‘With its extensive prohibition on the export of US microchip technologies to China, the US Department of Commerce’s Bureau of Industry and Security has implemented the most comprehensive controls on semiconductor fabrication and supercomputing to date’, Hosuk Lee-Makiyama and Robin Baker note in the first of our two lead essays this week.
Gary Hufbauer and Megan Hogan suggest in the second of our leads, semiconductor ‘export controls are not likely to cripple the Chinese military. According to a 2022 RAND Corporation report, China’s military systems rely on older, less sophisticated chips made in China on which US export controls will have no effect. If China needs more advanced chips for AI-driven weapons systems, it can likely produce them, albeit at a very high cost… This means that the US ban will have less effect on weapons systems, instead delaying the rollout of civilian applications, such as autonomous vehicles’.
Less heralded but nearly as ominous for the rest of the world, the United States and the European Union have announced they will try to find a compromise on subsidies for electric vehicles that were introduced in the Biden administration’s Inflation Reduction Act that disadvantage European companies. Most likely this will involve European manufacturers being granted some kind of concessional status when the local content rules are applied. Under the arrangements as they stand now, in order to qualify for subsidies, an electric vehicle must be assembled in the US or its NAFTA partners Canada and Mexico, and from next year a range of content requirements on inputs will also apply.
Europe is itself preparing to spend big on industrial policy. At the College of Europe in Bruges, the European Commission President Ursula von der Leyen proposed ‘simplifying’ rules on state aid in the EU, allowing governments to invest more easily in entire value chains in ‘strategic sectors’ like green hydrogen as well as semiconductors. If it does come to an arrangement with the United States on electric vehicle subsidies, it will likely be one that entrenches discrimination in the global trading system by deepening the divide between a North Atlantic ‘anti-China’ bloc and the rest of the world.
After decades in which falling barriers to international trade, rapid industrial growth in Asia and low transportation costs allowed the construction of intricate production networks that span the globe, geopolitical manoeuvring and industrial policy are shrinking supply chains and placing them back behind national borders.
This retreat from global markets comes at a considerable economic cost. Some firms, of course, will benefit from a return to large-scale industrial policy in the North Atlantic, and not all of them will be American or European. Australia, for example, stands to gain from the content restrictions contained in the Inflation Reduction Act’s electric vehicle subsidies, since critical mineral inputs in subsidised cars can be sourced from countries like Australia that have free trade agreements with the United States. Australian companies like Novonix and Talon that have processing operations on American soil will benefit from government subsidies. But Australian companies will find it increasingly harder to export to China, Australia’s largest export market. For other countries, the picture is more mixed. South Korean auto manufacturers will probably suffer, but battery makers could benefit.
The complicated nature of international supply chains means that any attempt to reshape them to conform with geopolitical rather than economic logic will produce a messy set of winners and losers. What seems certain, though, is that the economic losses will outweigh the benefits in aggregate, particularly for countries caught in the crossfire. The rise of Asia owes much to the dispersion of global production networks. In the medium and long run, rolling back that development is far more likely to inflict collateral economic damage on Asian countries that have yet to catch up, like Cambodia and Laos, than on China, which can reorient towards its own domestic market. Moreover, if the subsidised American and European manufacturers are less efficient compared to Chinese ones — as is likely — the hobbling of Chinese high-tech manufacturing will lead to higher prices for consumers around the world.
More broadly, aggressive American action on semiconductor exports to China and Europe’s collusion on electric car subsidies underscores a sobering truth: neither Washington nor Brussels is willing anymore to take on the mantle of global leadership in preserving the global trading system. China’s attempts to use its trade to extract political concessions from countries like Australia and Lithuania suggest it is not fit or in no mood to do so, either.
In some ways, this is unsurprising. Even today, American foreign trade is just under a quarter of GDP, while for the European Union — taken as a bloc — that figure is even lower. China’s trade-to-GDP ratio has declined from around 64 per cent in 2006 to 37 per cent last year. Though none of the three are going to withdraw from the global trading order altogether, it seems increasingly clear that none of the major powers feel obliged to do what is necessary to save it.
But trade-dependent economies like Australia, South Korea and Taiwan don’t have this luxury. They can either choose to fight for scraps from the major powers, begging for exemptions for their manufacturers when new protectionist industrial policies are introduced, or they can muster the will to reinforce the multilateral order before its decline becomes irreversible.
A world in which the US Congress or the European Commission decides who can produce what high-tech goods and where is not one which the economies of Asia, including Australia, should be prepared to accept.
The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.