China has a fatal shortcoming in its quest for hi-tech supremacy. The US and its close allies control the critical raw material.
For all its successes, China lags far behind in advanced semiconductors, despite strenuous efforts to close the gap. It must import them.
The Chinese Communist Party cannot hope to achieve global dominance of G5 mobile networks without secure access to these chips and their supporting ecosystem.
Nor can it take a lead in telecommunications and artificial intelligence (AI). Xi Jinping’s master plan to control the ‘internet of things’ and the digital economy of the 2030s runs into an insuperable obstacle.
Washington has enormous blockading power and in mid-May it began to exercise that power with seriously hostile intent, forcing the world’s biggest chip maker – Taiwan’s TSMC – to stop taking fresh orders from Chinese mobile leader Huawei.
We can mark the start of the real Sino-American Cold War from that moment. It played to the narrative – both cultivated by Xi, but also made self-fulfilling by his actions – that the US aims to thwart the rise of China, and therefore that restraint is pointless.
The end of Hong Kong as we know it followed in quick succession. Are there parallels with Franklin Roosevelt’s oil embargo against Japan, which set in motion Tojo’s all-or-nothing escalation in 1941? Not yet, but the gloves are off.
We can have a quaint debate in Britain and across Europe over whether Huawei should be at the centre our G5 networks, and therefore whether the People’s Liberation Army should have leverage through Xi’s doctrine of civil-military fusion.
It is out of our hands. Washington is not going to let Huawei gain such a lockhold in the foreseeable future. Which is why the Government is now bowing to US pressure.
It is not hard to manufacture the low-end logic and memory chips for laptops. It is much harder to make specialised chips for telecommunications or AI, or FGPA circuits that can be programmed. Japan, Korea, and Taiwan have the capability, but they are working hand in glove with the US.
Silicon Valley retains paramount power where it matters. It farms out some production to foundries or ‘fabs’ such as TSMC in Taiwan but it does not relinquish ultimate control.
The US and Japan between them also control 85pc of the market for electronic design automation (EDA) needed to create circuits . “Not to sound hyperbolic. All of China’s “self-made” chips are designed, verified, validated, etc, using foreign—mainly US—EDA tools,” said TechNode.
“Semiconductors are not easy to make. The manufacturing process has become progressively more complex as the chips become microscopically small, at the cutting edge of physics and materials science,” said James Lewis, technology director at the Center for Strategic and International Studies in Washington.
“China is not a peer. People don’t realize just how much they have been relying on stolen technology. But stealing is not enough. You need the magic ‘know-how’ and that takes years of experience.”
The Chinese caught up fast after 2015 when the Obama administration cut off two Intel chips used by the military but creating a semiconductor industry is harder. “They are on their third ‘Manhattan Project’ trying, but they are not there yet. They are ten years behind on high-end chips,” said Mr Lewis.
Yet time is of the essence. The next five to ten years will decide whether the US alliance system or China controls the digital infrastructure.
Huawei was able to get around the initial US curbs on technology by purchasing chips from TSMC. The US Commerce Department has now shut this down. All chip manufacturers using US equipment, IP, or design software will need a licence before shipping to Huawei.
TSMC promptly announced that it would halt sales to Huawei even though they make up 18pc of revenue. It will instead double down on its US ties with a $12bn plant in Arizona. Such is the long economic and strategic arm of the United States.
We should not be distracted by Donald Trump’s idée fixe on trade tariffs, cars, and soybeans. The actual fight is going at a more sophisticated level, managed by the professionals of the Washington establishment. Trump is best understood as a bellwether. As Henry Kissinger so tellingly put it, he is “one of those figures in history who appears from time to time to mark the end of an era and force it to give up its old pretences”.
A paper by professors Harold James, Markus Brunnermeier, Rush Doshi from Princeton argues that the Sino-American technology war “holds an uncanny resemblance” to Anglo-German rivalry in the lead up to the First World War. It was a clash between a rising, mercantilist, Wilhelmine autocracy and an anxious Britain, the slipping hegemon striving to preserve control over the nodal points of world trade.