Today, the world’s two largest economies find themselves in a tit-for-tat as the U.S. looks to ward off the rising challenge from China. The Americans first banned exports of chips, semiconductor equipment and software to Chinese technology giants. China retaliated by banning the import of lower-grade U.S. chips. The U.S. continued with further bans on chips to Chinese cloud providers. China replied with a shot across the bow on rare earths. Most recently, the White House announced an executive order restricting the flow of U.S. capital to specific sectors within the Chinese technology industry. While understandable in a short-term context, what characterizes the American actions against China is an overall naiveté regarding the history of the second and third-order effects of such actions.
China has been goaded into building self-sufficiency far earlier than it would have otherwise. Prior to the ZTE and Huawei components bans, Chinese companies were content to continue purchasing American chips and focusing on the front-end hardware. Today, the success of the Huawei Mate 60, with its domestically produced 5G chip, underscores the risks of driving Chinese innovation and self-sufficiency through decoupling. America now faces the short-term threat of losing the critical revenue that has fueled the research and development that made us an innovation leader, as well as the long-term inevitability that China will build its own full-scale semiconductor ecosystem. Ultimately, these actions will undermine American technological leadership and geopolitical leverage.
