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Argument
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DECOUPLING WASTES U.S. LEVERAGE ON CHINA


KEEPING CHINESE FIRMS DEPENDENT ON WESTERN CHIPS IS A BETTER STRATEGY.

By Paul Scharre, the executive vice president and director of studies at the
Center for a New American Security.
This aerial photo taken on August 10, 2022 shows a Taiwan Semiconductor
Manufacturing Company (TSMC) factory in Nanjing, in China's eastern Jiangsu
province.
This aerial photo taken on August 10, 2022 shows a Taiwan Semiconductor
Manufacturing Company (TSMC) factory in Nanjing, in China's eastern Jiangsu
province. STR/AFP via Getty Images

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for FP subscribers. Subscribe Now | Log In

 * Economics
 * China

January 13, 2023, 8:00 AM

In October, the Biden administration announced sweeping export controls on
semiconductors to China. Denying access to chips is necessary, the
administration said, to keep them out of Chinese weapons and protect U.S.
national security. The new policy is a mistake, however, and will harm U.S.
security rather than defend it. In cutting off China’s access to advanced chips
today, the United States is giving up its long-term leverage over Chinese
artificial-intelligence development and accelerating China’s drive toward chip
independence. Recent U.S. export controls are the latest step in “decoupling”
U.S.-China technology ties, yet decoupling is not enough to secure U.S.
interests in a long-term competition. A better approach would be to keep China
dependent on U.S. technology, giving the United States the ability to deny China
access to key technologies when necessary.

In October, the Biden administration announced sweeping export controls on
semiconductors to China. Denying access to chips is necessary, the
administration said, to keep them out of Chinese weapons and protect U.S.
national security. The new policy is a mistake, however, and will harm U.S.
security rather than defend it. In cutting off China’s access to advanced chips
today, the United States is giving up its long-term leverage over Chinese
artificial-intelligence development and accelerating China’s drive toward chip
independence. Recent U.S. export controls are the latest step in “decoupling”
U.S.-China technology ties, yet decoupling is not enough to secure U.S.
interests in a long-term competition. A better approach would be to keep China
dependent on U.S. technology, giving the United States the ability to deny China
access to key technologies when necessary.

Recent U.S. export controls are a major escalation in the U.S.-China tech
competition. In September, National Security Advisor Jake Sullivan announced a
change from the U.S. goal of being “only a couple of generations ahead” of China
in key technologies to maintaining “as large of a lead as possible.” The Biden
administration’s aggressive new semiconductor export controls put this principle
into practice, aiming to stop Chinese chip development in its tracks. Yet key
elements of the policy are likely to backfire.

Semiconductors, or computer chips, are vital to the global economy today, and
trends in machine learning suggest they are poised to become an even more vital
strategic resource in the future. Recent supply-chain shortages have highlighted
semiconductors’ importance, and in August Congress passed $52 billion in
subsidies to re-shore semiconductor manufacturing to the United States. Yet
chips are more critical than most policymakers or CEOs realize. Computing
hardware is one of four key battlegrounds, alongside data, talent, and
institutions, that will determine which countries lead an AI-driven future.

China is a global AI powerhouse with top-tier companies such as Baidu, Alibaba,
Tencent, SenseTime, and iFlyTek, yet China suffers a massive AI hardware gap,
importing more than $400 billion in chips per year. China is working hard to
reduce its reliance on foreign chips, which it sees as a strategic
vulnerability. Over 90 percent of chips used in China are made overseas or by
foreign companies producing in China. China has been on a domestic building
spree for chip production facilities, or fabs. Before 2020, China accounted for
the fastest-growing share of global semiconductor production.

The Biden administration’s new export controls restrict sales of U.S.
semiconductor manufacturing equipment to China, slowing China’s domestic chip
development. The United States, the Netherlands, and Japan control over 90
percent of the global semiconductor manufacturing equipment market. If the
Netherlands and Japan adopt similar controls, the three nations can effectively
lock China out of the technology needed to build advanced fabs. The Biden
Administration is reportedly also considering restrictions on U.S. investments
in Chinese AI and semiconductor firms. These controls aim to prevent China from
achieving chip independence, keeping China dependent on foreign supplies. Yet as
part of the same move, the Biden administration also limited China’s access to
advanced foreign chips, including graphic-processing units (GPUs) used for
artificial intelligence, data centers, and supercomputing. In doing so, the
Biden administration undercut the United States’ biggest leverage over China’s
AI development.




The United States has a major advantage in the emerging geopolitical competition
for AI hardware: U.S. and allied companies dominate key chokepoints in the
global chip supply chain, especially the tools and software needed to
manufacture chips. Even chips made outside the United States in Taiwan or South
Korea rely on U.S. equipment for manufacturing.

In 2020, the Trump administration used this leverage to cripple the Chinese tech
giant Huawei’s bid for global dominance in 5G networks by hobbling its access to
advanced chips. Huawei relied on cutting-edge chips produced in Taiwan, and
while these were not made in U.S. factories, they were made using American
equipment. The latest U.S. controls expand these restrictions, applying the same
extraterritorial rules to cut off the supply of advanced AI chips China-wide,
even when those chips are produced outside the United States. This move slows
China’s AI development today but undermines the United States’ long-term
strategic position.

The ability to deny China access to advanced chips is a powerful advantage whose
value is growing exponentially. The past decade has seen an explosion in
artificial intelligence. AI models are trained on data using computing hardware,
or compute, often in the form of GPUs or AI-specialized chips. Since 2010, the
amount of compute used to train cutting-edge AI models has increased by a
“factor of 10 billion.” Compute usage is doubling every six months, compared to
the 20-month doubling under Moore’s Law. (Compute for the largest AI models is
doubling every 10 months.)

Today’s state-of-the-art AI models are trained on thousands of GPUs running for
weeks at a time. Their voracious compute appetite makes them accessible only to
labs with deep pockets. Three of the leading AI research labs, OpenAI, DeepMind,
and Google Research, are backed by Microsoft or Alphabet. Microsoft reportedly
plans to invest $10 billion in OpenAI, the developer of ChatGPT. Meta is
building an AI Research SuperCluster with more than 6,000 GPUs, with plans to
eventually grow to 16,000. Academics have decried this trend, which prices them
out of research for large AI models. The U.S. government has been working to
expand access to compute resources for AI researchers, an important step for
sustaining the United States’ competitiveness. Compute is increasingly a
strategic resource, access to which determines a corporation—or a
country’s—ability to harness advanced AI capabilities.

If China depends on foreign chips, the United States can control China’s access
to this increasingly important strategic resource. Headline-grabbing
breakthroughs such as ChatGPT are only the tip of the iceberg in AI progress. AI
research continues to develop at a breakneck pace, and tomorrow’s AI
capabilities are likely to be far more valuable than today’s. Using U.S.
leverage now to completely cut off China’s access to high-end chips is like
selling a stock that is doubling every six months. Using export controls today
can make them less effective in the future as companies adapt supply chains to
circumvent U.S. restrictions.

The U.S. government has effectively just created a massive market for a
U.S.-independent semiconductor supply chain. The Chinese government has long
pursued wasteful and largely ineffective industrial policies to boost domestic
semiconductor manufacturing. In the wake of U.S. export controls, the Chinese
government pledged another $140 billion in spending. U.S. controls supercharge
the Chinese government’s efforts by creating incentives for the private sector
as well, mobilizing the global marketplace to accelerate Chinese chip
independence. Foreign companies have strong incentives to design U.S. components
out of their supply chains over time to circumvent U.S. restrictions and sell to
the Chinese market. Replacing U.S. suppliers will take time, but all of the
incentives are now in place to do so.

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A group of people on motorbikes ride on the street in front of a massive
microchip fabrication plant. The company name, TSMC, is displayed in large red
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THE CHIPMAKING WORLD HEDGES ITS TAIWAN BETS

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Rishi Iyengar
U.S. President Joe Biden and Japanese Prime Minister Fumio Kishida stand for
their national anthems during an arrival ceremony at the White House in
Washington, D.C.


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Even if Japan and the Netherlands join the United States on tooling restrictions
in China, foreign companies could build new fabs entirely free of U.S. equipment
outside of China to service the Chinese market. Restricting access to foreign
chips also turns China’s $400 billion of buying power inward, boosting domestic
chip manufacturing. Chinese commercial data and cloud companies could choose to
turn to second-tier domestic chip suppliers, rather than continue to rely on
foreign chips whose supplies are uncertain. These market incentives could
mobilize the private sector, inside and outside China, to finally achieve the
chip independence the Chinese government has long sought yet been unable to
achieve to date.

More targeted controls on military applications and human rights abuses while
permitting commercial use would be a better approach and could keep China
dependent on foreign chips produced with U.S. equipment. Targeted controls are
more cumbersome, as the United States is forced into a game of whack-a-mole
while the Chinese military tries to circumvent U.S. restrictions through other
buyers.



However, the United States just created a powerful tool to crack down on China’s
military-civil fusion. As part of the October 2022 controls, the Commerce
Department established that firms that do not cooperate with end-use checks
would be placed on the Unverified List and, after 60 days, would transfer to the
Entity List if they still have not complied. The U.S. government already
successfully used this tool in December to verify and clear 27 Chinese companies
that demonstrated compliance with end-use restrictions while escalating others,
including Chinese chipmaker YMTC, to the Entity List. The United States has the
tools it needs to enforce compliance with targeted restrictions. A more targeted
approach that allows sales of high-end chips to China’s commercial sector could
suppress demand for chips made without U.S. technology, delaying China’s chip
independence.

The United States should seek to foster strategic dependencies by China on U.S.
technology. In the U.S.-China tech competition, the leverage the United States
used to kneecap Huawei is a priceless strategic advantage. Yet the Biden
administration’s new chip restrictions undermine the United States’ long-term
position. Because U.S. export controls will only have a temporary effect as
global markets adapt over time, the United States is better off holding this
leverage in reserve for now. Artificial-intelligence capabilities are rapidly
advancing, and computing hardware is becoming an even more valuable input for AI
power.

The deep learning revolution is only a little over 10 years old, and the second
decade looks to be even more dramatic than the first. The United States will be
in a stronger position for the changes ahead if it retains the ability to deny
China access to powerful AI capabilities, if necessary. Using narrower export
controls today could still deny China’s military access to advanced chips while
keeping Chinese commercial companies reliant on foreign supplies. Keeping China
dependent on U.S. technology is a stronger strategy than decoupling and will
give the United States more control over China’s access to advanced technology
in the long run.




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 * Economics
 * China

Paul Scharre is the executive vice president and director of studies at the
Center for a New American Security and author of Four Battlegrounds: Power in
the Age of Artificial Intelligence. Twitter: @paul_scharre

Read More On China | Economics


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