Now is a vital time for China’s chipmaking ambitions

By Hal Hodson: Asia technology correspondent, The Economist

THROUGH TRADE wars and pandemics, China remains the world’s workshop. But there is still one vital product its manufacturers cannot make competitively: the microprocessor chips that power smartphones and cloud servers, whose number-crunching underpins the world’s leading companies. In this arena America and its allies, especially South Korea and Taiwan, remain dominant. China is trying hard to catch up. America is trying hard to stop it.

This struggle will intensify in 2021. American officials learned a lot about global microprocessor supply chains during their recent campaign against Huawei, China’s telecoms-equipment giant. The walls they threw up around the company, to cut it off from vital chip supplies, went from leaky to robust. They can now deploy that understanding against China’s nascent chipmaking industry.

Manufacturing chips requires huge multimillion-dollar machines that each carry out just one step of the complex chipmaking process. A few of those machines are made exclusively in the United States by American companies, mini monopolies that are ripe targets for new export-control rules prohibiting sales to Chinese chipmakers. That would set Chinese efforts back years. Chinese firms working on equivalent machines are nowhere near ready.

There is a less aggressive alternative. America could, with Joe Biden as president, adopt a more nuanced approach. Instead of Donald Trump’s unilateral, hard-man tactics, America could try to build a consensus with its allies about the common threat a thriving Chinese chipmaking industry would pose.

This would mean striking agreements with friendly governments about which technologies could be sold to Chinese companies, and which pose a threat. The market for selling advanced technologies into China is worth hundreds of billions of dollars, too big to ignore. If America and its allies do not move together, a blockade may create an opportunity for Japan, Europe or South Korea.

Instead of expecting allies to sign up to its own export controls, America would involve them earlier on, identifying mutual interests and threats. This would allow for a joint effort to squeeze and shape China’s technology ecosystem, without the risk of losing all contact with it, and thereby all control. But if America chooses not to pursue this course, in 2021 China’s chipmakers will enter a new, and potentially more hostile, phase in which they must thrive without America, or die. It may take time, but given the country’s record over the past 40 years, few people would bet against them on that.

Hal Hodson: Asia technology correspondent, The Economist ■

This article appeared in the Business section of the print edition of The World in 2021 under the headline “Bargaining chips”