3 episodes

• 1 Indo-Pacific: can trade succeed in preventing war?
• 2 Semiconductors at the heart of the China-US rivalry
• 3 China and the race for technological supremacy

Key takeaways

• The decentralisation that facilitated Asia-Pacific trade was initially a compromise between the United States and Japan – whose economic power they feared.
• Since the 1990s, the rise of China raised questions, but their assimilation into the market nonetheless continued.
• It was around 2007 that, faced with a strong China, America and India became closer giving rise to the “Indo-Pacific”.
• Over the past ten years, Chinese policy in the region has become more assertive, and the fears that had surrounded the rise of Japan have resurfaced.
• Recently, this space, which was designed to neutralise (economic) conflict, has once again become a zone of economic, political, and strategic confrontation.

The Indo-Pacific is increasingly perceived as a zone of confrontation, whereas it was presented for several decades as a model of “soft trade”, with geopolitical relations calmed by commercial exchanges. Was this model an illusion?

Pierre Grosser. No, but it has a history. The term “Asia-Pacific” emerged in the late 1980s. The geo-economic climate was marked by the end of the Cold War, with a triumphant Japan taking the place of the USSR as the number one challenger against the United States. At the time, Washington perceived that there was a risk of an “Asian refocusing”. Whilst Americans saw that there was a place to be taken in what was then described as the “Pacific century”, the power of Asian economies also appeared as a challenge to them. Back then, the Pacific was an area of trade, but which increased the deficits of the United States

APEC (1989) was a way for the United States and Australia to avoid the creation of an Asian block and to develop an open regionalism that would facilitate Asia-Pacific trade. Japan agreed because its leaders feared being accused by Washington of returning to the Asia-tism of the 1930s, dominated by Tokyo.

In the 1990s, summits were held regularly, and a large free trade area developed; a reality has not disappeared. Nevertheless, with the WTO crisis in the 2000s and the growing difficulty of negotiating global trade agreements, multiple bilateral agreements were signed between countries of the region, and now broader agreements (but Trump refused the TPP negotiated by Obama).

Does China’s entry into the game disrupt this “soft trade” paradigm?

It is made possible by President Clinton’s decision in the mid-1990s to disconnect trade and human rights – a way to turn the page on Tiananmen. China’s entry into the WTO in 2001 appears at first to be a confirmation of this virtuous circle between trade, peace, and democratisation.

Compared to the 1980s, when Japan had been a real threat (at the end of 1988, it controlled 50% of the world’s semiconductor sales and there was talk of a “Pearl Harbour” of electrical components), the early 2000s seem to have been marked by a certain naivety about China. No one imagined at the time that China was moving upmarket technologically, or that it would have a destructive impact on Western industrial jobs.

At the end of the 1990s, however, several debates raised crucial questions. Between 1996 and 2000, a first discussion concerned China’s accession to the status of great power, and a book even raised the possibility of a conflict. But this strategic and military debate was soon closed. At the beginning of the Bush presidency, the Americans decided to focus on the “peer competitors”, including China. But the attacks of September 11 put the reflection on the Chinese challenge in the background. Today, the Americans are wondering whether they have made the wrong enemy by exhausting themselves in the global war against terrorism.

When did Americans start to have doubts?

The financial crisis that began in 2008 opened a new stage: very quickly, Westerners realised that their economies were suffering while China was accelerating. Admittedly, there was a form of equilibrium: the Americans bought Chinese products cheaply, and the Chinese in return bought American public debt. This macroeconomic duo was once presented as a “G2”, at the top of global governance. But the Chinese partner is increasingly perceived as a rival.

The Chinese challenge is then formulated through new images, such as the “string of pearls”, which describes Beijing’s more “assertive” presence in the China Sea, with land reclamation that allows for the transformation of simple islets into islands, and especially Chinese activism in the Indian Ocean: Sri Lanka, Burma.

This context explains the accelerated conciliation between the United States and India. For the first time, the theme of the Indo-Pacific emerged. At the initiative of Japanese Prime Minister Shinzo Abe, the Quadrilateral Security Dialogue (Quad) was launched in 2007, an informal cooperation between the United States, Japan, Australia, and India. The pivot to Asia, which was fully affirmed by Obama in 2011–2012, had in fact begun under George W. Bush.

Does this pivot mark a major turning point?

Yes, even if it must be understood that it is not directed against China, which the Americans need on issues such as nuclear proliferation (North Korea, Iran). The pivot reflects first and foremost the ambition to focus on Asia, by reinvesting in regional organisations (ASEAN, Shangri-La Dialogue). Obama speaks of a “rebalancing”, but in terms of deployed troops the change is not very significant: with the consequences of the Arab revolutions and the emergence of Daech, the Americans are not withdrawing from the Middle East. What is perhaps more significant, then, is the Silk Roads project launched by Beijing in 2013, which marks a new stage in Chinese assertion. But this is not a breakthrough.

It is under Trump that the switch takes place, with a speech by Vice President Pence in 2018 that marks a break. Europeans are out of the game: only the British are interested in the Indo-Pacific and, starting with Hollande and then under Macron (partly in the context of strengthened ties with Australia, which then take the form of military cooperation), the French, partly to maintain their status as a world power with regards to the United States. The latter took up the (Japanese) theme of a “free and open Indo-Pacific”, which in this new context was diametrically opposed to Beijing’s ambitions in the China Sea. The question of Taiwan is resurfacing. Since the beginning of the pandemic, China seems to have been busy putting its internal affairs in order. The question of confrontation remains open, with the United States accused of looking for a new enemy and of wanting to replay the Cold War so as not to be overtaken by Chinese power, and China of wanting to place itself at the centre of the world and bend it to its interests.

Richard Robert

Semiconductors at the heart of the China-US rivalry

Clément Boulle, Executive director of Polytechnique Insights

On March 23rd, 2022 |

4 min reading time

Key takeaways

• The semiconductor market is worth nearly $600bn and is crucial to sectors such as the automotive and computer industries.
• There are two factors in the semiconductor crisis: the disruption of supply following the Covid crisis and the Sino-American competition which has brought in Chinese players threatened with access restrictions by the United States.
• There is a move to support domestic production to mitigate interdependence. Trump has given a golden bridge to Taiwanese TSMC, which is building a huge factory in Arizona.
• China has leadership ambitions, but it is far from it. It has set a target of producing 75% of its semiconductor needs by 2025 and is currently at 15%.

Why are semi-conductors so crucial?

Mathieu Duchâtel. They are essential to the functioning of both the automotive industry, which is currently undergoing a major transformation, and the IT industry. The latter is absorbing high-end, high value-added processors and memory chips for production of smartphones, computers, and data centres. It is also worth noting that semiconductors are essential to the defence sector from missiles to the field of cybersecurity – now a major factor in military operations – making their design and production strategic.

The market of semi-conductors is estimated at $600bn; with the major design and production centres found in the USA, China, Europe, South Korea, Taiwan, and Japan. Principally, design companies are American (Broadcom, Qualcomm, Nvidia, Apple) and production companies Asian (TSMC, Samsung, SMIC). A distinction is made between the most advanced technologies (with nodes equal to or less than 7nm; today 5nm, tomorrow 3nm and then 2nm), which mainly meet the high-end needs of information and communication technologies, and the rest of the market (14, 28 or 55nm and beyond), which is more than sufficient for the automotive and arms industries.

What are the reasons for the current shortage?

There are two factors: the disruption of supply following the Covid crisis and Sino-American competition, which has led Chinese players threatened with access restrictions by the United States to build up stocks. Regarding the Covid crisis, the phenomenon started at the end of 2020 in the automotive industry. These difficulties could last at least until mid-2022. Moreover, the automotive industry consumes $110bn-worth of semiconductors per year. But the shortage has spread to some extent to the smartphone and connected object sector.

Finally, in terms of stockpiling, we can mention Huawei, which purchased 13 billion semiconductors in 2019. The behaviour of other Chinese players threatened by the United States from 2019–2020, such as ZTE or SMIC, is not quantified but it is logical that they also sought to build up stocks to anticipate possible restrictions that were adopted by the Department of Commerce in the second half of 2020.

There is a dependence on a small group of countries. What are the strategic risks and responses of governments?

There is a move to support domestic production to mitigate interdependence. Trump gave a golden opportunity to Taiwanese company TSMC, now building a huge factory in Arizona. Biden is asking Congress for $50bn to support the industry, too. The Europeans realised the importance of boosting production on their own soil and will take action. But it is above all in relation to China that states and companies are positioning themselves.

China is, for once, the biggest loser because it is technologically behind the United States, Korea and Taiwan, who are in alliance to keep China two or three generations behind. To explain this, we need to understand the semiconductor value chain. Semiconductor design accounts for 47% of industry sales, and is dominated by Silicon Valley, from Nvidia to Qualcomm. There is a TSMC duopoly in Taiwan and Samsung in South Korea for the most advanced foundry processes. Closing off Chinese companies’ access to industry leaders cuts them off from certain segments of the global competition. For example, without access to TSMC, Huawei can no longer build high-end smartphones.

But China retains advantages related to its scale. TSMC has cut its ties with Huawei, instead producing the top of the range for Apple in Formosa but is investing to expand its foundry in Nanjing (China) to meet the needs of the automotive industry. And, geopolitically, TSMC is an asset for Taiwan. It is hard to imagine a US government risking the loss of access to the most advanced TSMC technologies in a worst-case scenario where China invades Taiwan. 

What is preventing China from catching up?

China has leadership ambitions, but it is far from that; whilst their target of producing 75% of their own semiconductor needs by 2025, the country is currently only hitting 15% of that. Also, China no longer has access to foreign technologies and faces bottlenecks in EDA (Electronic Design Automation) and extreme ultraviolet lithography. This second technology, which allows the 7nm threshold to be crossed, is the monopoly of ASML, a Dutch company, the second largest in Europe. It is important to understand that the development of semiconductors is a race to miniaturisation. It follows Moore’s law, and for others it is very difficult to catch up technologically when they are excluded from the virtuous circles of innovation that exist between designers, producers, and their various suppliers – and you have fallen behind. China would like to buy this technology, but the current situation means they are totally deprived of it.

What is the European strategy?

Europe has high production capacities with a world leader, ASML, and are concentrating their forces on R&D. Around 20% of the European recovery plan is dedicated to digital transformation, and a new Major European Common Interest Project for nanoelectronics is due to be validated by the European Commission shortly. However, disagreements persist, notably on the choice of market segment. Thierry Breton believes that Europe must produce very high-end products, whereas manufacturers do not see how they can compete with TSMC in this market, where they have a considerable lead.

What roles do countries like Korea and Japan play in the geopolitics of semiconductors?

Each has their own strengths. South Korea, with Samsung, is in the duopoly of high-end engraving and can therefore accompany the major IT leaders in their production of innovative products. Of course, Samsung’s nano-electronics branch feeds its offer to consumers. Japan is a materials giant with companies like Shin Etsu and JSR dominating certain segments of the sector. They have different strategies, South Korea is seeking a balance between China and the United States while being forced to accept the restrictions on technology transfers put in place in Washington, Japan is much more openly playing the alliance card, and is looking to Europe to build the future.

Clément Boulle

China and the race for technological supremacy

Richard Robert, Journalist and Author

On March 23rd, 2022 |

Key takeaways

• At the end of the Cultural Revolution, when China began to reform, a large cohort of educated young people who had been sent to the countryside returned to the cities and became entrepreneurs.
• The Chinese Communist Party then simply let the enterprises flourish before taking over in the so-called “surveillance capitalism” regime.
• In becoming a technological power, China has set itself the goal of making its technological standards world standards to dominate the field of industry.
• The United States is therefore facing the rise of China, creating an existential competition between capitalism and communism.

China’s rise to the top over the last ten years has been spectacular, especially with regards to technology. In many industries, it would appear they are aiming for technological supremacy. Is this part of a grand strategy? Was it predictable?

On more than one occasion, the Chinese Communist Party has been surprised by the consequences of their own policies. At the end of the Cultural Revolution, when China started its economic reform, the country didn’t take into account the impact of a large cohort of educated youth who had been sent down to the countryside and came back to the cities. Because of their “bad” class backgrounds, they couldn’t get government jobs. Many became entrepreneurs. Nobody had factored this in, but over time we saw this entrepreneurship taking hold.

China’s technological development was partly a haphazard process, which the authorities tried, if not to control, to manage. With ICT, the Chinese leadership proved to be very good, with a top-down view that creating a free-market environment would enable experimentation. 

The Party simply sat back and watched as companies fought amongst each other, with the most successful ones making it to the top, before progressively moving in to exercise control over these entities. The tech giants behave in a way similar to what Shoshana Zuboff called “surveillance capitalism”: anti-competitiveness, abuse of consumer data. The Party is now working on regulating these companies, forcing them to leave space for new entrants and to stop exploiting their customers digital surplus.

There is a get out clause: the state can access all of this data whenever it wants. China is also collecting large volumes of Western data, stored in digital warehouses around the country, and private sector companies are pushed to sift through them to find information that could help the Party.

Western governments are still imbued with the idea that not all information needs to be protected. We are only beginning to realise that, aggregated together with other datasets and analysed throughout the filter of artificial intelligence, data which in and of themselves would appear innocuous can be very revealing – in ways that we might not want them to be.

What kind of supremacy is China working to achieve?

As China became a more confident technological power, it began to realise that it could use its growing capabilities to shape the international arena. In areas of cyber-governance and cybersecurity, China has realised that if they can establish their technology standards as the global ones, they can then use their overwhelming manufacturing power and economic reach to become globally dominant in key areas. This is what the USA did during 20^th Century and what we the British did in the 19^th Century with telegraphy. When you wire the world, it gives you a lot of influence and power.

A key objective is to enhance the international acceptance of China’s political and value systems, hence providing security for a Communist Party that lives in constant paranoia. There is also the military dimension. China has been working hard to become a credible competitor to the USA and is on its way to achieving this goal. It is indeed ahead in some areas of military technology such as hypersonics. There is also a huge advantage for China in terms of intelligence as it rolls out its digital “Silk Road,” which is a subset of a much wider global strategy. 

While Russia has considerable cyber strengths, nobody is going to buy a Russian operating system or a Russian computer. Though Russia has been actively thinking about issues of cyber security and cyber governance, it is China that, through its domination and ability to commercialise this technology, is much better placed to make the weather in these areas.

How is the West reacting?

It is now an article of faith amongst the Chinese leadership that the USA is bent on preventing China’s rise. This is a dangerous situation. Mark Twain said, “history doesn’t repeat itself, but sometimes it rhymes”. If you look at Imperial Japan in the 1930s, there are similarities. Put bluntly, if China is backed into a corner and has no other option, it may lash out.

Commercial integration used to be a factor of peace. But this trend has reversed. There has been an overconcentration in the manufacture of strategic commodities in China. Before the Covid-19 crisis the private sector was already starting to diversify its sources. This movement is gaining momentum. The golden era where China was the world’s factory is coming to an end. 

Earlier this year Chinese Foreign Minister Wang Yi said the big question is whether the USA is willing to coexist with a country with a very different culture, values and stage of development. Its external discourse is about coexistence. However, the internal messaging is one of existential competition between capitalism and socialism.

The question is: is there any room for Europeans in this global contest? The EU and the UK lack a basic corpus of expertise and understanding of China. They have great scholars, but their knowledge doesn’t feed through into political awareness. Besides, political and commercial interest might diverge, both at national level or within the EU between net exporters and net importers.

China’s preference would be to deal with Europe as a single, predictable block. Whereas, in reality, it is a kaleidoscope of 27 states, each with very different objectives. The temptation to divide and rule is overwhelming.

Does technology reinforce these trends? So far, it has been unifying the world, but it might become a barrier between two separate worlds in the near future. 

I always suggest my Chinese friends to read Karl Popper on the poverty of historicism. They won’t read Popper because he’s very rude about communism. But his basic point is that you can’t predict the future because you can’t predict how technology will evolve.

Technology can be an empowering force for all countries, not just China and the USA. Take the example of the cheap Turkish drones that were able to alter the military balance in Nagorno Karabakh. Europe can shape its own destiny if it gets the fundamentals right. We need to create an enabling environment for European technology, and then develop applications of existing technologies that would add value and give the Europeans some leverage.

In quantum computing, Europe has a few champions. How do you keep these companies afloat long enough?  In the USA such start-ups would be taken over by one of the big tech companies: in China they would receive generous state subsidies. Can Europe find a way to subsidise its tech start-ups until they can commercialise their research?

5G is stalled at the moment, just delivering faster download times for video. It will stay that way unless we develop the actual applications. If you don’t invest in autonomous vehicles or in robotics, if you don’t authorise adventurous applications for artificial intelligence, 5G will not fulfill its potential.

Europe should also start to move away from the precautionary principle and catch up with technology leaders in fields like AI, biotech and robotics. Data privacy is also an issue: there is a balance between privacy and innovation.

Emerging technologies can serve mankind’s interests if used properly. Maybe in every government committee dedicated to these topics, there should be a couple of career criminals, to be able to anticipate how malign actor might abuse these technologies and hence pre-empt abuse. In any case we need various competencies. 

As such, technology issues should be at the very centre of the political agenda. Last year the Chinese Politburo spent two days looking at blockchain technology. This is how you do it if you want to understand, and to shape, the future.

Richard Robert