It looked as if the study attempted to throw some bones to the US. It dignifies our balloon panic:

Although balloons are conceptually low tech, their ability to (at least sometimes) slip through detection systems and carry heavy payloads is extremely valuable. The Financial Times reported that Chinese state television showed footage of high-altitude balloons carrying hypersonic glide vehicles in 2018, but that the video is no longer available. Video matching the description can be found on Twitter and Toutiao. Comments below the video state these were scale models of hypersonic glide vehicles used for testing, and suggest the wing design matches the ‘I-plane hypersonic concept’ from the Chinese Academy of Sciences. The 2018 research paper describing this design has been cited by, so far, 19 subsequent research papers. Thus, it’s likely that high-altitude balloon research has
directly contributed to the cost-effective testing and development of nuclear-capable hypersonic glide vehicles.

Douglas Macgregor pointed out that for the US touring Chinese balloon to have had meaningful surveillance capabilities, it would have had to carry a payload similar to the one of the Goodyear blimp.

Oddly the report did not spend much time on medicine or pharmaceuticals despite continuing development in areas like robot assisted surgeries and the use of AI in diagnostics. Instead we get:

Now admittedly medicine took a big step back under Mao’s efforts to push traditional Chinese medicine, and the fact that doctors are not highly esteemed or well paid (while by contrast, both Singapore and Thailand are medical tourism destinations). And this study focuses on major areas of technology advancement, not routine practice. Nevertheless, I found this bit to be surprising:

It’s also in front in the crucial areas of quantum computing and vaccines (and medical countermeasures). This is consistent with analysis showing that the US holds the most Covid-19 vaccine patents and sits at the centre of this global collaboration network. Medical countermeasures provide protection (and post-exposure management) for military and civilian people against chemical, biological, radiological and nuclear material by providing rapid field-based diagnostics and therapeutics (such as antiviral medications) in addition to vaccines.

America’s terrible performance in Covid infections and deaths, and in our “medical countermeasures” as witness the inaction after the East Palestine toxic explosion, raises questions about whether our supposed excellence actually benefits anyone other than the vendors.

As I said, this was intended to be a high-level introduction, so forgive me for being broad brush. No doubt we’ll be returning to this topic.

Yves here. If possible, this article understates how bad this nuclear submarine deal is for Australia. For instance, the US is making Australia buy three cast-off submarines. And it hopelessly ruptures Australia’s once-good relations with China. I recall when I live in Oz the government eagerly inking an LNG deal with China, and later liberalizing immigration rules, significantly to the benefit of Chinese, who then further big up Australia’s already overheated housing market.

By Prabir Purkayastha, the founding editor of Newsclick.in, a digital media platform. He is an activist for science and the free software movement. Produced in partnership by Newsclick and Globetrotter

The recent Australia, U.S., and UK $368 billion deal on buying nuclear submarines has been termed by Paul Keating, a former Australian prime minister, as the “worst deal in all history.” It commits Australia to buy conventionally armed, nuclear-powered submarines that will be delivered in the early 2040s. These will be based on new nuclear reactor designs yet to be developed by the UK. Meanwhile, starting from the 2030s, “pending approval from the U.S. Congress, the United States intends to sell Australia three Virginia class submarines, with the potential to sell up to two more if needed” (Trilateral Australia-UK-U.S. Partnership on Nuclear-Powered Submarines, March 13, 2023; emphasis mine). According to the details, it appears that this agreement commits Australia to buy from the U.S. eight new nuclear submarines, to be delivered from the 2040s through the end of the 2050s. If nuclear submarines were so crucial for Australia’s security, for which it broke its existing diesel-powered submarine deal with France, this agreement provides no credible answers.

For those who have been following the nuclear proliferation issues, the deal raises a different red flag. If submarine nuclear reactor technology and weapons-grade (highly enriched) uranium are shared with Australia, it is a breach of the Nuclear Non-Proliferation Treaty (NPT) to which Australia is a signatory as a non-nuclear power. Even the supplying of such nuclear reactors by the U.S. and the UK would constitute a breach of the NPT. This is even if such submarines do not carry nuclear but conventional weapons as stated in this agreement.

So why did Australia renege on its contract with France, which was to buy 12 diesel submarines from France at a cost of $67 billion, a small fraction of its gargantuan $368 billion deal with the U.S.? What does it gain, and what does the U.S. gain by annoying France, one of its close NATO allies?

To understand, we have to see how the U.S. looks at the geostrategy, and how the Five Eyes—the U.S., the UK, Canada, Australia, and New Zealand—fit into this larger picture. Clearly, the U.S. believes that the core of the NATO alliance is the United States, United Kingdom, and Canada for the Atlantic and the United States, United Kingdom, and Australia for the Indo-Pacific. The rest of its allies, NATO allies in Europe and Japan and South Korea in East and South Asia, are around this Five Eyes core. That is why the United States was willing to offend France to broker a deal with Australia.

What does the U.S. get out of this deal? On the promise of eight nuclear submarines that will be given to Australia two to four decades down the line, the U.S. gets access to Australia to be used as a base for supporting its naval fleet, air force, and even U.S. soldiers. The words used by the White House are, “As early as 2027, the United Kingdom and the United States plan to establish a rotational presence of one UK Astute class submarine and up to four U.S. Virginia class submarines at HMAS Stirling near Perth, Western Australia.” The use of the phrase “rotational presence” is to provide Australia the fig leaf that it is not offering the U.S. a naval base, as that would violate Australia’s long-standing position of no foreign bases on its soil. Clearly, all the support structures required for such rotations are what a foreign military base has, therefore they will function as U.S. bases.

Who is the target of the AUKUS alliance? This is explicit in all the writing on the subject and what all the leaders of AUKUS have said: it is China. In other words, this is a containment of China policy with the South China Sea and the Taiwanese Strait as the key contested oceanic regions. Positioning U.S. naval ships including its nuclear submarines armed with nuclear weapons makes Australia a front-line state in the current U.S. plans for the containment of China. Additionally, it creates pressure on most Southeast Asian countries who would like to stay out of such a U.S. versus China contest being carried out in the South China Sea.

While the U.S. motivation to draft Australia as a front-line state against China is understandable, what is difficult to understand is Australia’s gain from such an alignment. China is not only the biggest importer of Australian goods, but also its biggest supplier. In other words, if Australia is worried about the safety of its trade through the South China Sea from Chinese attacks, the bulk of this trade is with China. So why would China be mad enough to attack its own trade with Australia? For the U.S. it makes eminent sense to get a whole continent, Australia, to host its forces much closer to China than 8,000-9,000 miles away in the U.S. Though it already has bases in Hawaii and Guam in the Pacific Ocean, Australia and Japan provide two anchor points, one to the north and one to the south in the eastern Pacific Ocean region. The game is an old-fashioned game of containment, the one that the U.S. played with its NATO, Central Treaty Organization (CENTO), and Southeast Asia Treaty Organization (SEATO) military alliances after World War II.

The problem that the U.S. has today is that even countries like India, who have their issues with China, are not signing up with the U.S. in a military alliance. Particularly, as the U.S. is now in an economic war with a number of countries, not just Russia and China, such as Cuba, Iran, Venezuela, Iraq, Afghanistan, Syria, and Somalia. While India was willing to join the Quad—the U.S., Australia, Japan, and India—and participate in military exercises, it backed off from the Quad becoming a military alliance. This explains the pressure on Australia to partner with the U.S. militarily, particularly in Southeast Asia.

It still fails to explain what is in it for Australia. Even the five Virginia class nuclear submarines that Australia may get second hand are subject to U.S. congressional approval. Those who follow U.S. politics know that the U.S. is currently treaty incapable; it has not ratified a single treaty on issues from global warming to the law of the seas in recent years. The other eight are a good 20-40 years away; who knows what the world would look like that far down the line.

Why, if naval security was its objective, did Australia choose an iffy nuclear submarine agreement with the U.S. over a sure-shot supply of French submarines? This is a question that Malcolm Turnbull and Paul Keating, the Australian Labor Party’s former PMs, asked. It makes sense only if we understand that Australia now sees itself as a cog in the U.S. wheel for this region. And it is a vision of U.S. naval power projection in the region that today Australia shares. The vision is that settler colonial and ex-colonial powers—the G7-AUKUS—should be the ones making the rules of the current international order. And behind the talk of international order is the mailed fist of the U.S., NATO, and AUKUS. This is what Australia’s nuclear submarine deal really means.