As the Senate and House of Representatives negotiate their so-called “China Bill” or America COMPETES, one of the central questions is whether to give semiconductor companies subsidies to invest in states. -United. It would be a big mistake.
Like most COMPETES, the bill’s $50 billion gift to the semiconductor industry has little to do with beating China. In fact, it will help China achieve its industrial goals and thus strengthen its competitive position against its rivalry with the United States.
Two years ago, CPC General Secretary Xi Jinping introduced the world to a new framework for investing in the Chinese economy. The CCP calls this “dual circulation.” China wants to onshore its technology supply chains, especially in semiconductors, where recent experience with national industrial champion Huawei has shown it to be particularly vulnerable.
To achieve this, there are two options. It can pump tons of money into national innovation, which it has the wherewithal to do. However, in an industry as complex and rapidly changing as semiconductors, this could become incredibly expensive, with no guarantee that it will accomplish more than stay five to ten years behind the competition. The other option is to use its market power to compel global industry to build manufacturing capacity in China.
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Surprisingly, COMPETES encourages the latter. It does this by providing subsidies for investments in the United States without preventing recipients of those funds from making similar investments in China.
Why would these companies double their investments in China? Because the Chinese will require it as a cost of doing business. “Dual circulation” means that China gradually stops importing foreign chips. In the future, anyone wishing to supply chips to China will have to manufacture their chips there.
Now, there is a simple way to solve this problem: prohibit semiconductor companies from taking US government money if they also contribute to the development of Chinese industry. At the same time, the U.S. government could use export controls to expand Chinese reliance on U.S. and dependent manufacturing technology. It is this leverage effect that has captured the attention of the Chinese over the past three or four years. In the meantime, it would allow the revenue stream companies say they need, which would continue unless and until China achieves a self-sustaining supply chain.
American industry does not like this market. Why? Because, unlike many Hill supporters of semiconductor subsidies, he is not interested in limiting future competition from China. Its interest is to take market share from American security partners, particularly in Taiwan. Continue to invest in Chinese capacity and taking the grants provided by the US government places them in the best position to do so. The industry will wait to deal with the China-based threat – and will surely ask for even more help from taxpayers – once it has served the CCP’s purpose and is squeezed out of the Chinese market.
It’s bad enough for the US government to give money to wealthy tech companies that already have market incentives to diversify out of China. There should be unanimous opposition to help China to build his industry.
Not only will this create a much stronger competitor economically. But the capability being contributed by US companies could be used to improve the effectiveness of the Chinese military. Under the concept of “civil-military fusion,” the CCP’s military is actively working to make the most of developed technology in China’s civilian economy. China’s military prowess and the threat it poses to the United States are growing. He doesn’t need a boost from corporate America.
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Don’t underestimate Chinese ingenuity. The fact that China does not have a true market economy does not mean that it cannot innovate. It has a very long history of technological leadership, predating the first industrial revolution. The question is whether its current model of government can facilitate the kind of innovation needed to fuel the fourth, without help from outsiders and at a reasonable price.
The safe bet is “no”.
The United States used a similar dynamic to its advantage 40 years ago. President Ronald Reagan forced the Soviet Union to ruin itself in an arms race that history has proven the American system was better equipped to handle. The CCP’s system of government will not collapse by investing too much in technology. Its economy is too great. But the United States should force him to waste as much money as possible on this effort. After all, the renminbi he spends on innovation with CCP characteristics is a renminbi he cannot spend on his military – or for that matter on internal surveillance, espionage, Confucius centers and police operations in the United States.
The contradictions at the heart of the Chinese model of governance are America’s greatest asset in its global confrontation with China. Unlike how Reagan used American forces to make the most of these contradictions, America COMPETES helps China resolve them.