Trade War: Revisited

At the hand of Chairman Deng Xiaoping, China finally opened its economy in 1979 to foreign investment and technology, normalizing trade with the US and becoming the factory of the world, which led to rapid growth. China was seen as an opportunity but has now turned into a threat. The most hostile steps taken against this new threat to US political and economic hegemony were initiated in 2018 by Trump by setting up tariffs. The policies of Trump regarding China have been kept in place. On top of that, President Biden's administration decided to restrict exports of equipment and services required by China to produce semiconductors. This article will explore the story behind the hostility in depth.

 The US government stated several reasons for starting the trade war, such as labor and human rights violation, currency manipulation, unfair subsidization, stealing technology etc.  However, we all know the main reason, which is the threat of China becoming the largest economy and military power in the world and with it gaining many political advantages. This reason is also known as “national security concerns.” Hostility was rising even before Trump wielded his policy, and Biden is just following his predecessor’s footsteps. The US aims to restrict China from developing advanced node semiconductors, semiconductor production equipment, advanced computing capabilities, and supercomputers, all crucial technologies. The research tank PIIE states that the US plans to restrict China “through novel uses of lists of controlled items, through controls on activities by US persons, and extraterritorial reach concerning foreign-made items going to specific Chinese companies.” Specifically, “The policy restricts US exports of the top-of-the-line tools made by American companies from going to facilities in China making semiconductors.”

All this effort is to stop Chinese companies such as SMIC from producing and developing advanced semiconductors, which would lead to significant advances not only for commercial uses but also for military purposes. As the national security advisor articulated: “On export controls, we have to revisit the longstanding premise of maintaining relative advantages over competitors in specific vital technologies. We previously maintained a ‘sliding scale’ approach that said we need to stay only a couple of generations ahead.” In summary, if the US is ahead, they are tolerant, which hints at the nature of globalization and free trade slogans.

However, the effectiveness of US policies depends on two allied countries, the Dutch and Japanese governments. This is because Tokyo Electron in Japan and ASML in the Netherlands both facilitate the Chinese production of semiconductors. Hence as stated by the chief executive of ASML, the US was “putting a lot of pressure… to make sure that the Dutch government and the Japanese government follow as well.” The Dutch Minister for Foreign Trade stated that they will defend their interests. As such, they will not follow with the USA unless its loss is compensated politically or monetarily. 

China cannot make advanced semiconductors without the goods and services provided by the USA, Japan and the Netherlands. Even if Japan and Netherlands don’t follow suit, US sanctions would be extremely harmful. The Chinese government is not the only one suffering but also the US companies. However, this won't significantly impact major users such as Jack Gold, an analyst at J. Gold Associates, who noted, “restrictions are mostly focused on the very advanced chips.  Other high-volume chips are not restricted and will flow as they do now.” As a result, the majority of users will not notice.