The US-China Tech War 

China’s restrictions on gallium and germanium, essential for electronics production, are not a significant threat due to the availability of these minerals elsewhere. If China restricts exports, the U.S. and other non-Chinese mining companies could enter the market. Even if China uses its dominance in rare-earth metal mining and refining as a threat, the potential for non-Chinese substitutes exists. This scenario would require political will, not just technological feasibility. If China restricts its rare earth supplies, it would raise questions about its reliability as a supplier in all sectors. As a result, global policymakers and corporations are diversifying their trading relationships. Companies like Samsung and Dell have already moved production away from China or plan to do so.

However, retaliation is not the core element of China’s approach. There are four critical components of China’s revised strategy for semiconductors that truly stand out:

China is evading chip export controls by smuggling in advanced AI chips, betting on finding loopholes in the U.S. Department of Commerce’s enforcement barriers. Additionally, it is working to divide the U.S. from its allies by turning its attention to other countries in Europe and South Korea, potentially combining their technical expertise with Chinese resources to pose a serious threat. Additionally, China has escalated its industrial espionage and talent recruitment efforts, with companies like ASML facing thousands of cybersecurity incidents each year.

Most importantly, China is investing heavily to build an all-Chinese supply chain that eliminates dependence on foreign technology suppliers, a move that predates the Biden administration’s export controls. The Chinese semiconductor industry aims for the “replacement of imports with Chinese-made products,” in line with the “self-reliance” goals of China’s Made in China 2025 policy. Despite the policy no longer being openly discussed, it continues to guide China’s tech strategy.

China’s decoupling strategy, which is closer to reality than the Biden administration’s erroneously labeled efforts, has made it harder for China to succeed due to the October 7th export controls blocking access to chip-making equipment. German and South Korean firms should be wary of transferring technology to Chinese competitors for short-term profits, as this would help build a Chinese future where non-Chinese companies have no significant long-term role.

China’s retaliatory measures, designed to intimidate the U.S. and its allies, are creating fear among policymakers, especially in key undecided countries like Germany and South Korea. However, the major strategic concern is China’s long-standing policy to eliminate foreign firms from its tech supply chains and the risk of an authoritarian superpower dominating AI’s future. Although it’s unlikely that the U.S. and its allies will persuade China to abandon these goals, standing strong together can ensure the failure of China’s strategy.

Parties affected by the tech war

South Korean tech giants Samsung and SK Hynix have heavily invested in China, but their commercial ties are strained due to geopolitical tensions. The U.S. has implemented steps to limit China’s access to advanced chips, a move that has repercussions for South Korea’s semiconductor industry, which is crucial for its economy. Uncertainty looms as a one-year waiver from these export restrictions is due to expire soon.

According to South Korean President Yoon Suk-yeol, geopolitical challenges have grown to be a significant risk for businesses. The semiconductor manufacturing process involves global supply chains and the new restrictions have challenged alliances across Asia, Europe, and the U.S. South Korea is among the countries grappling with the potential economic disruption due to these trade restrictions.

China is a significant consumer of South Korean chips, with both Samsung and SK Hynix operating large production sites in China. Semiconductors comprise 20% of South Korea’s exports, with Samsung and SK Hynix leading the memory chip market. Over half of South Korean chip exports have been to China in the past decade, though this dropped to 55% in 2022. Samsung’s chip-related subsidiaries in China reported a 35% sales drop in the first half of 2023 due to reduced chip demand and China’s economic slowdown. SK Hynix’s China revenue, which peaked at 47% in 2019, fell to 27% in 2022.

The China-US tensions bring uncertainty for tech giants like Samsung, SK Hynix, and Taiwan Semiconductor Manufacturing Company, with decisions on export restrictions pending from the US Department of Commerce. As a result, these companies may have to change their business strategies in China. Options include focusing production on less advanced products to avoid restrictions or serving Chinese customers from their factories within China. In response to the uncertainties and a temporary dip in chip demand, SK Hynix has scaled back its capital spending in 2023, and construction on its plant in Dalian,China, has stalled.

To counter these challenges, South Korea is planning to boost its domestic chip-making capabilities by creating a semiconductor “mega-cluster” in Yongin, while Samsung and SK Hynix are investing heavily in South Korea and the US. However, aligning too closely with the US could risk economic retaliation from China.

The role of AI in this tech war

In this technological Cold War, artificial intelligence and quantum computing have emerged as the new nuclear weapons of this era. The question arises whether the US can effectively hinder China’s progress in these areas, reminiscent of their unsuccessful attempt to prevent the Soviet Union’s nuclear advancement. Trade sanctions, which have struggled to suppress even Russia’s underdeveloped economy, are unlikely to significantly impede Beijing. Additionally, China has a history of ignoring intellectual property laws in order to get around things it cannot produce or buy, as seen in its treatment of Uyghur culture.

In the context of this technological rivalry, the evolution of AI and other futuristic technologies in China is of paramount concern to the administration, which views Beijing as its chief international strategic adversary.

In an attempt to curb China’s progress, Washington has imposed restrictions on chip exports to the country and levied sanctions on specific Chinese firms. Despite these measures, Chinese tech leaders have still achieved substantial advancements.

In a recent development in October, the US further tightened its control measures to encompass a broader range of chips, equipment, and geographical locations. A primary focus of this update was on companies headquartered in China but operating in over 40 countries, with the aim of preventing these firms from using other nations as middlemen to procure semiconductors that are inaccessible within their home country.

To sum up, the ongoing tech war between the US and China signifies a significant change in global power dynamics, with technology becoming the main platform for competition. The ability of Chinese tech firms like Huawei to bounce back despite the severe US sanctions highlights the limitations of such tactics and underscores China’s progression towards self-sufficiency in technology, with potential repercussions for the global tech scene. At the same time, the fallout from this dispute on other technologically advanced countries like South Korea underlines the wide-ranging impact of this conflict. As AI and quantum computing become the new battlegrounds, the stakes in this tech war continue to rise. The management of this complex situation will necessitate a careful mix of innovation, cooperation, and strategic policy-making from all parties involved.