Can de-risking avert supply chain precarity in the face of China-U.S. geopolitical tensions? From sanctions to semiconductor resilience and national security

Abstract

As a main driver of geoeconomic power, technological supremacy is at stake in the current zero-sum tech war between the U.S. and China. Semiconductor chips have become an emerging geopolitical frontier in the rivalry of the two powers. Since the confrontation has intensified, the U.S. seeks to weaponise its dominant position in the global semiconductor value chain (GSVC). Some industrial policy-driven geostrategic approaches inform the race to reduce the GSVC vulnerabilities. The tit for tat nature of sanctions risks making multilateralism decline and further undermining the effectiveness of the global governance regime. Shifts in rising economic competition highlight the constraints on collective action. It remains critical as to whether the international economic and legal system can survive the current fractured geopolitics, and whether the new thinking on global governance could be viable for a non-zero-sum game.

1 Introduction

Economic competition has steadily merged with geopolitical and ideological rivalries into one race for global dominance.¹ In the digital era, China and the U.S. are vying for dominant position, which has become a main global geostrategic issue.² A battle for technological supremacy in quantum computing, artificial intelligence (AI) and semiconductors lies at the heart of the competition. As the driving force behind the innovations poised to revolutionise life for years to come, semiconductor supremacy is essential to the future competition of global power. The issue of who controls the semiconductor industry carries geopolitical significance. Powering the 21st-century economic growth, chips are the lifeblood of the modern economy, and the brain behind every electronic system.³ The foundational technologies determine how the future of the global order will be reshaped. Whoever dominates chip manufacturing will be advantaged in the global market. As the backbone of a digital economy and a choke point, microchips allow the U.S. to increasingly impose tougher restrictions and more punitive measures. A series of tit-for-tat trade sanctions have embroiled the two powers in a tech war. In particular, the sweeping controls of October 2022 trigger the U.S. most massive escalation in the geopolitical tensions. These measures represent a major watershed in U.S.-China relations, and the global economic order has dramatically changed. The growing rivalry has the potential to magnify out of control and cause irreversible damage.⁴ This study seeks to examine whether the use of wide-ranging sanctions could work to ensure dominance in critical technologies.

Going into a deeper layer, the Fourth Industrial Revolution (4th IR) underpins the current contest of values between authoritarianism and democracy.⁵ It remains to be seen whether the international legal and economic system could survive the current contentious and fractured geopolitics.⁶ A core inquiry is how democracies can deal with China without sacrificing their core values. Geopolitical, policy, and economic implications of the U.S. restrictions are to be explored and a roadmap to be navigated for a non-zero-sum game between the major powers. It is proceeded with five parts. Part I starts with U.S. multipronged controls and resurgent industrial policies, which potential leverage is deployed to restrain China’s semiconductor advancement. The U.S. uses its dominance on global semiconductor supply chains (GSSCs) or the global semiconductor value chain (GSVC)⁷ as a geo-economic weapon to block China’s access to advanced chips. It is uncertain whether its allies will impose similar controls when the U.S. attempts to launch sanctions in tandem with them. Part II examines China’s response to the U.S. geostrategic sanctions that has led to Chinese countermeasures, of which the Micron action is widely seen as a retaliation. This part further discusses how China would level an uneven playing field because of its nonmarket economic behaviours. Part III investigates hardening geopolitics impacts based on a theory of an intersectoral espionage and national security. It analyses how firms in crosshairs contend with rising geopolitical risks when their home and host states incline to punish the rivalries. Part IV discusses a multipronged governance strategy for conflict resolution to break the deadlock. Decoupling is being accelerated through a combination of protectionism and geo-strategically driven approaches. In view of barriers that prevent the playing field level for competition, this part questions the prevailing one-size-fits-all approach to multilateral governance. It is argued that a zero-sum approach will harm both sides. New thinking based on innovatively conceptual pillars will help to find an innovative roadmap for the sake of restoring a mutually beneficial relationship. A concluding remark will be given at the end of this research.

2 U.S. multipronged tech controls and resurgent industrial policy

American technology’s deep involvement in designing high-end semiconductors gives the U.S. leverage and influence over the ecology of the whole GSSCs. Geopolitical risks have propelled shifts of U.S. semiconductor policy from laissez faire to interventionism. Through the restructure of GSSCs, the U.S. exercises technological and geopolitical power to weaponise its dominance and further aims to sustainably preserve America’s lead in critical technologies. Realising the potential of the Creating Helpful Incentives to Produce Semiconductors for America and Science Act (CHIPS Act 2022) will require a rethinking of this global strategy. As China and the U.S. compete for technological supremacy, the U.S. semiconductor policy would be better implemented with multilateral approaches among those like-minded allies.⁸

2.1 Sweeping new controls

The U.S. has been pursuing a far-reaching strategy to alleviate the U.S. economic reliance on China. The foremost design software and intellectual property have been feeding China’s advances in AI, quantum computing and semiconductors. Such an ecosystem enables the U.S. to escalate sanctions with deep leverage in frontier technologies. A new two-pronged strategy enshrined in the CHIPS Act 2022 is aimed to incentivising U.S. investments in the production of advanced chips while denying China’s access to advanced semiconductor-manufacturing equipment. The extraterritorial effect of the Foreign Direct Product Rule (FDPR) helps to tighten the restrictions.⁹

2.1.1 CHIPS Act 2022

The U.S. endeavours to strengthen the innovation ecosystem and bolster its competitiveness and self-sufficiency. The Innovation and Competition Act (ICA 2021) identifies sanctions as central to strategic competition with China. Seeking to revitalise American supply chains, the CHIPS Act 2022 provided $ 52 billion to subsidise the semiconductor sector to ensure that the GSSC is resilient in case of potential disruptions caused by hostile states. The law represents the first step in addressing threats to its leadership in advanced semiconductor. The legislative intent is to deter China’s tech industry from catching up with U.S. counterparts. The controls ban sales of advanced semiconductors that are vital for the development of AI, supercomputers. As to the Moore’s Law, the approach could only help the U.S. expand its lead in key technologies.¹⁰

2.1.2 Executive approaches: foreign direct product rule (FDPR)

The U.S. Department of Commerce (DoC) imposed additional export controls on semiconductor electronic design automation (EDA) software in an attempt to eradicate China’s entire ecosystem of the latest technology for military purposes.¹¹ Executive Orders (EOs) further restrict the use in the U.S. of foreign telecommunications technology that raises national security concerns.¹² On 7 October 2022, the DoC’s Bureau of Industry and Security (BIS) imposed severe restrictions, which was seen as a declaration of chip war on China.¹³ On the basis of the FDPR and a global reliance on U.S. technologies, the far-reaching mechanism of these controls have extraterritorial effect in scope.¹⁴ Since the FDPR went into effect on 21 October 2022, it in effect bars any firms from supplying targeted Chinese entities with hardware or software containing American technology. On 9 August 2023, an Executive Order (EO) banned new American investment in critical technology industries that could be deployed to enhance China’s military and intelligence capabilities.¹⁵

The strategic move implies a fundamental shift through launching controls to address national security objectives. These measures significantly expand the BIS’ ability to curtail technology transfer to China. The goal of the above legislative and executive approaches, tailored to strategically guard national security, is to help fortify American ability to produce advanced technologies. The restrictions indicate a zero-sum approach and escalate the confrontation over semiconductor supremacy, exemplifying a major step towards U.S. decoupling from China. In principle, it makes it harder for China to develop quantum computing and AI technology. The effectiveness of the U.S. restrictions largely depends on the collaboration of U.S. allies. It all comes down to how the U.S. will enforce these measures.

2.2 Strategic alliances with like-minded countries to hinder China’s semiconductor development

The chip industry is characterised by a web of mutual interdependence. It is unlikely that any firm, or even country, can own the whole GSSC and control all the parts of the design and manufacturing process. The U.S. intends to create a global chip alliance in furtherance of its more chip self-sufficiency.¹⁶ The policy is restricting U.S. exports of the most advanced tools from advancing China’s semiconductor-making. Multilateral controls would be more effective than unilateral ones, whereas the latter raise major concerns over efficacy and effect. Through more coordinated export restrictions, the U.S. pursues to secure more resilient GSSCs among trusted allies. The effectiveness of these measures depends largely on whether allies ultimately agree to impose similar controls.¹⁷

2.2.1 Implement sanctions multilaterally with like-minded allies

The semiconductor industry relies on a GSSC that is highly interconnected, which needs capabilities across countries. The effect of sanctions requires the U.S.’ likeminded allies to coordinate for greater leverage. A few leading companies control all of the upstream ends of the GSSC, in which the U.S., Taiwan and Netherlands control key chokepoints. American firms design three-quarters of all semiconductors, Taiwan Semiconductor Manufacturing Company (TSMC) manufactures over 90% of advanced semiconductors.¹⁸ China will not be capable to develop its nascent industry and make less than seven-nanometre level chips, unless it uses extreme ultraviolet lithography machines monopolistically made by the Dutch firm ASML. With its technological dominance of key chokepoints and controlling hyper-globalised semiconductor value chain, the U.S. strategy relies fundamentally on allies to counter China in making advanced chips.

The U.S. seems to solely bear the diplomatic and economic costs of imposing unilateral controls.¹⁹ American firms may be put in a disadvantaged position before China is prohibited from purchasing critical supplies from other foreign competitors. The sanctions tend to be less effective because the same items can be purchased from non‑U.S. suppliers. If the U.S. allies do not impose similar restrictions, but provide alternatives, the efficacy of U.S. sanctions will be eroding, and may even be counterproductive to America’s own economic and geopolitical interests. In consequence, unilateral controls could undercut the effectiveness of the U.S. deterrence efforts and compromise the U.S. national security and economic competitiveness. It would be against wisdom for the U.S. to punish China significantly enough to jeopardise its own business interests in China.²⁰ If so, the restrictions will hit profit margins at some large high-tech firms. For instance, Nvidia will lose the most because China accounts for around one quarter of its revenues from chip sales.²¹ A complete ban on U.S. chip sales to China would cost U.S. semiconductor firms 18% of their global market share and 37% of their revenues.²² The Export Control Reform Act (ECRA 2018) provides that: “Export controls should be fully coordinated with the multilateral export control regimes.”²³ In order to command the full semiconductor ecosystem, the U.S. has been building an alliance of like-minded partners to thwart Chinese efforts in AI and quantum computing, crucial to China’s goal for indigenous innovation. Nevertheless, some of them are reluctant to cut off trade with China, lest they could lose sales in the world’s largest lucrative technology market. The U.S.-led sanction regime will not be effective unless the allies adopt an aligned posture and impose similar measures, that is, turning these unilateral approaches into multilateral controls.²⁴

2.2.2 Exterritoriality of control measures

The extraterritorial effect helps to anchor the effectiveness of U.S. sanctions through inducing third nations to take similar measures.²⁵ The extraterritoriality of restrictions affects every firm regardless of where it is located, as long as it uses American technology. The U.S. has been pursuing extraterritorial measures to reshape the semiconductor ecosystem, where allies fail to comply with the restrictions. Such an approach is to ensure the strategic re-shoring within the confines of the U.S.²⁶ ASML and Samsung had been reluctant to abandon China’s market to align with U.S. sanctions. Apart from its geopolitical power, the U.S. dominance of chip design makes it an influential player with leverage within the ecosystem.²⁷ It is thus capable to threaten some firms with exclusion from the U.S. market unless they ban sales to China. As a result, certain key suppliers had to cut ties with some Chinese chipmakers. Redesigning its GSSC plans, TSMC has strategically decided to start production in 2024 and manufacture 4 and 5 nm process technology chips in the U.S.²⁸ The Netherlands eventually revoked ASML’s export license to China. Furthermore, the spill-over effect invariably compromises the implementation of the Regional Comprehensive Economic Partnership (RCEP), of which China, Japan, and South Korea are all main members. The U.S. sanctions inhibit the global trade alliance, although Japan and South Korea have expressed reservations about its industrial policy drive.²⁹ After all, some allies need time to reform their laws and regulations and put new restrictions in place. The challenges make it harder to predict how effective the restrictions will be. At stake is how much longer the U.S. and its allies can sustain the technological edge, which underlies the U.S. geostrategic policy of national security.³⁰

2.3 Resurgence of protectionism and strategical alterations of industry policies

The chip industry has become a key part of geopolitical competition.³¹ The interventionist school holds that unfettered capitalism can lead to imperfect results, and trade is not win-win, but win-lose in the sensitive sector of critical technologies.³² The CHIPS Act enables private actors to gain subsidies to fulfil the public role on a non-market basis.³³ The subsidies are not only an indicator of the rise of economic protectionism, but also reflected in reshoring policies.³⁴ U.S. industrial policy enshrined in the CHIPS Act 2022 is partially aimed at protecting national security. There is, however, a strong need to put substantial guardrails around the strategic shift. It is imperative that U.S. industry and government work in tandem to reinvigorate a more sensible GSSC.³⁵

2.3.1 China’s playbook?

The decline is visible in terms of liberal norms and institutions. The U.S. has previously objected to government subsidies for private sectors, like China’s Huawei. It has long criticised China for its use of subsidies to gain an unfair competitive advantage.³⁶ Nevertheless, the U.S. embraces major market intervention to maintain its high-tech hegemony through bolstering the semiconductor sector. The protectionist and nationalist-driven policy is steadily being shaped on the ground of national security. Gradually abandoning the policy of deregulation, it is shifting to the adoption of an industrial strategy.³⁷ The initiative is akin to China’s dual-circulation model in that the approaches combine an industrial policy element. The U.S. Innovation and Competition Act (ICA 2021) envisions an active role for government in the economy. The CHIPS Act 2022, a watershed in U.S. economic policy, replicates China’s industrial policy, and plays the Chinese playbook.³⁸ Through wrestling control of the free market, the U.S. has mirrored China’s state-driven approach, and weaponised sanctions to further America’s national interests. It seems to be a new normal for the government to strengthen the competitiveness of the semiconductor industry. The rationale behind this shift is that markets do not properly function on their own. However, the deployment of industrial policies should be consistent with international commitments.³⁹ A risk of subsidy wars should be nipped in the bud between China and the West.

2.3.2 The theoretical lacuna in the post-Neoliberal era: productivism vis-à-vis nationalism

The interventionism departs away from pure laissez-faire economics. During the last half century, the concept of neoliberalism has laid solid foundation for political economy, while the governmental intervening approach has generally been on the margins.⁴⁰ Embracing free market principles, the neoliberal economic doctrine has prevailed for the most profitable returns.⁴¹ Conventionally, it is international law that constrains protectionism and nationalism so that markets could properly function to ensure a thriving economy.⁴² Washington Consensus came into being that is characterised by global market integration and liberalisation. Nevertheless, the deviation of global economy from national interests fuels the resurgence of nationalism and protectionism,⁴³ which will leave the global economy and GSSCs more fragmented.⁴⁴ Supported by classic industrial policy considerations, reshoring embraces economic nationalism.⁴⁵ Rodrik describes the emerging industrial policy as an illustration of a “new doctrine of productivism”, which recognises the critical role of government.⁴⁶ Productivism leaves less faith in markets, thereby revitalising nationalism over globalisation.⁴⁷ It focuses more on the supply side of the economy to create economic opportunity.⁴⁸ To support supply-side investments to strengthen its economic capacity, the U.S. has passed a series of laws, including the Infrastructure Investment and Jobs Act, the CHIPS Act 2022, and the Inflation Reduction Act. The legislative approaches entail enormous government interventions for the U.S. to remain chokepoint control of the GSSC. These measures are a departure from conventional minimum intervention approaches that have kept the West ahead in key technologies.⁴⁹ The rhetoric toward reversing globalisation raises a controversial issue about whether subsidies race represents sound economics.⁵⁰ The European Chips Act (ECA 2023) marks the European Union (EU) joining the global subsidy race.⁵¹ The ECA 2023 gives the Commission more power to shape the EU’s role in GSVCs, which may diversify supply of high-end chips outside of Taiwan, lower-end chips away from China. Nevertheless, the economic efficiency arising from specialisation may theoretically argue against reshoring.⁵²

On the one hand, the EU and the U.S. complement each other and seek to provide an effective counterbalance to Chinese economic pressure globally.⁵³ On the other hand, the EU urges de-risking ties with China, and seeks to maintain its position between the two powers’ confrontation over technology supremacy.⁵⁴ The tit-for-tat retaliations ultimately produce counterproductive effect to the detriment of both national interests, let alone achieving due resilience in GSSCs.⁵⁵ The repercussions are thus manifested in steering the American mindset toward interventionism, which doctrine harms people’s well-being.⁵⁶ Shih argued that the laws may reflect a sustainable and equitable approach to industrial policy.⁵⁷ Whether to deploy industrial policy depends primarily upon whether the government intervention could produce more positive results than a more relatively laissez-faire approach.⁵⁸ A rethinking arises about how to strike proportionate balance between global and national interests.

2.4 Potential repercussions over China’s advanced chip industry

The escalating U.S. sanctions strike a heavy blow to stymie China’s efforts to become self-reliant. It is the interconnectedness that makes the industry vulnerable to regulations. Much of China’s production is in the lower end of GSSCs. The U.S. uses export controls to prohibit China from accessing American strategic assets and further imposes costs on the adversary when the latter attempts to develop its own upper end of the supply chains.⁵⁹ Its comprehensive restrictions are aimed at deterring the country from upgrading its high-tech power. The multipronged controlling regime goes beyond an Entity List of dual-use technologies.⁶⁰ The measures deprive Chinese firms of access to critical U.S. technologies, which could face punishment in case of circumventions. The policies are de jure a license requirement but de facto a ban or even a technological death sentence,⁶¹ which would create an effective embargo.⁶² They in effect prohibit export of any U.S. critical components to China capable of high-end semiconductor-making. The severity of the U.S. regulations will potentially jeopardise and even weaken China’s capability to indigenise its semiconductor industry.⁶³ The sanctions will hurt China’s plans to achieve self-sufficiency and hamper the country’s development of 5G infrastructure.⁶⁴ The sanctions have been by far the most sweeping approach to stymie the advancement of China’s semiconductor industry. The effects have been going far beyond deterring China’s military advancements, they are also threatening the country’s economic growth.

3 China’s response to the U.S. sanctions

China intends to safeguard its sovereignty and strategic autonomy in the pursuit of technological supremacy.⁶⁵ It strongly advocates that national security is the bedrock of national rejuvenation.⁶⁶ The sanctions highlight China’s technological dependence on the U.S.-led ecosystem, which poses a national security risk. The “Whole Nation” approach is crucial for China to become less dependent on Western supply chains.⁶⁷ The U.S. leverage would, in principle, fade provided that China could develop its own cutting-edge chip production. It is also concerned that the sanctions would trigger retaliation from China.

3.1 China’s retaliation

The U.S. expanding controls out of tech hegemony has triggered China’s retaliation. It has established a comprehensive legal framework to counteract the enforcement of foreign sanctions against Chinese firms. Besides issuing controls on the export of rare metals geranium and gallium, China has banned the U.S. chip giant Micron Technologies, which may, to some extent, influence the manufacture of chips around the world.

3.1.1 Statutory approaches in maintain the U.S. supremacy in semiconductors

The U.S sanctions may involve risk of triggering countermeasures under the Anti-foreign Sanctions Law (ASL 2021). The law provides that: “China is entitled to take countermeasures, if any foreign country takes discriminatory restrictive measures against Chinese entities.”⁶⁸ The ASL 2021 targets “conduct that is detrimental to China’s national sovereignty, security and development interests.”⁶⁹ The law shares many of the same features as the EU Blocking Statute, while seeking to mitigate the impact of the extraterritorial reach of foreign sanctions.⁷⁰ It provides a mechanism to invalidate the long-arm jurisdiction of foreign laws and regulations. To safeguard China’s national security, the Foreign Relations Law (FRL 2023) deepens China’s control over its external relations.⁷¹ The law enshrines two hallmark policies, i.e. the Global Security Initiative and Global Civilisation Initiative, which serve as China’s alternative to the U.S.-oriented order.⁷² The FRL 2023 requires foreign persons in China not to infringe national security, do harm against public interests or disrupt public order.⁷³ Similar to the ASL 2021, China is vested with a legitimate right to take “countermeasures and restrictive measures” against acts that compromise its sovereignty, security and development interests, and breach international laws or violate “basic norms of international relations.”⁷⁴

The FRL 2023 is likely to provide a firmer legal basis for China’s diplomatic response against western export controls. The law is also viewed as legislative response to China’s new challenges resulting from unilateral sanctions and long-arm jurisdiction. It is assumed to be a counter charge against western hegemony and a reaction to the EU-initiated de-risking strategy.⁷⁵ The laws strengthen China’s legal backing for countermeasures against potential threats to its national security. Furthermore, the Counter-Espionage Law (CEL 2023) came into effect on 1 July 2023,⁷⁶ expanding the government’s investigatory powers. Institutionally, the State Council is authorised to coordinate China’s ministries to enforce retaliatory measures.⁷⁷

3.1.2 Retaliation silos—A ban on U.S. chipmaker Micron’s products from critical infrastructure

China has retaliated by imposing restrictions on access to critical raw materials and its markets, since the country has approximately a third of the market share in the global semiconductor sales. The U.S. Executive Orders (EOs) have prompted these continued escalatory retaliations. China has taken punitive measures, particularly limiting the export of gallium and germanium, which produces 80% of the former and 60% of the latter in the world.⁷⁸ That China exerts influence over other countries through leveraging these critical materials has triggered the rise of resource nationalism, and further poses a significant geopolitical challenge.⁷⁹ In addition, China has retaliated with countermeasures through exercising its market leverages over crucial technology. In the escalation of a tech war, Micron suffered a serious blow due largely to a plausible failure in a cybersecurity review. As the Cyberspace Administration of China (CAC) held:

“The review found that Micron’s products have serious network security risks, which pose significant security risks to China’s critical information infrastructure (CII) supply chain, affecting China’s national security.”⁸⁰

The ban came just a day after the Group of Seven (G7)’s new initiative to “De-Risk, Not Decouple” from China.⁸¹ Seen as apparent retaliation, the ban represents the latest tit-for-tat response to the U.S. and its allies’ joint controls. As Allen observed, the timing of China’s action “reinforces perceptions of the retaliatory nature of the sanction”.⁸² The ban could affect roughly an eighth of Micron’s worldwide revenue,⁸³ implying a major blow against the U.S. chip maker during increasingly escalated confrontations between the two adversaries. This could have a chilling spill-over effect given Micron’s Chinese customers were set to replace its memory chips. The effectiveness of this ban depends largely upon whether the U.S. allies would have the most to gain from the Micron ban and have other foreign competitors take advantage.⁸⁴ The CAC’s decision is seen as a de-risking measure to enable China to mitigate further reliance on western supplies. However, any further retaliation would make China to have potentially more to lose than the U.S. Being the greatest beneficiary of globalisation, China’s gains have been extraordinary, and its exports had surged to 12.7% of world exports by 2021.⁸⁵ After all, the ASL 2021 and its own Unreliable Entities List (UEL) have not shown teeth so far. The counteractive effect out of positivism may have dialectically justified the U.S. advocation to make Western manufacturers less reliant on China.⁸⁶

3.2 Supply chain resilience-The whole nation system

Semiconductors are the Achilles’ heel of the Chinese economy.⁸⁷ The U.S. sanctions have exposed the vulnerabilities, which have propelled the country to accelerate its pace of improving China’s chip capabilities. The production requires access to complex GSCs, which are inexorably tied to U.S. technology. A major innovation challenge is the lack of indigenous capabilities in high-value digital hardware, particularly semiconductor logic chips.⁸⁸ China’s economy will remain vulnerable unless it can manufacture a cutting-edge chip. It lags far behind the U.S. and its allies, which will take years for China to catch up in the design of advanced chips.⁸⁹ At the current stage, it is unlikely that China could replicate the immense complexity of the globe-spanning supply chains.⁹⁰ For instance, without ASML’s latest machine, China cannot produce in scale the most advanced chips. The choke points leave China vulnerable amid the trade war and represent an intolerable situation for the country.⁹¹ The Chip self-sufficiency has become China’s paramount industrial policy goal. In order to achieve breakthroughs, China has reactivated a Whole-Nation system.

China ambitiously intends to become self-sufficient to dominate in the most advanced semiconductor technologies. Its “Made in China 2025” strategy aims to vastly increase domestic production of high-end chips.⁹² The 20th National Congress called for China to “increase the security and resilience of its own industrial supply chains.”⁹³ Its 14th Five-Year Plan advocated the development of self-sufficient semiconductor supply chains to minimise exposure to foreign sanctions.⁹⁴ A dual-circulation strategy highlights the insulation of Chinese domestic market from foreign disruption while maintaining its global market share.⁹⁵ The cornerstone of the industry policy framework is to foster domestic technological self-sufficiency. In this regard, the U.S. sanctions could serve as a catalyst for China’s self-sufficiency. Under the ‘Whole Nation System’, the potential derailing of China’s progress will likely backfire.⁹⁶ Navigating its own path, China tries to show that a highly centralised nation can be as technologically advanced as the West. The current deadlock could provide massive incentive for China to race to develop an alternative ecosystem to Compute Unified Device Architecture (CUDA), which could potentially harm Nvidia sales globally.⁹⁷ The unintended two sperate digital ecosystems would inevitably increase costs for all semiconductor end-users around the world.⁹⁸

4 Hardening geopolitics impacts global trade and investment: espionage and national security?

Semiconductor chips have emerged as a key priority of national security, which takes precedence over business concerns. The West views China as a global champion of authoritarianism.⁹⁹ The current trade war is inherent in economic interdependence between China and the U.S. with clashing ideologies and security interests. The two powers recognise the need for greater sovereignty of GSSCs to ensure their security. The most advanced chips are critical for the military and economy. As a crucial component, they play a determinant role in protecting national security and foreign policy interests. In particular, the GSSC security includes the risk of cutting off supply by a hostile foreign government. The way in which the challenge is to be responded will reshape the landscape of global technological and economic power in the next decade to come.

4.1 China’s pursuit of military-Civil fusion

Semiconductors are of crucial military as well as economic importance.¹⁰⁰ They are used to power most modern electronics, and train AI systems, which will determine who wins in the future global economy. A country which can produce advanced chips will dominate in economics and military affairs. Whoever controls the upper end of chip supply chains will seize supremacy in the battlefield as well as the market.¹⁰¹ The chip-integrated AI systems propels a new era of weapons and surveillance equipment.¹⁰² Either weapons or civilian tools depends upon who controls the software, and notably, they can be “converted civilian tools to military weapons, and vice versa”.¹⁰³ Advanced chips have de facto fed into Chinese military and surveillance programmes that run counter to the U.S. national security interest. China’s “military-civil fusion” strategy presents a substantial challenge for the U.S., given shell companies help Chinese entities evade export controls and gain access to critical technology.¹⁰⁴ Through creating sophisticated networks to circumvent the sanctions, the firms will be used for advanced chip production. Thus, the U.S. seeks to defend its national security since some sensitive technologies are critical to the next generation of innovation, which can be dually used for military purposes. It does not distinguish technologies and blur the line between China’s civilian and military purposes.¹⁰⁵ The policy to stymie the Chinese military development is arguably seen as a rational response to heightened geopolitical threats. Otherwise, the lack of adequate justification would leave a sanctioning government open to losing credibility in global governance.

4.2 Would national security justify the U.S. sanctions under the WTO law?

Chinese measures under the ‘military-civil fusion’ scheme may risk harming the U.S. semiconductor ecosystem. In this vein, U.S.-China trade is supposed to be underpinned under the World Trade Organization (WTO) law to ensure impartial adjudication of disputes. Ostensibly, national security considerations restrict flows of technology and data. China has launched a WTO lawsuit complaining that the U.S., on the ground of national security, abuses export control to threaten the stability of GSSCs.¹⁰⁶It has criticised U.S. economic protectionism for undermining the rules of trade liberalisation, and that the U.S. has used “vague national security reasons” to suppress competitors.¹⁰⁷ The U.S. countered that the WTO was not the appropriate forum to settle concerns related to national security.

Mere national-security argument used to justify the new restrictions simply does not add up.¹⁰⁸ An open multilateral trading system benefits the entire global economy. It is the neoliberal philosophy that has given birth to the global institution of the WTO. The Sino-Western integration has boosted the global economy and fostered prima facie greater geopolitical stability, since China’s accession to the WTO in 2001.¹⁰⁹ Leveraging the weight of U.S. trading partners within the WTO would have been a more effective way to deal with China.¹¹⁰ In this perspective, the WTO system could recalibrate the nature of both sides’ approaches, and determine whether they are compatible with WTO rules and norms.

In principle, the WTO should have worked more effectively on such thorny issues confronting the increasing clashes between China and U.S. Currently, the legitimacy of the WTO rests upon whether it is still an appropriate venue for pursuing of trade liberalisation and whether its dispute-settlement mechanism can effectively adjudicate complaints over national security.¹¹¹ In reality, if the WTO can do less and less, then its legitimacy would be significantly diminished. One of the main challenges has been the friction regarding the interpretation of the trade rules.¹¹² More specifically, China’s model of state capitalism represents unprecedented challenges facing the current multilateral system.¹¹³ It knows how to strategically exploit economic opportunities under the WTO system with the West.¹¹⁴ It is the slow pace of reforming the WTO that is exacerbating the current crisis. The failure of the WTO to regulate the national security issue has eroded confidence in the international trading system. The WTO is supposed to play a main part to accommodate China’s unique geopolitical position. As Mavroidis and Sapir observed, it should “function well to accurately translate some of its implicit principles into explicit treaty language”.¹¹⁵ Apparently, the WTO need to initiate efficient reforms to renew confidence within the multilateral institution.

4.3 Multinational corporations (MNCs) in crosshairs

The growing geopolitical tensions cast a shadow over the semiconductor industry as firms need to navigate rising uncertainties that could impact their GSSC strategies.¹¹⁶ Given that national security overrides MNCs’ need for higher profits,¹¹⁷ geopolitical risks have complicated their cross-border transactions.¹¹⁸ Export controls due diligence has become a challenging issue. It is sensible for multinationals to integrate de-risking into their risk calculus and focus on making GSSCs more resilient to disruptions.¹¹⁹

4.3.1 A proverbial deadlock between a rock and a hard place: due diligence and resilience

Regulatory changes have significantly amplified risks of noncompliance and put MNCs in the crosshairs of national security policy.¹²⁰ The two powers increasingly incline to adopt state-centric and security-oriented economic policies, for the sake of strengthening controls on markets, key minerals and critical technologies.¹²¹ Conflicts of laws will arise when China uses market access as a bargaining chip to counter U.S. sanctions, which inevitably affects MNCs when they operate across the two jurisdictions. The U.S. purports to require firms to comply with its sanctions, which manifestly infringes on their home states’ sovereign right to set their own foreign policy.¹²² However, China’s Anti-sanction law (ASL 2021) was designed to penalise firms if they comply with U.S.’ extraterritorial sanctions. With extraterritorial effect, coercive measures are applied to MNCs using American technology to take sides. The combination of the extraterritorial effect of U.S. sanctions and the retaliatory effect of the Chinese ASL 2021 has created a clear risk of conflicts of laws.¹²³ MNCs are thus caught up in a proverbial deadlock between a rock and a hard place and forced to take a side. They may find themselves subject to competing legal requirements and compliance obligations. The leverage may serve as a kind of compliance test, of which the onus will fall largely on MNCs.

4.3.2 Separate China businesses from the rest of their global footprints

MNCs are supposed to operate as close to the edge of legality as possible, and their Chinese counterparts will have every incentive to game the system.¹²⁴ It remains an enormous challenge as to how MNCs can efficiently handle their geopolitical risk assessment to mitigate potential national security risks without damaging their global commercial interests.¹²⁵ They may strategically restructure their businesses and decide not to completely pull out of China.¹²⁶ They may move overseas both to reduce their U.S. regulatory and reputational risks. If an MNC isolates China businesses from the rest of their global footprints, it will still be able to make profits, while complying with the U.S. sanctions without affecting their business elsewhere.¹²⁷ Furthermore, MNCs must proactively reduce some relevant political and legal risks triggered by the export restrictions.¹²⁸ Adequate ccompliance entails additional due diligence efforts to identify end users, which should be factored into their global strategic moves.¹²⁹ A rule of thumb is that western MNCs should always consider identifying any China-nexus in a proposed transaction and assess how it may be impacted.¹³⁰

5 Break the deadlock: a multipronged strategy for conflict resolution

China and the U.S. are increasingly departing away from the narrative of globalisation. The U.S. strategically seeks to maintain its current dominance in shaping global rules in technology, information and data (TiD).¹³¹ A real challenge facing the U.S. is how to accommodate China’s continued rise and engage in trade and investment while maintain its core values. It is unviable for the West to sustain a global institutional architecture through engaging only to those which share same values. The U.S. cannot afford the exclusion of China from its multilateral arrangements of global governance, lest the latter would spearhead more costly alternatives. The cost of decoupling will considerably outweigh the benefit. It is imperative to have new thinking to manage strategic relations between major powers with different institutional and political arrangements.

5.1 G7’s Non-Decoupling but de-risking: a comprised rhetoric?

Geopolitical conflicts and national-security concerns are intensifying across all dimensions of trade and accelerating the deglobalisation process.¹³² It seems that there is no end in sight for Sino-Western decoupling. The U.S. dominated ecosystem allows it to influence its allies to expand the scope of decoupling,¹³³ which means cutting off the interdependence in strategically sensitive sectors. Friend-shoring involves choosing suppliers based on pure domestic industrial policy objectives.¹³⁴ In terms of subsidising the domestic production and offsetting present efficiency costs, the politically-driven GSSC restructuring approaches cause potentially significant costs to the public good.¹³⁵ This would continue destabilising for the global economy, given the escalation of American restrictions on exports of advanced technologies to China.¹³⁶ Decoupling would bring about economic disruption, resulting in slower global economic growth. China’s prolonged economic slowdown will increase the risk of a global recession. The restrictions do not put more weight on a complex network behind the production, but only deal with the visible part of the GSVC.¹³⁷ Less interdependence and short-term policy engagement will carry its own repercussions.¹³⁸ The approach would be calamitous for the two powers and even the global economy.¹³⁹

The world benefits greatly from an interoperable system in globalised economies, while decoupling would unravel decades of successful economic integration.¹⁴⁰ The focus on de-risking in lieu of decoupling indicates that the West tries to reduce reliance on China on the GSSC but not cut ties entirely.¹⁴¹ As the two powers move toward technological de-risking, the takeover of international economics by geopolitics is shaking up globalisation and further the global economy.¹⁴² Given that trade with China is inherently risky, the de-risking is the compromised rhetoric to address how to ensure resilient effective supply chains.¹⁴³ Orthodoxically, the risk must be managed and alignment be placed on the basis of commitment to open economies.¹⁴⁴ Less confrontational, but more diplomatic as it is, the de-risking may introduce opacity into the global trade system, and further lead to enforcement challenges.¹⁴⁵ Initiated from the EU, the move bears the hallmarks of a more agile emerging “small yard, high fence” doctrine, which is created to protect critical technologies.¹⁴⁶ The de-risking strategy may prevent China from undermining the U.S. security through exploiting the latter’s fundamental technologies. A substantial challenge is how to build ‘yards and fences’ and when to allow competition. Given the initiatives have prompted serious concerns of a possible global economic decoupling, it is more sensible to address how to di-risk from China enough to reduce the threat of coercion, without triggering tit-for-tat retaliation that causes unnecessary damage.¹⁴⁷

5.2 New thinking in the confrontation

The U.S. and China are locked in an increasingly intense rivalry in terms of economic competition and national security.¹⁴⁸ They are competing to acquire supremacy to shape the global order in ways most advantageous to their geoeconomic and political systems.¹⁴⁹ The competition in GSSCs seems to have created new frontiers for confrontation, in which the U.S. has used technological power to weaponise its dominant choke-point positions. Behind the game is the U.S.’ concern that China would reshape the global playing field to its advantage.¹⁵⁰ The real effect will be to curtail China’s development in semiconductors that will be critical to its global power.¹⁵¹

5.2.1 Theory of Thucydides’ s trap in the Sino-U.S. tech war

A global power would be one that masters the military, economic and technological domains.¹⁵² Thucydides’s Trap refers to a seemingly inevitable conflict that arises when an emerging power challenges an established hegemon.¹⁵³ It serves as best lens to understand the most critical foreign policy issue, i.e., rising powers will often clash with incumbent ones.

The Sino‑U.S. competition over geopolitical influence is epitomised in this hypothesis. A full-scale technology war is one for economic dominance between the U.S., an incumbent superpower and China, a rising challenger. To protect core security interests and retain hegemony, the former’s controls on technology access have brought about an unprecedented global conflict of tech trade.¹⁵⁴ A rising China is perceived as a power to undermine the rules-based international order.¹⁵⁵ Playing an enhanced role in global governance, China seeks to reshape the rules of the global order. It tries to demonstrate that mercantilism can be an effective economic strategy.¹⁵⁶ As the main competitor at a global stage, China has both the intent and power to reshape the international order.¹⁵⁷ The Beijing Model may have eroded the belief that free markets represent an irreplaceable development strategy, which could make the West possibly question the free-market ideology and rethink its own orthodoxy.¹⁵⁸ The geopolitical race behind the chip’s restriction has intensified, which makes the tensions escalate into a Cold-War competition.¹⁵⁹ China accuses that the U.S. severely seeks to stymie its semiconductor development. The two powers must avoid unintended escalation of conflicts due largely to exaggerated misperceptions about changing power relations. In this regard, the U.S. may need to strike a balance between treating China as a geopolitical rival and a business partner.¹⁶⁰

5.2.2 Real threats vis-à-vis false narratives

Plausibly negative rhetoric associated with strategic competition makes it unviable for effective multilateralism. Such a threat theory has been amplified by more ideological hypothesis and reflective misconceived concerns than a credible assessment of real risks.¹⁶¹ The U.S. may weaponise dollars and strategic asset against increasing adversaries. Although the 2008 financial crisis, to some extent, delegitimises capitalism, there is no appropriate alternative to the U.S. financial system, and thus no economy is immune to the U.S. sanction.¹⁶² Ostensibly, China’s strategic whole-of-nation system for achieving self-reliance and in furtherance of geopolitical leverage poses a substantial challenge to the West. These issues do not necessarily justify that China is capable to threaten the U.S. national security. While China and the U.S. can both leverage access to their massive markets or critical technologies to induce compliance with their control measures, only the U.S. can cut firms and individuals off from the global financial system and key GSSCs. The global reach of the dollar allows the U.S. to internationalise restrictions. Through exploiting the dominant currency, only the U.S. can enforce its assertion of extraterritorial jurisdiction.¹⁶³ The economic rise of China should not be perceived as a threat, rather the West should focus more on total Gross domestic product (GDP) and less on per capita GDP.¹⁶⁴ China’s poor rural areas need resources to become integrated into a modern economy.¹⁶⁵ Its domestic poverty alleviation will require significant restructure, despite its rapid economic growth over the past four decades. In addition, its shrinking labour force will offset previous productivity gains.¹⁶⁶ The failure to implement crucial structural reforms has led to ongoing economic slowdown.¹⁶⁷

The conflict would not have severely happened without a clash of false narratives.¹⁶⁸ The two rivalry powers have mutually reinforced the narratives of threat, which has far-reaching implications for the whole global economy. An overestimation of Chinese power stokes fear, which would threaten the dynamism responsible for American technological supremacy.¹⁶⁹ The misconception of the zero-sum-game has driven conflict escalation.¹⁷⁰ That China will eventually replace the U.S. as the world’s largest economy fuels expectations of the clash.¹⁷¹An established world order requires that the above responses be properly balanced and well calibrated, and that a new road map be restoring a mutually beneficial relationship.¹⁷² More sensible is to consider what alternative policies can help achieve the same goals.

5.3 Cooperate on addressing global challenges

Multilateralism and the rule of law through efficient cooperation would pave the way to reshaping consensus for a new international order to address the global challenges.¹⁷³ A new system is highly needed to better balance global and national interests. In theory, ecological interdependence reduces the probability of a war, because the two powers have a massive incentive to cooperate in pressing global challenges.¹⁷⁴ A more sensible approach would involve alleviating confrontation to most pressing global public good seeking mutual gain therein.¹⁷⁵

5.3.1 Cooperation against urgent global challenges

Cooperation is indispensable in addressing most urgent collective challenges. Most pressing global challenges would not be solved without engaging with China. Pursuing a war will undermine the prospects of cooperation to tackle those shared challenges, such as climate change, collapsing biodiversity and cybercrime.¹⁷⁶ As Tucker observed:

“The connecting tissue for a system of international cooperation should be legitimacy, creating a world of concentric circles in which we cooperate more with those with whom we share the most and whom we fear the least.”¹⁷⁷

For the sake of geopolitical benefits, both sides need to find discrete areas where they can pursue cooperation.¹⁷⁸ Doing so will shape the principles of international cooperation for a new era of progress toward those vital global common goals.¹⁷⁹ For instance, to limit global warming to 1.5 °C requires collaboration between the U.S. and China. Both powers could jointly finance clean energy in poor countries to effectively mitigate global warming.¹⁸⁰ Nevertheless, increased confrontation is incompatible with international cooperation. The two powers are supposed to work together to address common challenges, simply because no country can seriously solve the transnational perils issues alone.

The U.S. seems to be locked on a path of denying China advanced technologies.¹⁸¹ In particular, this would eliminate any hope of non-zero-sum collaborations with China on the pressing global challenges.¹⁸² A subtle issue arises as to whether the U.S. could tolerate China’s trade abuses in exchange for those vital global public goods, like climate cooperation. It is not viable for the U.S. and China to reach an agreement on meaningful emission cuts when they both prioritise securing a geopolitical strategic advantage.¹⁸³ On a trajectory of conflict de-escalation, it is worth critically examining how to dispel a notion of zero-sum competition that has long ensnarled great-power rivalries.¹⁸⁴ Broad-based cooperation needs to be put in place to tackle the pervasive unilateralism.¹⁸⁵ It is highly doubtful whether the increasing use of economic sanctions is just, expedient, or effective.¹⁸⁶ With technological supremacy being critical to the two powers with competing ideologies, shared values become more important than ever. Working with alliance that are committed to the set of core values is indispensable to effective cooperation on the pressing global challenges. Some new thinking is key for a more innovative global economic strategy.

5.3.2 New thinking on a non-Zero-Sum game

The U.S. sees China primarily as a threat to its global supremacy and thus defines the relations in largely zero-sum terms.¹⁸⁷A growing tit-for-tat trade war over dominance in semiconductors underpinned by both sides’ policies have reinforced the zero-sum dynamic.¹⁸⁸ Both sides impose similar state controls over the semiconductor industry. The rising U.S.-China geopolitical tension has led the two powers to adopt initiatives, such as the CHIPS Act and Chinese 14th Five-Year Plan to bolster domestic semiconductor manufacturing.

China is seeking to reshape the global system to its benefit, while the U.S. is seeking to reverse China’s rise.¹⁸⁹ Further deglobalisation has been reinforced by efforts to align cross-border economic ties with geostrategic alliances.¹⁹⁰

Firstly, whether the two powers can tackle their confrontations will be key to achieving global prosperity in the current uncertain context.¹⁹¹ It remains to be seen whether the two divergent agendas could be reconciled to address the pressing global challenges.¹⁹² Given the lack of a promising path for de-escalation of the tension, the current chips war makes it considerably challenging to establish an efficient multilateral regime for those vital global public goods.¹⁹³ The U.S. and China must respond by bolstering rules-based multilateralism through strengthening multilateral institutions, like the WTO. It is sensible for the U.S. to reconsider whether the conflicts under discussion would be efficiently mitigated through joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Otherwise, some global common goals, such as addressing climate change, will become a zero-sum game.¹⁹⁴

Secondly, the world’s most important bilateral relationship is “too big to fail.”¹⁹⁵ The Chinese economy has grown far too big for the U.S. to sanction, not to mention that the two economies are too closely intertwined. U.S. and Chinese semiconductor firms are deeply integrated within a highly interdependent GSSC. Integration of China with the world economy would promote democratisation and rule of law.¹⁹⁶ It is significant to maintain an inclusive international order while protecting the core values. The increasing polarisation of global economy is underpinned by the asymmetry of the two powers’ political systems.¹⁹⁷ China’s authoritarian system enables quick response to challenges and ensures that few domestic firms will break with policy.¹⁹⁸ The advantages could be obvious in a crisis because there is no need to use precious resources for fighting legal challenges,¹⁹⁹ which can compromise government efforts.²⁰⁰ The U.S. and China seem to have embraced a zero-sum framework, according to which the two sides cannot simply co-exist.²⁰¹ The logic of zero-sum competition with China risks undermining America’s own interests.²⁰² With the two powers’ competition strategically managed, they are supposed to explore a way for coexistence without necessarily sacrificing their core interests.²⁰³ After all, the world would be safer with China inside rather than outside the international system.²⁰⁴ The West should consider reasonable terms of coexistence with China through building up trust between each other.²⁰⁵ It means re-establishing common ground and mutual trust to develop a more cogent and credible strategy.²⁰⁶ As such, the U.S. should solely mitigate those Chinese policies pertinently that have caused negative effects, instead of pursuing the policy of weakening China’s development.²⁰⁷ Given that the opportunities for a mutually constructive engagement are growing scarce, policymakers should ensure a proper calibration between national security and economic considerations.²⁰⁸

6 Conclusion

The U.S. sees China as the greatest geopolitical challenge of the 21st century. The race for global technological supremacy and self-sufficiency presents unprecedented confrontations. Seeking to expedite the transition toward less interdependence, the two powers seek to achieve supply chain resiliency and reduce their dependency on each other. Doing so could ostensibly help lower the national security stakes by hedging against supply chain vulnerabilities. However, weaponising resources and technological capabilities has global repercussions. Diversification helps to mitigate one’s economic vulnerabilities and dependencies. This dramatic escalation of the technology war is bound to have dramatic economic and political consequences. The increasingly adversarial relationship may reshape the global economic and technological landscape in a decade to come. The nationalist ideology should not captivate the world. Balancing national security interests with economic reality will be a key challenge for the two powers, let alone their ideological incompatibility.

It is imperative to preserve the benefits of GSVCs while safeguarding national interests. An ideal solution is to avert future escalations while protecting national security. Institutionally, it is worth exploring whether a third party would play a critical role in a neutral jurisdiction to provide shared commitment to relationship management. Identifying multilateral channels that could revive the WTO is particularly urgent. The two powers should explore a path to de-escalation and navigate how and whether both sides could embrace a non-zero-sum approach to deal with structural arbitrage in conflicts. Apart from deepening ties with those countries that strongly adhere to similar core values, the U.S. need to cooperate with China in the delivery of global public goods. Despite some divergent values, both the U.S. and China may have to explore a shared set of rules, instead of trying to unilaterally impose its own ones. It is more sensible to seriously assess what aspects of the conflict are inevitable, and what can be mitigated by smart policy. New strategic thinking would help the West deal with China within the framework of coexistence, defending its own values and interests.