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After a puzzling on-again, off-again trade action against China’s information and communications technology (ICT) giant ZTE in 2018, the Trump Administration began sanctioning China’s number #1 ICT player Huawei in May 2019.  The sanctioning action involved putting Huawei on a Commerce Department “entity list” and thereby restricting U.S. suppliers from selling their goods and technology to Huawei.

As with all of Trump’s trade actions against China, impulse outweighed well thought-out execution in the Huawei crackdown.  Initially, some sales were allowed and others denied without clear criteria being communicated to U.S. industry.  Later, without preparatory signaling, the Huawei campaign was intensified by expanding U.S. government authority to require licenses for sales of semiconductors made abroad with American technology.

The fitfulness of this policy can be measured by (1) the number of licenses (and dollar value of affected goods and technology) pending but held up in the inter-agency process and (2) the number of licenses (and dollar value of affected goods and technology) which had been applied for by U.S. companies but not processed towards the end of the Trump Administration.  (As things stood at the time of the November 3rd election, the expectation was that products in both categories which had clear 5G application would likely be rejected while non-5G products would likely be processed on case-by-case basis.)

Meanwhile, in the international sphere, the Trump Administration pursued a parallel campaign to try to persuade traditional allies to disallow Huawei technology from 5G infrastructural build-out in their respective markets on the grounds that – despite price and performance competitiveness — Huawei’s products represent a national security threat.  The results of this international campaign were mixed at best, not least because many of these traditional allies had themselves been targets of different tariff sanctions under Trump’s America First trade policy.  Without delving into the changing fortunes of this campaign at different times in different parts of the world, a summary headline on November 3rd might have read “Trump’s 5G Campaign Against Huawei: Embraced in India, Accommodated in the UK, Begrudged in Germany and Repudiated in Thailand and Elsewhere.”

The Biden Administration, while making a quick and clean break from Trump Administration trade policy in the area of climate change mitigation and clean energy technology, has largely kept the Trump Administration domestic policy of restrictive licensing for sales of advanced ICT goods in place.  At least, it has made clear that no substantive change should be expected until after the completion of a whole-of-government review of China trade policy and a parallel review of strategic global supply chains which includes semiconductors. In the international arena, it has relaxed the narrowly-focused pressure campaign against Huawei adoption in favor of a more broadly-conceived alliance strategy to rally traditional allies and other democracies to rise to the 21st century challenge posed by China’s autocratic model.

So where do things stand today?  The restriction of supplies of U.S. advanced semiconductors to Huawei under both the Trump and Biden Administrations has taken the biggest toll on Huawei.  Less impactful but still a headwind for Huawei has been the doubt sown internationally as the U.S. and China edge closer towards global confrontation and supply chain de-coupling.  The result?  Huawei reported last Friday its third straight quarterly decline in revenues, falling a significant 38% against 2021Q1 results.

Huawei is likely to remain at the center of a highly-fraught tug-of-war between the U.S. and China over 5G.  On one side, China has ability to leverage the world’s largest installed base of advanced mobile phone users in the world.  On the other, the U.S. dominates the global market for the advanced microchip designs on which advanced telecom markets depend. And the U.S. maintains close partnerships with the world’s leading microchip fabricators in Taiwan and the makers of the world’s leading fabrication equipment in the Netherlands and elsewhere.

Expect more tremors and seismic activity on this fault-line for the foreseeable future.  Just last week, the PRC government issued retaliatory actions against Huawei’s main Western rivals – Sweden’s Ericsson AB and Finland’s Nokia, among others.  And, as fall-out from the recent spread of the SARS-COV-2 Delta-variant in China, it was announced over the weekend that the World 5G Conference – scheduled for August 6-8 in Beijing – would be postponed indefinitely.  Pressure continues to mount while chances to release that pent-up pressure close off.

“We are in competition with China and other countries to win the 21st century,” Biden said on April 28th. “We are at a great inflection point in history. We have to do more than just build back better. … We have to compete more strenuously.”

Image Courtesy of the Financial Times

The question we are examining today is what does “compete more strenuously mean.” I’ll be identifying four distinct fields in which heightened competition is likely to come to the fore but first some context and disclaimers.

The first point to note is that, in President Biden’s own words, some partial answers are already clear. Biden has made clear that he sees this 21st century competition as one between the US and its democratic allies on the one side versus Xi, Putin and other autocratic leaders on the other side. in other words, the heart of the competition is democracy versus autocracy. What Biden has also made clear involves timing, that the competition will not be joined in earnest until the U.S. has emerged from the worst of the COVID-19 pandemic and largely revitalized the performance of the U.S. domestic economy.

Two caveats are also in order. The analysis provided below is strictly my own. The Biden administration – under Kurt Campbell, deputy assistant to the President and  coordinator for Indo-Pacific Affairs at the National Security Council — is currently directing an assessment under which cabinet-level departments and some agencies are re-viewing their policies and procedures as they relate to China. These departments and agencies will be reporting their findings to the White House later this year at which point Kurt Campell, his senior director for China Laura Rosenberger, and their staff will be synthesizing these inputs and articulating an updated “whole of government” policy towards China. (This process is consistent with the ‘get our house in order now’ before focusing on generational competition with China, as referenced above.) Clear answers to the question we’re examining today likely won’t be rolled out by the Administration until that process is complete.

In the meantime, the single best open-source for a quasi-authoritative readout of Biden’s thinking on what heightened US- China technology competition will look like may be the Penn Biden Center. While I am affiliated with Fox Leadership International under the School of Arts and Sciences at Penn, I want to make clear that this blog post does not draw on any information from that source.  This is my analysis and I bear sole responsibility for any deficiencies.

So, on to the substance …

At the broadest level, the U.S. needs to up its game in four areas of traditional strength to respond more effectively to the 21st century tech challenge from China:

Field 1:   Industry Sector Focus

NASA’s manned mission to the moon and DARPA’s role in the creation of the internet are the most storied examples of U.S. Government success in mid-wiving new high technology industries.  What has changed since those early post-war successes is the subsequently accelerated pace of technology innovation and development in the Fourth Industrial Age.  In fields as diverse as semiconductor design and fabrication, 5G telecommunications, artificial intelligence and robotics, quantum computing, EV batteries and biotechnology, U.S. government policy is currently nowhere near as focused in positioning its support role as is China.  What is called for is not a return to 20th century “industrial policy” (and its poor record of picking company-level winners and losers) but a new, 21st century approach to policy support to better prepare eco-system support for the emergence of entire new industries.    

Field 2:   Funding for Innovation & Regulation of Foreign Acquisitions

Despite the recent trend-line of falling investment in basic research in the U.S. and increasing levels of basic research investment in China, the fact remains that China is still no match for the U.S. in terms of the breadth, depth and quality of its basic research or of the commercial potential of the developments it spins off.  This is readily apparent in cutting-edge fields like advanced semiconductor design and gene therapy.  In these fields, China can’t put a home-grown team onto the field but instead tries to snap up foreign talent and fledgling foreign companies in hit-or-miss hopes of leveraging that into a domestic breakthrough.  Committee on Foreign Investment in the U.S. (CFIUS) and other related government entities need more focus on the dynamics underpinning tomorrow’s industries and less on yesterday’s. Likewise, less silo-ing between basic research and commercial development is urgently needed.

Level 3:   Rule of Law

Perhaps no societal field offers greater contrast between the U.S. and China than the field of law and legal practice.  The U.S. system of case law based on precedent stretches back to the time of the Saxon Kings of England (with very occasional admixtures from the Roman system of law more common to Continental Europe).  As enshrined in the U.S. constitution, ours is the rule of law, not the rule of men (or women).  While the Chinese Communist Party (CCP) has borrowed legal ‘parts’ from a wide variety of sources since 1949, the legal system it has assembled from those parts is principally designed to serve the interests of the governing party rather than to protect inherent rights of its citizens or its private companies.  It is rule by law, rather than rule of law, as was vividly demonstrated with the imposition of the new security law in Hong Kong in the summer of 2020. Despite the slowness and costs associated with it, the U.S. legal system provides a level of predictability and protection for investors and businesspeople which can’t be matched in China.  We can expect to see the Biden Administration act to shore up the foundations of this legal system following the strains put on it by the previous administration.

Level 4:   Wellsprings of Economic Vitality

Two of the deepest sources of support and revitalization for technology innovation in the U.S. are immigration and our capital markets.  Immigration brings a steady stream not only of young and eager workers but also on occasion transformational business talent such as Sergey Brin and Elon Musk. Our capital markets spread risk over a broad pool of investors and investment vehicles, incentivize iconoclastic thinking and efficiently channel capital to the points of likely greatest return.  While China has through its tax policy been impressively building an investment-led structure for its markets, the efficiency and speed of execution of the U.S. capital markets can’t be matched in China.  In broad view, China currently tries to leverage its centralized leadership and ‘command economy’ model to try to neutralize this U.S. advantage as well as hoping to ride the momentum from its high-growth domestic macro-development over the last four decades (and the internationalization of that development model over the last ten years). How China fares in field of competition in the years ahead as it emerges from its fast-growth phase of development and collides with a dire demographic imbalance will be one of the more consequential questions of the early 21st century.

Editorial Note:  Upcoming posts in the TEA Collaboratives T-series on technology topics will pick up and expand on some of the topics identified above.  Our focus in this Technology Competition sub-series will mostly fall under the industry and innovation topics identified above but we will also have occasional invited guest experts to delve more deeplly the legal and capital markets topics.  Also, it’s important to note explicitly that the viewpoint expressed in this post and other future posts in the series are obviously a perspective from the U.S.-side.  We will present the ‘emic’ view (as seen through the eyes of Chinese government planners and officials) separately through our A-series (Ambitions) posts which appear on Fridays.  

As a final note, the Technology Competition sub-series posts introduced in today’s post will alternate on Mondays with our TECH-tonics sub-series posts (which focuses exclusively on issues associated with the micro-electronic supply chain fault-line between the U.S. and China passing through Taiwan).  In any given month, we’ll be producing in alternating fashion two posts in the TECHtonics and and two poss in the Tech Competition sub-series.

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