As the US-China tech war escalates loudly, no one wins

For decades, the US and China engaged in strategic ambiguity to keep their relationship stable, but both are now openly targeting global leadership
By ramping up their rhetoric and acting with explicit intent, the two countries are not only inflicting economic pain but also increasing the chances of a hot war

Christopher Tang

Published: 3:00am, 6 Jul 2023

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During her visit to Beijing, US Treasury Secretary Janet Yellen is expected to stress the need for both countries to “responsibly manage” their relationship, “communicate directly about areas of concern and work together to address global challenges”. Although her visit is well-intentioned, it will not be a panacea for the current conflicts between the United States and China. Instead, the visit represents a positive initial step, providing the two countries with an opportunity to reassess and develop more effective strategies for peaceful engagement.

For decades, both the US and China used a policy of strategic ambiguity to keep their relationship stable. But in recent years, President Xi Jinping declared his dream of China becoming the world’s “leading power”. At the same time, US President Joe Biden wants to ensure the US will continue to “lead the world”.

These publicly declared intentions led some scholars to speculate that this conflict is akin to a “Thucydides Trap” that could result in war. However, other scholars found this trap analogy to be inaccurate because the characteristics of the US and China are very different from those of Athens and Sparta. Therefore, the threat of war between the US and China can be avoided if both parties can re-engage each other to ensure prosperity and peace.

Declaring intentions explicitly is risky, but revealing each party’s action plan openly is dangerous. As Sun Tzu wrote in The Art of War, “The spot where we intend to fight must not be made known; for then the enemy will have to prepare against a possible attack at several different points.”

Besides enabling your opponent to counter-attack, making your action plan known publicly binds you and limits your flexibility to change course when your original plan is ineffective. This tit-for-tat exchange between the US and China is escalating with no end in sight.

Instead of engaging in friendship-building activities, the political rhetoric of the two sides has ratcheted up tensions since former president Donald Trump started the trade war against China in 2018. The Biden administration’s current explicitly stated strategies include keeping in place Trump’s tariffs on imports from China, imposing restrictions on the export of chips from the US, and expanding the US military presence in Taiwan.

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An unwinnable conflict? The US-China trade war, 5 years on

These could all escalate the likelihood and severity of conflict with China. Instead of addressing these issues, both countries are carrying out a trade war of attrition and declining to negotiate behind closed doors which would allow for some wiggle room. Each has explicit plans to inflict economic pain on the other.

Last year, as a way to slow down China’s technological development, the Biden administration banned US companies from selling advanced microchips and the equipment used to make them to Chinese firms. In retaliation, Beijing banned the operators of China’s key information infrastructure projects from buying chips from Micron Technology. The current tit-for-tat game is causing economic harm as it hinders China’s development of artificial intelligence and limits US economic growth.

This trade and technology war escalated further when it was reported in late June that the US Commerce Department was considering banning the sales of Nvidia’s AI chips to China. Because China accounted for 22 per cent of Nvidia’s revenue last year, the company warned this strategy would result in a “permanent loss of opportunities” for the US semiconductor industry.

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To counteract this, China announced on July 3 that it would restrict the export of gallium and germanium. These two metals are critical to producing high-speed computer chips and radio frequency amplifiers for smartphones, for example.

Given that China accounts for more than 95 per cent of the global production of gallium and over 65 per cent of germanium output, this export ban, which will take effect on August 1, will trigger an immediate ripple effect on advanced chip production in the US. When China controls the supply of these metals at the same time as the US depends heavily on imports from China – it acquired more than half of the gallium and germanium it used in 2021 from China – sourcing from other countries, extracting these metals in the US or developing alternative materials as substitutes might not be immediately feasible.

In addition to imposing export bans, the US Department of Commerce issued licence restrictions last year barring US citizens from working in China’s chip manufacturing industry. In response, China amended its anti-espionage law earlier this year with changes that went into effect on July 1. The Chinese counter-espionage law bans the transfer of any information related to national security and broadens the definition of spying in a way that could put US firms operating in China at risk.

Unless there is a truce between these two countries soon, China could expand its export ban to include rare earth metals. While rare earth metals are not all that rare, extracting, processing and refining the metals pose a range of technical, political and environmental issues in the US.

Limited access to metals such as gallium, germanium and rare earths could affect the US capability to develop AI technologies. At the same time, US export bans on advanced chips and chip-making equipment could hurt China economically.

However, this export ban is pushing China to invest heavily in its semiconductor industry as a step towards self-sufficiency in chip development. In the long run, China could end up leading the semiconductor industry. The current tech war is hurting both countries and could escalate into a hot war.

It is imperative that both the US and China refrain from engaging in open warfare as it could result in significant economic and political damage for both nations. Because there is no winner in war throughout history, maintaining peace is of utmost importance.

Christopher Tang is a distinguished professor at the UCLA Anderson School of Management