A Trade War Will Exacerbate the Chinese Threat

Sanctions targeting China’s military instead of economic prowess might be the most effective deterrent

Shutterstock. Quality Stock Arts.

This summer, the Biden administration issued an executive order limiting US investments in China’s computing sectors, the latest round in a tech war going back to the Trump era. While last October’s export controls targeted the semiconductor industry, these new restrictions add quantum computing and artificial intelligence to the lineup. Mercifully, they were more telegraphed and limited in scope than the 2022 crackdown, focusing on investment in projects with military, intelligence and surveillance applications. That previous round of curbs eviscerated Chinese firms’ ability to acquire some of the most advanced chips, their IP and, critically, the machinery to make them. In many cases, they even prohibited Americans from working with Chinese firms. In concert with the Netherlands and Japan, two other dominant exporters in the industry, the administration was able to squeeze off access to the most critical nodes in an uber-globalized supply chain.

Biden’s newest restrictions are softer than many in the industry feared, but they will by no means be the last. Both the Trump and Biden administrations have clearly resolved to “contain” China. While it is true that the former wished to bully the Middle Kingdom into better trade terms, his successor has maintained these measures for technological-strategic goals rather than pure protectionism. As Nikkei Asia’s Hiroyuki Kotake writes:

The Biden administration has focused more on ‘derisking’ supply chains that rely on China, but is still shying away from expanding and deepening free trade.

Despite disagreements between Democrats and Republicans over whether this containment goes far enough, the strategy appears to have bipartisan consensus. Like it or not, some degree of economic decoupling seems inevitable.

But the trouble is that such decoupling will increase China’s determination to harden itself for future conflict—a dangerous gamble on the part of the US. The tech war is ratcheting up as the two powers drift further apart and nationalist sentiment rises on both sides, creating a self-perpetuating feedback loop. If left unchecked, this dynamic could spell disaster for both countries.

An attempt to comprehensively strangle China’s technological development would be both futile and harmful to America’s own strategic and normative positions.

A targeted approach that identifies and prohibits export of chips posing clear security threats, while maintaining the deep industry linkages that disincentive confrontation, would be far more prudent.

China’s Stalled Liberalization

Two decades ago, market liberals had hoped that China’s integration into the world trade system would lead to economic liberalization and then political liberalization, diminishing both the prospects of war with the outside world while improving the country’s human rights record.

But Chinese Premier Xi Jinping clearly represents a step backward on both counts. He has obliterated Hong Kong’s governing autonomy and freedoms, cracked down on domestic dissidents and brutally repressed minorities such as the Uyghur Muslims. At the same time, he has tried to extend China’s dominion outside its borders, nibbling at the border with India and eyeing countries in the South Sea such as the Philippines. 

And then there is the nightmarish hot-war scenario over Taiwan that could well draw America and Western countries into World War III.

But despite Xi’s bad behavior, without deep trade ties with China, we might have reached the current dismal state of affairs with the country —and likely worse—much faster, much sooner. That is why American rhetoric criticizing Biden for not going far enough because it won’t contain China is deeply worrisome.

Containment: A Dangerous Delusion

What’s driving such calls, especially on the nationalistic right, is a zero-sum worldview that goes something like this: Since societal capabilities can be transformed into state power, anything that gives a rival nation an edge is fair game. Their loss is our gain, and vice versa. But by that logic, all the economic progress that China has made to date in lifting its people out of poverty is a bad thing. And not just China, any country that closes the economic gap with America potentially becomes a threat.

But the fact is that China is threatening not because it is large and prosperous, but because of the rhetoric and actions of the Chinese Communist Party. Countering the CCP’s strategic moves is one thing, but attempting to contain the nation, as if it were the 1950s when anticommunist paranoia was at its height, is quite another.

So how should we thread the needle?

Lessons of What Not to Do

The first thing is to realize that wide-ranging sanctions intended to economically cripple the country might slow the Chinese government for a while but, once it recovers, it’ll be less easy to control. There are two main reasons for this, one on our end, the other on China’s.

Taking the example of semiconductor sanctions, one big reason that US and its allies were able to deal a crushing blow to China’s industry is because they had a dominance at the bleeding edge of an impossibly complex and globalized supply chain. But it was partly access to a large market like China’s that allowed them to maintain this position in the first place by expanding production and funneling money into R&D. Cutting off this access will weaken America’s own semiconductor industry. Industrial policy and friendshoring may make up for some of this lost revenue, but replacing it all would be a tall order. If the US semiconductor industry is weaker, America will have less room for future sanctions to force compliance by China.

On China’s end, there is no doubt that in the computing race, the US has thrown a banana peel in its path to competitiveness. But that’s a move that only works once. The Communist Party (CCP) now knows what to expect— and is more resolved than ever to both sever from— and surpass—its rival. It remains to be seen whether it will succeed in this quest (as discussed further below), given its current dependence on US chip designs.

But regardless of whether it succeeds or not, what are the consequences of this going to be from the standpoint of a containment strategy?

Risks of Decoupling

Pre-sanctions, the quality and ubiquity of Western chips and components eliminated the need for Chinese homegrown firms: the more available foreign chips were, the less attractive the domestic chips championed by Chinese industrial policy. This need for foreign chips generated economic linkages between the China and the rest of the world, including the West, and bound China in what is called complex interdependence in academic parlance.

This interdependence generated incentives for the CCP not to act belligerently and disrupt global supply chains because that would risk its own economy. Now it has no choice but to build alternate supply chains, or even source on the gray market. This will be a short-term bother, but in the medium to long term, China will be able to recoup, even if it never matches America’s dominance. Once it become chip independent, it will have little reason to be conciliatory toward the West and have a far freer hand in pursuing its expansionist ambitions.

The sanctions on Russia show that even if America tries to prevent the rest of the world or even key allies from cooperating with China, it may not succeed. It is just not possible to completely close off the country from international markets.

Another Cold War?

But even if the West comes together, it cannot count on the global South to cooperate. At the moment, China’s friends in the less-developed world are not big players in the tech industry. But this may change quickly and accelerate if Chinese demand fully turns to these third-country sources. Even EU allies and South Korea have been reluctant to follow suit to the extent the America wants. China will progress on the technological frontiers of concern to us, no matter what we do, even if it never catches up.

This will force third countries into choosing sides, severing the delicate and multilayered web of global connections that has helped to maintain peace and openness for decades. Even if World War III does not break out, Cold War II might very well result from such a policy of containment. Incidentally, an escalating tech war will also provide justification to the US to harass the millions of Americans with connections to China, and for the CCP to do the same to its expatriates in the US.

An escalating trade war could lead to a global bifurcation with the world split between China and the US at great cost to global security and prosperity.

The security-first worldview downplays or ignores these factors, even when the overall costs of hardening our posture exceed the benefits.

The Realistic and Less Risky Course Forward

So what should we do? Maintaining economic linkages is paramount. We should also refrain from fanning the flames of nationalism and paranoia—if for no other reason than that China is just not going to be the economic powerhouse that it wants to be.

The CCP’s tech policy goals now are dedicated to onshoring its entire computing industry. No country has come close to achieving this and it is not clear that China can given the demographic, political and economic headwinds it is running into. Regardless of what the US does, investors have become more bearish about the Middle Kingdom. The chances that China bootstraps itself past the US in computing by dint of lavish industrial policy and a lot of effort appear pretty slim. During the 1980s Japan-panic, America painted it as 100 feet tall when it was only 10 feet. It's doing the same with China’s computing prowess. Overreacting to an exaggerated Chinese threat would be futile as well dangerous.

Instead, the US and its allies should target sanctions at clear military and intelligence threats, cooperate to diversify their own supply chains, but still maintain crucial economic links with China. Admittedly, this is easier said than done, given the ambiguity surrounding AI’s future military uses. A good start would involve tracing the ultimate uses of certain chip designs, and gaming out how the People’s Liberation Army, China’s military, could use them.

But it is also imperative that we keep in mind that China is not a monolith or static. It is a huge, complex, and dynamic society. We don’t know how Chinese domestic politics or strategic orientation will change in the coming decades. It is hardly impossible that China will become more temperate in its interactions with other countries as it focuses on its massive domestic challenges.

The worst thing we could do is provoke it now through a trade war aimed at containing it. It would be prudent for us to keep our powder dry rather than shoot ourselves in the foot.

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