The US responded to the rise of the USSR and Japan by focusing on innovation, Dan Wang says, but so far the US is responding to the technological rise of China by kneecapping its leading firms:
So instead of realizing its own Sputnik moment, it is triggering one in China.
This year, the US doubled down. It produced two rounds of novel restrictions on Huawei, threatened wider restrictions on Tencent and ByteDance, forced the sale of TikTok to a US consortium, and limited technology exports on SMIC, DJI, and dozens of other companies. Aside from Alibaba, it’s hard to name many big Chinese tech firms that have not faced sanctions or the threat of one from the US.
The actual effects of these regulatory actions have been uneven. Designation to the entity list hasn’t always had a major impact on every company’s operations. Federal courts have tied up the bans on Tencent’s WeChat and ByteDance’s TikTok. At the same time, Huawei is trying to work through major difficulties, especially in its smartphone business. TikTok, China’s most successful tech export, still might be sold off. And more generally, Chinese firms are starting to be locked out of developed markets. Lack of access to the richest and most discerning consumers makes it more difficult to make the best products in the world.
The US can revel in Huawei’s pain. But its actions have not been costless to itself. By withholding components that Chinese companies have relied upon, the US government has turned American firms into unreliable suppliers. These restrictions can sometimes block non-American firms from making sales too. In an extraordinary assertion of extraterritoriality, the US declared in August that any company, anywhere in the world, needs to apply for a license to sell a product to Huawei if it is produced on the basis of US technologies.
Nothing can be easier to destroy than trust. Chinese companies have responded by de-Americanizing their supply chains because they have no choice. US politicians can observe the sometimes-devastating impacts of sanctions. What they don’t seem to realize — or want to believe — is that they’re simultaneously pummeling the American brand writ large. I’ve documented for Dragonomics the uncomfortable questions American companies tell me they’re starting to face on whether they can credibly be long-term suppliers. Elsewhere, the Economist has reported that even poultry farmers in China are wondering if they’ll be able to import baby chicks from the US. And there are now multiple reported instances of Japanese companies marketing themselves as more reliable than their American competitors. Moreover, I hear growing unease from companies in the rest of Asia and Europe on buying American. Can everyone really be sure that this denial campaign will be limited to a handful of bad Chinese actors? Or is a better model of the US government that once it has found a fun new toy, it will keep playing with it until it is no longer fun?
With these regulations, the US has initiated one of the greatest and strangest antitrust actions ever, against potentially all American exporters. The US Treasury has for years expressed worry about the potential decline of the dollar’s dominance following excessive use of blocking sanctions. This fear is turning into reality for the real economy. One might expect alarm bells to be going off in DC, but it doesn’t appear that there’s much pushback against these regulations, except for murmurs from trade associations. It’s possible to defend these moves as correct — for example by justifying that the costs on American firms are worth it for the chance to slow Huawei down right now — but the government does not appear to have had a vigorous debate about the tradeoffs. Instead, the strategy seems to be a result of bureaucratic kludges, pushed forward by whichever faction has the upper hand, made mostly because the financial sanctions office has resisted dealing a serious blow to Huawei in a single stroke.
For the most part, the control hawks faction of the government has had a run of the table, shown by the fact that US agencies have been more focused on taking down Chinese firms than extending US strengths. At a time when it’s more important than ever to advance its semiconductor companies, the government is crippling their sales to their largest or fastest-growing market. When research capabilities at US universities need to grow, the government is denying them students. And when the US should be attracting more talent to its shores, the government has made it more difficult for people to immigrate. Thus the US looks committed to a strategy to destroy the scientific and industrial establishment in order to save it.
Meanwhile in China, these actions have triggered a surge of interest in mastering technology. For the first time arguably since the industrial rise of Japan in the 1950s, a major country is committed to thinking deeply about the invention of its own tooling. A whole generation of scientists and engineers must examine foundational problems like to build leading tools (like lithography machines) and create the best materials (like wafers and chemicals). And the state is fully behind that effort. After steady calls from Xi throughout the year to master technology, the Central Economic Work Conference announced in December that science and technology work will be the top priority in 2021; the conference has never broken science and technology out as an independent item, never mind give it top spot.