By Carlton Joseph
International trade is “war,” where nations seek to extract wealth from other nations in a “peaceful” environment. Unfortunately, the environment is not as peaceful as it looks, because strong nations create the parameters for trading that benefit them, and allow them to extract wealth from weaker nations. Eventually, weaker nations are made so poor, their internal systems breakdown resulting in coups, revolutions or failed states.
Meanwhile, strong nations become stronger, and begin to focus on national security, because they have much more to lose. This focus pushes them toward hegemony in order to eliminate any possibility of a challenge by another strong state. This is precisely the situation today with America and China. America has achieved hegemony in the Western Hemisphere, and fears that China’s economic rise might enable it to achieve hegemony in Asia, the US has decided to stop China rise.
Using trade as the primary weapon, US President Joe Biden declared “economic war” on China when he announced sweeping export restrictions aimed at stopping China from advancing technologically. This new policy toward China implies that it is no longer enough for the world’s largest economy simply to outcompete its economic rivals through technological innovation, it can deploy any mechanisms at its disposal, to stop another state from advancing economically, to guarantee its continued hegemony and economic domination. Weaker states must be concerned because if the US can unilaterally deploy such severe economic trade weapons to maintain economic dominance, then the supposed International rules-based order has no rules. The rules-based order does not, and will never be in the interest of weak states, therefore, they will be forever poor and dependent.
The Center for Strategic and International Studies (CSIS) called this new policy “strangling with an intent to kill.” Not only do the prohibitions cover exports from American firms, but also apply to any company worldwide that uses US semiconductor technology, which includes all the world’s leading chipmakers. Also, the new rules forbid US citizens, residents, and green-card holders from working in Chinese chip firms. In effect, Biden’s goal is to freeze in place the level at which these Chinese fabrication firms have advanced today, and prevent China from buying the world’s best chips and the machines to make them.
The interesting thing about these sanctions are that American companies do not manufacture these chips; Taiwan, South Korea, Singapore and Japanese firms do, but American firms are involved in designing these high-end semiconductors, which gives the US influence over the entire supply chain. Biden is revealing the long reach of US power in a globalized economy. Simultaneously, this show of US power reveals it’s weakness, it acknowledges that it cannot win this competition with China by simply outcompeting them. Biden’s action will only promote the progress of independent high-end chip production in China, and accelerate the development of Chinese hardware and software systems, which will result in US firms losing market share in China’s market. In the “best” case, this policy would buy the U.S. a few extra years of economic dominance at the cost of a peaceful economic relationship that has served both countries and the world well for the past thirty years.
One should recall that the Western world blocked nuclear technology from entering China in the 1950’s, China in turn developed its own nuclear technology, and has the second largest number of nuclear power plants and the third largest nuclear arsenal in the world. China was barred from visiting the International Space Station (ISS) in 2010, today they are nearing completion of their own space station, and completed many visits to the station, with Chinese astronauts. To quote Charlie Munger: “The best thing a human being can do is to help another human being know more.” Biden needs to reevaluate this trade policy.
Rightly, some US companies are beginning to reevaluate their policy of outsourcing its manufacturing capabilities. Intel’s CEO, Pat Gelsinger has vowed to regain leadership in high end chip production technology, and recently broke ground on a $20 billion advanced semiconductor manufacturing facility in Ohio. By announcing its own plans to build semiconductor factories in the US, Intel might have an uphill battle since the dominant players in the chip market have decided to compete directly with Intel.
South Korea’s Samsung Electronics, announced plans to build a $17 billion semiconductor factory in central Texas. The factory will aim to help boost production of advanced logic semiconductors, which are used in phones and computers. Taiwanese chipmaker TSMC announced that it plans to build a $40 billion semiconductor factory in Arizona with construction to start next year. TSMC said the factory will create more than 1,600 high-tech jobs. And, South Korea’s SK Hynix plans to select a U.S. site for its advanced chip packaging plant and break ground around the first quarter of next year.
China is also trying to avoid a trade war with the US. In Indonesia, for instance, Biden and China’s President Xi Jinping agreed to cooperate on shared priorities including climate change, but Biden insisted that its trade measures were tailored to prevent China’s military from obtaining advanced chip technology. China has begun to cooperate with US efforts to ensure that American technology isn’t routed to China’s military.
Europe is anxious about the Inflation Reduction Act, which offers subsidies to US and International companies that invest in certain sectors in the US, including clean energy. They argue that it’s designed to lure investors away from Europe to the US, and would be very inflationary, especially with uncertainties about EU’s energy supplies and an economic war with Russia. French President Macron told Biden: “We have no alternative but to work together. We need to resynchronize together. France, like America, wanted to rebuild its manufacturing base after 50 years of industrial decline. “We want to succeed together, not one at the expense of the other.” I am certain that Europeans agree with his position for Europe.
US allies should carefully consider making moves that would affect their economies negatively, and make them less powerful or more dependent on the US or China; they must recognize that when it comes to global dominance, the US is ruthless with both enemies and allies. For more than a century America has repeatedly intervened in Europe to ensure that no power or coalition of powers dominate the continent. Britain, especially, should remember that after WWII, the US took advantage of its bankrupt empire to gain geopolitical concessions and eminence. British magazine, The Economist, reports that “American economic populism and geopolitical rifts threaten the long-run competitiveness of the European Union, and the continent’s prosperity; and health of the transatlantic alliance, is at risk.
At the ground-breaking ceremony in Arizona, Biden declared that American manufacturing is back. Obviously, Intel building a chip facility in the US does not mean that America’s manufacturing is back. My concern is that America is now operating like a developing country. To entice Samsung, Texas offered property tax breaks of up to 92.5% for the first 10 years, with write-offs gradually declining over several decades. Interestingly, these foreign investments come at the same time that Congress approved $52 billion in direct subsidies for new semiconductor making facilities, plus $24 billion investment tax credit for chip plants.
In effect, taxpayers’ money is subsidizing foreign competitors and making it difficult for smaller local companies to thrive or enter the market. They might provide some jobs, and end reliance on foreign located factories, but these companies will funnel profits back to their country, and therefore extract wealth from the US. America will be weaker in the long run.
(Trinidad-born Carlton Joseph who lives in Washington D.C., is a close observer of political developments in the United States.)