Zhou Qi

(Photo/IC Photo)

Decoupling is becoming a new phenomenon in international relations and the world economy.Of all the areas of decoupling,the most striking is that of technology,given the special feature of high-tech and its close connections with trade.The United States is implementing a policy of decoupling itself from China in the entire range of high-tech.IMF experts predict that technological decoupling will not only define the strategic competition between China and the U.S.,but also in turn have a strong impact on Europe.

HOW TECHNOLOGICAL DECOUPLING BECAME A POLICY

Technological decoupling can be defined as restricting or blocking cross-border trade and investment in high-tech goods and services.Hightech underpins the global economy.It is not only just a sector,but an unprecedented driver for innovation and economic development,with a profound impact on the world’s production and consumption patterns.It is by nature at the center when the industrial chain is restructured.Among the many sectors of the global economy,high-tech companies are the most valuable,followed by companies whose growth is driven by technologies.

The U.S.interest in technological decoupling from China began in Obama’s second term.It was able to grow into a policy due to influences from the following four factors.

First,a growing number of Americans in the strategic and diplomatic circles embraced the theory of“China threat”,arguing the Obama administration’s China policy was too weak.The domestic pressure led to the hardening of Obama’s China policy in the last two years of his second term.Under Donald Trump’s presidency,American perceptions of China changed fundamentally,and China began to be seen as the biggest strategic competitor.The Trump administration was convinced that China would take advantage of its close ties to American technologies to steal secrets,spread false information and try to gain an upper hand in competition,which could hurt the American economy,and,more broadly,lead to the global technological dominance by the so-called authoritarianism.When technology becomes a key battleground of competition between states,blocking China’s high-tech development is put on U.S.government’s agenda.

Second,the United States feels threatened by China’s rapid advances in high-tech.In artificial intelligence,China ranks second in the world in academic research,patents,investment,labor force and the number of hardware units,only next to the United States.Some Chinese companies,with cutting-edge research and industrial products,are already considered to be leading the world in such fields as 5G telecommunications,mobile devices,commercial drones,high-speed rail,wind turbines,supercomputers,quantum computing,space launch vehicles and satellites,and liquid crystal display.The gap between China and the U.S.and 27 EU countries is closing fast as Chinese publish more scientific papers and file more patent applications than most of the countries,with the number of patent applications rising from 4,800 in 2005 to 57,598 in 2018.

Third,the United States believes that the tremendous development of science and technology in China is primarily due to government support for high-tech R&D.America has paid close attention to Made in China 2025,a strategic document for manufacturing upgrading,according to which the Chinese government will “support companies’overseas mergers and acquisitions,equity investments and venture capital investment” to reduce the country’s dependence on foreign technology.And based on that,U.S.Government believes that it must take counter measures.

Fourth,“techno-nationalism” has risen,an ideology that sees technology not as neutral,but as a tool of competition among nations.Edward Snowden’s revelation that U.S.government required some tech companies to take on the role of national information monitoring caused an international uproar.Given the important value of digital technology in espionage and war,countries all over the world have come to recognize the necessity of safeguarding digital sovereignty.

The Trump administration set technological decoupling from China in motion.The Biden administration,despite its mild verbal criticism of Trump’s policies,has in fact continued this policy.The Republicans and Democrats have now agreed on a policy of technological decoupling from China.The Trump administration decided in May 2020 to block Huawei from using American technologies to design or make semiconductor chips,marking a significant fracture in the technology supply chain between the two countries,also widely recognized as the beginning of the decoupling.Given the pervasive nature of technology,technological decoupling has greatly limited the economic interactions between China and the United States.

U.S.DECOUPLING MEASURES TO SUPPRESS CHINA

Currently the United States has adopted two kinds of decoupling measures,those to suppress the development of science and technology in China by restricting the export of Chinese products and services,and those to strengthen its own scientific and technological power through government support for research and development and through policy coordination and cooperation with allies and partners for the shared goal of curbing China’s advances and maintaining America’s global leadership in science and technology.During the four years of the Trump presidency,the U.S.decoupling measures were predominantly “suppressive.”

Most of the laws and regulations the suppressive measures were based on were made during the Trump administration.For example,the Export Control Reform Act passed by Congress in 2018 states that“The national security of the United States requires that the United States maintain its leadership in the science,technology,engineering,and manufacturing sectors,including critical technologies for innovation.”And “Such leadership requires that United States persons are competitive in global markets.” It requires a robust process to identify and control emerging and critical technologies that are essential to U.S.national security,and to prevent China from accessing potentially important American technologies.

America’s suppressive measures are wide ranging from export controls,investment restrictions,to telecommunications licenses and equipment authorizations,from visa restrictions,import restrictions to financial sanctions,from technology trading rules,federal government procurement and spending restrictions to law enforcement.The most direct measures are the first three.

Export control is administered by United States Department of Commerce (DOC) in accordance with the Export Administration Regulations(EAR) enacted in 2020,an important component of which is the Commerce Control List (CCL).The CCL requires that an export license is needed from the DOC before certain software,technologies or manufacturing equipment used to design and manufacture semiconductors can be exported to China.China has been the target of various export controls,with the number of controlled items related to China increasing from 130 in 2018 to 532 in March 2022,their share of total U.S.export control items rising from 14% to 29%.It is noteworthy that two kinds of foreign-produced items are also made subject to the EAR and are not allowed to be re-exported to companies on the BIS Entity List without the DOC permission.The first kind is products that contain more than 25% U.S.-origin technology;the second kind is products,though not containing any controlled U.S.-origin technology,are considered to have been designed or manufactured with the help of such technology.These provisions provide the basis for the United States to exercise the socalled “l(fā)ong arm jurisdiction.”

Staff from Los Angeles Fire Department observing a drone of Chinese tech company DJI.

Inbound investment is regulated by the Committee on Foreign Investment in the United States (CFIUS),an interagency committee whose jurisdiction has been expanded by the Foreign Investment Risk Review Modernization Act,which entered into force in August 2018,to block transactions with non-controlling interests that could give the foreign investors the right to access key information or influence company decisions.Concerning outbound investment,President Biden issued in June 2021 an executive order that expands the scope of the Trump administration’s ban on American investment in Chinese companies and prohibits U.S.investors from purchasing or selling shares of Chinese companies on the entity lists.The U.S.Congress passed the Holding Foreign Companies Accountable Act in December 2020,requiring the Securities and Exchange Commission (SEC) to delist publicly traded companies from a national stock exchange and ban the overthe-counter trading of their stocks if the Public Company Accounting Oversight Board is unable to inspect their audit reports for three consecutive years.The SEC believes that none of the about 270 Chinese companies listed on U.S.stock exchanges has complied with the rule on financial audits inspection.As of May 12,2022,139 China concepts stocks were put on the “pre-delisting” list.

Regarding telecommunications licensing and equipment authorization,the Federal Communications Commission (FCC) is charged with cracking down on Chinese entities seen as “vulnerable to exploitation,influence,and control by the Chinese government.” The FCC denied China Mobile’s license application and revoked the licenses of Chinese companies such as China Telecom and China Unicom,and in 2020 it rejected an application for the building of a cable connecting the United States with Hong Kong,China by a Chinese company and American companies,citing security concerns.The FCC also regulates radio frequency devices contained in nearly all electrical and electronic products sold to businesses and consumers.After the U.S.Congress passed the Secure and Trusted Communications Networks Act of 2019,the first five companies put on the list were all Chinese.

Concerning visa restrictions,in May 2020,the Trump administration suspended the entry of graduate students and researchers associated with “entities in the PRC that implement or support ‘military-civil fusion strategy’ of the PRC.” This policy,not questioned by the Biden administration,has so far led to the cancellation of more than 1,000 visas and the rejection of at least 700-1,300 visa applications.The Center for Security and Emerging Technology at Georgetown University estimates that 3,000 to 5,000 Chinese STEM students and researchers may have been denied entry each year,accounting for one-third of the annual number of Chinese students enrolled in STEM graduate programs in the United States.The Trump administration also limited the visa validity for Communist Party members and their families to one month and single entry.The Biden administration has kept this policy.

Regarding import restrictions,the most high-profile case was the imposition of 10%-25% tariffs in three rounds on about $360 billion of Chinese exports to the United States,by the office of the United States Trade Representative based on the findings of a 2018 Section 301 investigation into China.These tariff rates have remained to this day.

Concerning technology trading rules,the Trump administration used the International Emergency Economic Powers Act to restrict “trading”powers and on this basis published the Chinese Military-Industrial Complex Companies List and other lists.One of Trump’s most controversial“innovations” was his attempted “app ban” first on TikTok and WeChat,and later on Alipay,Tencent QQ and six other Chinese applications.

Regarding federal government procurement,Chinese-made drones have been placed on a list that prohibits their purchase or use.

In addition to the above regulations,the U.S.government has combated China’s so-called “illegal acquisition” of U.S.technology through law enforcement actions.In November 2018,the Department of Justice launched the China Initiative,under which there were 77 criminal cases and more than 150 defendants as of December 1,2021.The Biden administration announced the end of the Initiative in February 2022 after months of review,following widespread concerns at home and abroad.

As can be seen from the above,the massive technological clampdown against and decoupling from China that began under the Trump administration are not just about restrictions on the export of technology and products (these are only export controls in the first category of measures mentioned above),but rather a broad-based,continuous process bolstered by measures that are constantly expanded and enhanced.Therefore,the metaphor “small-yard,high-fence” does not paint a true and whole picture of the current U.S.tech decoupling policy toward China.

THE BIDEN ADMINISTRATION’S“SELF-STRENGTHENING”DECOUPLING MEASURES

During the Trump presidency,the administration and congress generally focused on “suppressive”decoupling measures.When Biden became president,U.S.policymakers reached a consensus on the need to pay more attention to “selfstrengthening” measures.The most significant events in this regard were the adoption of the U.S.Innovation and Competition Act of 2021 and the America COMPETES Act of 2022 by the House and Senate in February and March 2022,respectively.The Acts will lead to record investments in emerging technologies and American manufacturing.They prioritize the development of science and technology in the United States,stressing the need to strengthen the domestic supply chain and increase investment in R&D and scientific research,so as to enhance the competitiveness of the United States so that it can compete with China in the relevant fields globally.They will also greatly increase the federal government’s investment in scientific research and ensure the security of the semiconductor supply chain.

The CHIPS and Science Act,passed by the U.S.Senate and House in its final version in July 27-28,2022,will provide about $52 billion in government subsidies for American semiconductor production and about$24 billion worth of investment tax credits for chip plants,and authorize about $170 billion over the next five years to promote scientific research in the United States.

Gina Ramondo,Secretary of Commerce of the U.S.,attends the video conference in 2022,promoting bills for chips.

To form an alliance of so-called“techno-democracies” is an important part of the strategy of tech decoupling and “removing China” from the industrial chain.The difference of the Biden administration from the Trump administration is that Biden does not intend to go it alone,but rather would like to coordinate science and technology policies on China with allies and partners through an alliance of “techno-democracies”.In February 2021,the Biden administration developed a plan to create such an alliance with the goal of “setting the rules and shaping the norms that govern the use of technology,”and stopping the so-called “technoautocracies” from dominating technologies worldwide.

U.S.President Biden signs the CHIPS and Science Act at the White House,Aug 9,2022.

An important step the United States took in forming this alliance was to establish the Trade and Technology Council (TTC) with the European Union in June 2021.The State Department explained the goal of the TTC as to cooperate in the development and deployment of new technologies based on shared democratic values,ensure that trade policies and the deployment of emerging technologies are informed by national security and scientific priorities as well as by economic and commercial priorities,increase the competitiveness of the transatlantic economy and ensure their joint leadership in setting global norms for emerging and other critical technologies that are based upon their shared democratic values,and maintain U.S.and allied leadership in science and technology while countering authoritarian influence in the digital and emerging technology space.

In the Indo-Pacific region,the United States has also set clear goals for technological decoupling from China.In February 2022,the Biden administration proposed in its new Indo-Pacific Strategy that it will coordinate with partners to maintain the integrity of international standard bodies and promote consensus-based,values-aligned technology standards;facilitate the movement of researchers and open access to scientific data for allies and partners;and work to implement the framework of responsible behavior in cyber space and its associated norms.

Quad,one of America’s “inner circles” in the Asia-Pacific region that includes the U.S.,Japan,India and Australia,has been given a special mission: joint research and development of critical and emerging technologies,ensuring the resilience of semiconductor supply chains,and establishing general technical standards.In March 2021,the United States announced that Quad had agreed to set up a working group to set standards for emerging technologies such as 5G and artificial intelligence.In fall of the same year,Quad announced that they would launch a cooperative initiative “to map capacity,identify vulnerabilities,and bolster supply-chain security for semiconductors and their vital components.” The Unite States has also been trying to expand its trilateral cooperation with Japan and Korea into areas such as technological research and development and supply chain security so that it may reinforce Quad.

THE DECOUPLING HAS ALREADY HAD CERTAIN EFFECT

The trade and investment restrictions the United States has imposed on China have already resulted in certain degree of economic decoupling,particularly in the high-tech sector.A July 2020 report by Rabobank concluded that America’s supply chains had begun to shift away from China.In 2019,U.S.imports of Chinese manufactured goods fell 17 percent,or $88 billion,leading to a 4-percentage-point drop in China’s share of U.S.imports.The trend of shifting away from China is most obvious in computer and electronics industries.Vietnam,Mexico and China’s Taiwan region are the main beneficiaries of this shift.Wireless communications equipment,printed circuit board components and semiconductors are the three major high-tech industries where the supply chains are moving out of China.

The mounting trade tensions between China and the United States have increased production costs and uncertainties in China for the affected companies.To reduce their dependence on China and stabilize their operations in the Chinese market,some foreign companies have started to adopt the “China+1” strategy to improve the resilience of their supply chains.The expected increase in China-U.S.and geopolitical tensions is the most important reason behind the accelerated shift of supply chains across multiple industries.

Concerning U.S.high-tech exports to China,their value fell by 13 percent in 2019.Aerospace and ICT products are the most affected.Since 2016,U.S.ICT exports to China have continued to decline.In 2019,their share fell by almost 16 percent.In 2020,U.S.high-tech exports to China were $30.762 billion,down by 9 percent (about $3 billion) from 2019.

Concerning Chinese investment in the U.S.,the value of Chinese M&A fell from almost $9 billion in 2017 to less than $3 billion in 2018.Chinese investment and its share of FDI in the U.S.have also declined year by year.The number of investment notices Chinese investors filed with CFIUS was 60 in 2017 (25% of the global total),55 in 2018,25 in 2019,and only 17 in 2020 (9% of total).

The biggest impact of technological decoupling is felt by the semiconductor industry,a sector that relies on highly specialized global supply chains.The United States currently leads the world in this sector,in sales,profits and innovation capability,having eight of the world’s 15 largest semiconductor companies and accounting for 48 percent of global sales in 2020,far outperforming other countries.But at the same time,U.S.companies rely almost entirely on Asian supply chains for contract manufacturing,assembly and testing of semiconductors.

Given the exponential increase in the cost of chip R&D and remaining competitive,semiconductor companies’ investments in capital equipment and R&D are astronomical.The U.S.semiconductor industry typically spends 15-20 percent of its annual revenues on R&D,about$44 billion in 2020.Higher R&D spending than other countries gives the United States a comparative advantage in chip design and manufacturing technique,which account for about 45 percent of semiconductor’s value.America’s technological leadership makes R&D spending part of a virtuous circle,which in turn brings higher market share and profit margin and makes more investment in R&D possible.

The importance of the Chinese market to the U.S.semiconductor industry is illustrated by the facts that the United States exported about$14.1 billion of integrated circuits to China (including Hong Kong) in 2020,generating for itself a trade surplus of about $12.7 billion and its semiconductor sales in China were about $11.8 billion in 2021,or about 35 percent of its global sales.If the Unites States continues tech decoupling from China,the impact is sure to be a double-edged sword.

In a widely cited report published in March 2020,the Boston Consulting Group concluded that if the United States continues the decoupling policy in the semiconductor industry,its global leadership in semiconductor will be replaced by other countries,for example Korea.Although the report did not take into account the new “self-strengthening”measures adopted by the Biden administration which may offset some of the effects,the logic of the report is convincing,i.e.,technological decoupling may lead to declined market share for U.S.companies,trapping them in a vicious circle of rapidly diminishing competitiveness and plummeting market share and profit margin.

Representative introducing top-notch technology at the World Internet Conference Wuzhen Summit,2021.

Judging by the current policy orientation of the Biden administration,technological decoupling has become an established government policy.But this policy cannot benefit the United States in the long run and will only lead to a lose-lose situation.It is conceivable that the United States would not change the policy until it has tasted its bitter fruits.This is a reminder for China that it must be fully prepared for the worst and find an effective path for Chinese R&D,particularly in critically important high-end semiconductors,so as to get back in the game as soon as possible.