China Fires Back in its Tech War with the United States

EMILIO IASIELLO

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In response to the United States’ passing of its Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act , China announced it intended to conduct a cybersecurity probe into Micron Technology, one of the United States’ largest memory chip makers. In accordance to China’s National Security Law and Cybersecurity Law, the Cyberspace Administration of China (CAC), Beijing’s central internet regulator, censor, oversight, and control agency, will conduct the review for the purposes of ensuring that critical information-infrastructure supply chains were secure and did not contain any potential threats to China’s national security. One Chinese official said the potential of manipulation, data theft, or disruption due to political, diplomatic, or trade issues, could have prompted the review. The intent is clear and clearly parrot the justifications that the United States and Western for banning Huawei and Tik Tok. The CAC did not provide any additional information as to what products it intended to inspect, intimating that the decision is up to the CAC’s discretion.

In August 2022, the United States signed into the law the CHIPS and Science Act , which allocates approximately USD $280 billion (USD $50 billion dedicated for the design and production of chips domestically) to strengthen U.S. semiconductor capacity, catalyze research and development, and create regional high-tech hubs. Additionally, CHIPS aims to create a larger, and more inclusive skilled science, technology, engineering, and mathematics (STEM) government workforce. The intent behind the law is clear: policymakers needed to catalyze U.S. self-sufficiency in critical technology. And while there is evidence that this has encouraged private sector investment as of the end of 2022, the United States

still relies on other countries for input into semiconductors, including China and Russia, showing that the road to self-sufficiency is a winding path and not a straight line.

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Further exacerbating tensions with Beijing, in October 2022, the United States used its export control power to mitigate China’s technological ambitions that have strategic importance, instituting a “sweeping” set of export controls that ban Chinese companies – 600 so far on its “Entity List” – from acquiring advanced chips and chip-making equipment without a license from the Department of Commerce. Washington has been able to recruit other nations like the Netherlands to follow suit, and align with the U.S-led CHIP-4 Alliance, a congregation of Japan, South Korea, Taiwan, and the United States, the world’s top suppliers of semiconductors that represent 70% of the value of the global semiconductor industry. This ostensibly has obstructed China’s access to advanced chipmaking tools, thereby constraining the ability for Chinese semiconductor manufacturers to improve their processes. The alliance looks strong on paper, but there is evidence that solidarity may be optical as there are problems at a more granular level where private companies face market competition and are generally reticent to share technology with commercial rivals. Compounding matters is the fact that China is an important production base for South Korean and Taiwanese chipmakers, with 60% of South Korea’s exports flowing through China.

China hasn’t retaliated until now. The targeting of Micron is not a surprise given the company’s announcement on the heels of the passage of CHIPS. The CHIPS act allegedly encouraged other U.S. tech companies to similarly invest in American semiconductor manufacturing. Notably, Micron announced that it would invest USD 40 billion to support this effort, aiding in the development of 40,000 new construction and manufacturing jobs. Per a White House published Fact Sheet, this investment would bring the U.S. market share of memory chip production from less than 2% up to 10 percent over the next decade. China’s stated import review of the company caused Micron to suffer immediate economic losses, potentially benefitting competitors. This is noteworthy as China’s review of a Chinese company took an entire year before levying a substantial fine. Similar financial consequences or other stricter liabilities are possible depending on the circumstance. Potential exclusion from the China market is a big concern for Micron, whose products could be replaced in China by either local suppliers or Korean firms. This is a clear warning to other companies in the Chips-4 Alliance should they continue down the path they’re headed.

It’s also consistent with China’s increasing control over foreign interests. Beijing has cracked down on foreign accounting and information-related firms over the potential loss of business and political information to foreign rivals, forcing Chinese state-owned companies to phase out their services. As chair of the policy-setting Central Cyberspace Affairs Commission (CCAC), Xi has a personal interest in continually trying to galvanize China’s information security. After the 20th People’s Congress, Beijing established a National Data Bureau (NDB), an entity charged with the responsibility for collecting and protecting data, which includes information from multinational IT firms, and which reports directly to the CCAC. Perhaps “tech war” is a misnomer for what’s really transpiring and should be replaced by “data war” as China has always believed data to be part of its cybersecurity strategy, and the cybersecurity

and data protection laws that it enacted that address not just technology but the information produced, processed, stored, and disseminated by it.

In March 2023, President Xi called out the United States’s restrictions on China’s access to technology a campaign of “containment and suppression” against China’s development plans. Its latest move against Micron will very likely escalate the tech war between the two nations, a risk calculation that Beijing no doubt has taken into consideration and is willing to accept. Whatever follows is just the next rung in the China-United States tech war, with the future of technology hanging in the balance as both countries vie for the top slot. However, though they are competitors, their interests and efforts often overlap, making retaliation and self-sufficiency very difficult to achieve in the near term.

China still has a reliance on foreign sources of technology, which explains Beijing’s commitment to outpacing the United States in advanced and critical technology research areas, an attempt to not only improve China’s economic performance, but also to help it assume a global leadership role in influencing how technologies and industries around the world work together. To get to that goal, in the near term China must balance its work in advanced technologies while maintaining a positive foreign investment environment. The extent with which Beijing is successful may balance the scales in its favor.