October 2022. News is echoing around the internet, sending shockwaves throughout the world. The White
House has just hit China with something no one expected. American workers in Beijing and Shanghai
are packing their bags and coming home. They never imagined this. The trade war, not so fierce up
until now, has become a veritable Stalingrad. It’s the Somme of international relations skullduggery.
It’s being called an “annihilation.” China is down on its knees, or it looks that way.
What’s going on? We don’t doubt that you’re well aware of China’s
meteoric economic rise. This is a country that, just a few decades ago under Communist leader Mao
Zedong, experienced widespread famine and mass death. The Great Leap Forward was a big stumble
backward, and the Cultural Revolution was cultural contamination straight from a tyrant’s mind.
Millions upon millions of Chinese people were thrust into abject poverty. Tens of millions
of people died as a result. It was the worst of times, and it was a period where you could
be executed for even showing the slightest amount of skepticism towards the leftist
movement. Unsurprisingly, China’s greatest enemy at the time, a country Mao said was the wicked
imperialist, was the USA. Things have changed since then, but the present relationship is hardly
ideal. Certainly not after what’s just happened. In the late 1970s, when Mao was a few feet in
the ground, things changed in China. The country embraced economic reform.
It said it would become a “socialist market economy.” It leaned into the capitalist mold,
and although it was still officially communist, led by “The Chinese Communist Party,” if Karl Marx
could have seen it from the grave, he might have spun around in his coffin shouting “Scheisse!”
Communist in name, but not really in nature. China today is a strictly authoritarian country.
It runs a strict top-down enterprise. Under its present leader, Xi Jinping, it clutches onto a
kind of exceptionalism. China does things the Chinese way. The US on the other hand,
expects countries to play ball (in its ball court), and if they don’t, trouble usually
follows. Ask any country that’s ever had a visit from an economic hitman…if they exist, that is.
China became the great tiger of Asian economies. Its growth during the reform
was called “unprecedented.” Sure, there was pervasive corruption and a lot of
intolerance towards criticism, but the days of famines and people eating tree bark,
or worse, their relatives, were over. The Chinese economy kept on growing.
According to the International Monetary Fund, their GDP hit a trillion dollars in 1998. That
was still way behind the wealthiest European nations and Japan and didn’t look like much
compared to the USA’s $9 trillion (IMF), but things took off around 2006. The Chinese GDP
was around $5 trillion in 2009, now well ahead of those rich European nations and not far
behind the US’s IMF figure of $14.5 trillion. The World Bank says the United States GDP for
2022 is $20.89 trillion. China’s is $14.72 trillion. The prediction for China for 2027
is $28.2 trillion, with the prognosis for the US being $30.2 trillion. Still,
some economists say China will overtake the US. It certainly could. No one will say it’s impossible.
Well, that’s if the US doesn’t succeed in crippling China; to land that perfect kick where
it hurts the most, in its economic golden balls. China became rich because it was a powerhouse in
industry and manufacturing. We are sure that when many of you look at the label inside many things
you buy, and we mean from a toy to an electronic device to a pair of sneakers, you aren’t too
surprised when you see the words, “Made in China.” The country’s pharmaceutical industry is huge,
as is its electronics industry. Machines of all types are made in China, as are many of
the clothes you buy. If you’re about to go out and get yourself some broadcasting equipment or
a computer, there’s a good chance it will come from China. And let’s not forget that app you
love so much, TikTok, made by the Chinese company ByteDance LTD. China is a big part
of your life, whether you like it or not. We’re sure you’ve all thought about buying
a phone from Xiaomi, Huawei, Oppo, Vivo, or ZTE. Why not? They seem decent enough
and often cost a bit less than a Samsung or Apple phone. The Chinese phones industry is
catching up. Only a couple of years ago, Huawei was ahead of Apple and almost as big as Samsung.
Huawei might have left Apple and Samsung in the dust, but the US, how do we say it,
peed on Huawei’s parade. The US slapped some sanctions on Huawei, telling the public that their
favorite phones were Chinese government spying devices. Was that true? We’ll come back to that.
Although the trade problems have raged on for years now, the US needs China,
as currently, the communist nation is the US’ biggest trading partner.
The value of goods that the US imported from China in 2021 was just over $506 billion,
well above second place Mexico at $384 billion. In 2018, the US’s import business from China was
a whopping $538 billion, but in 2019 and 2020, it sank to $450 and $434 billion, respectively.
This was because of Trump’s trade war, when the White House accused China of “unfair” trading
practices. This is why Trump introduced a bunch of tariffs on Chinese goods. The war was on,
and China announced to the world that it would retaliate. Whatever you can do,
said China, we can do better. It accused the US of not playing fair, so if that’s the way
you want it, said China, then bring it on! When it came to the distrust in Huawei, the
US wasn’t alone. As is usually the case, the UK backed up the US and also cracked down on Huawei.
The US’ allies all said the same thing: that Huawei’s wireless networking equipment contained
all kinds of back doors, making it possible for the Chinese government to spy on its users. This
was a big deal because Huawei had business with various countries concerning 5G wireless networks.
The company was also accused of corporate espionage, meaning it was allegedly stealing
intellectual property from US companies that had spent millions upon millions on research
and development. To make matters even worse, the US accused China of human rights abuses.
The UK government chimed in, saying China used Uighurs, a Muslim minority group that
resides in western China, as slaves. Huawei was involved, according to the reports in the UK.
The US Federal Communications Bureau recently said Huawei and ZTE were both spying on its users,
and it looks like these firms will be blacklisted from the US market. The companies have denied
the accusations, and it has to be said that no country has found the so-called smoking gun that
proves these claims. Even TikTok was accused of spying on its users, with Trump stating
that it was a national security threat. TikTok wasn’t banned, but it had to make some changes.
Meanwhile, China says the US has no proof of all this spying. It says the US is using dirty tactics
to undermine the Chinese economy. The spying thing, says China, and the other allegations,
are just part of the US playing games with trade. This is sometimes known as trade protectionism.
The question is, who is benefiting from this and how? This question was
asked just as Trump was introducing new tariffs and one analyst wrote:
“Regardless, a drop in imports from China only actually reduces
U.S. reliance on China if companies manage to find viable substitutes. But last year,
the United States was not able to fully meet the need for alternatives to Chinese merchandise.”
The same article said the winners were the countries that the US had turned to after
snubbing China. Two of the main nations that filled in the gaps were Taiwan and
Vietnam. Europe and Mexico filled in some other gaps. It should be said that China introduced
its own tariffs on American goods. Trade wars are a complicated thing, as you’ll soon see.
In 2020, an analyst writing for Carnegie said China actually came out better at the start of
the early trade war. It might have lost some of its business in the US, but when that happened,
it “was able to compensate by ramping up sales to nearly everyone else.”
Something also happened that wasn’t great for the US. As Forbes said recently,
all this trade warring has been detrimental to US companies working with China. The article said,
“America First trade policies have put Americans and U.S. companies last.”
So, at first sight, it might seem that the trade war wasn’t exactly doing that much damage,
but that was then; this is now. The US has completely changed its plans.
It recently enacted a kind of economic Schlieffen Plan that is part of the ongoing
assault to hit China from several directions. As you know, China has a massive electronics
industry, the biggest in the world by far. And we’re not just talking about sales of phones here,
but many of the components that go into various machines. According to one source we found,
for 2020, China’s electronics global exports added up to a massive $710 billion. Taiwan
was next at $219 billion, and the US was third at $162 billion. We should add that
different sources give different numbers, but China is always well ahead of everyone else.
The key here is metal–oxide–semiconductor field-effect transistors, something we
doubt the average person who owns an electronic device is able to talk about at the dinner table.
We doubt you have been on a Tinder-arranged date,
and just after you ordered your well-done steak (savage!), you tried to impress your
date by going on about how much you dig monolithic integrated circuits.
If you ever want to try that, it might be better to use the more familiar term for
this bit of silicon: the microchip. These tiny things changed everything. They were an integral
part of the computer revolution. That’s why that area of Northern California where dreams are made
and young guys in sweatpants have more money than entire nations is called Silicon Valley.
While people might queue overnight to be the first to buy an expensive but pretty phone,
the thing these enthusiast should predicate is what is inside, not what it looks like. It’s the
chips that count, and if you have control over the chip business, you have power.
What just happened is the US tried to mess up China’s chip world. Almost overnight,
the US introduced new rules, making it really hard for China to import what the media called
“key chips and components for supercomputers.” The White House fears China might use such
technology for “advanced military capabilities.” After all, you need the best electronic components
and chips for the best weapons. Still, is it really all about weapons? It’s obviously more than
that. It’s about making China hurt economically. Let us explain.
Taking chips away from China is a huge deal that will greatly hamper Chinese technology. As one
analyst said to CNBC, “There is no going back to the way things were. With the latest action,
the chasm between the U.S. and China has now expanded to the point of no return.”
If US companies want to sell China such technology, they’ll have to get a license first,
and we’re sure getting such a license won’t be easy. The same applies to foreign chips
if American tools or software are used in the production of the chips. And when
it comes to the machines that help make the chips in China, if they are from an
American company or involve American-made tools, then a license will be required if
they want to go on selling stuff to China. As we said, you only have an empty shell
without the chips. So, if China can’t get hold of the chips it needs, what’s going
to happen to its electronics industry? From now on, China will really struggle
to get the most advanced chips, which means it will fall behind in areas such as artificial
intelligence and quantum computing. Not to mention making any kind of advanced electronics devices.
The US has its own chip giant, Intel, but it is now way behind other countries' manufacturing.
Taiwan and South Korea are the giants here, so you might wonder, why is this pseudo-embargo
a problem fo China? After all they could just ignore the tech coming out of the US and focus
only on those two countries. Well, we just told you what the problem with that is. The
new US rules apply to technology, hardware or software, that uses any kind of American tools.
For example, Taiwan Semiconductor Manufacturing Company (TSMC) is the
world's largest semiconductor foundry. Word on the street is that this company is “critical” to
many brands around the world when it comes to making products. That’s not surprising,
given that Taiwan and South Korea make up about 80% of the entire chip foundry market.
TSMC uses American products, too. When the US was busy trying to kneecap Huawei, Trump used
something called the “foreign direct product rule” to stop Huawei from getting its chips from TSMC.
As you know, this pretty much crippled Huawei’s phone business. Now that the US is expanding its
economic influence over this sector, what will happen to the rest of China’s electronics firms?
And ehat will China do? First of all, it will be pretty damn
angry. What’s happening is akin to you having the world’s biggest candy business and just being told
you no longer have access to sugar. China might have to fall back on its homegrown chip giants,
which by all accounts, aren’t even in the same league as the guys in Taiwan.
China’s biggest chip manufacturer is Semiconductor Manufacturing International Co., but in terms of
chip sophistication, it just isn’t close to what China is getting from Taiwan. China wanted to rely
on just its domestically produced chips it would have to go without things such as AI chips and
the processors that are used in supercomputers. If you want to make those super-sophisticated
chips, you need something called an ultraviolet lithography machine. You can only get these from
a company in the Netherlands named ASML, but will the new rules mean it can’t sell its products to
China? You can bet that the US will put pressure on the Netherlands to make this a reality.
Those following what’s been happening have said that China is still far from realizing its dream
of being totally self-sufficient when it comes to making computers. Nonetheless,
the Biden administration created these new rules because it’s likely worried China was getting
too far ahead. The trade war wasn’t working. Breaking legs wasn’t good enough. Now the US
has slashed the tires on China’s wheelchair. For China to be fully self-sufficient,
it needs the brains to create such high-end chip technologies. We already know that
China has the industrial capabilities to out-produce just about everyone else,
but brainpower is king here. If China can find that power, no economic weapon the US throws at
China will work. This is why people are now saying that China will have to “reinvent the wheel.” This
might be easier if China somehow gets a spy or two to get hold of the blueprints engineers use
to make the chips. But that’s a big ask. There are tons of highly skilled American
engineers working in China right now. Maybe some of those guys could help?
The answer is that they probably won’t be able to. The new rules say that any US national
will also need a license if they want to work on developing or producing chips in China. Basically,
the US has just told quite a lot of folks: Hey. It’s time to come home. Keep doing what
you’re doing, and you’ll lose your citizenship. This is what one analyst said: "To put it simply,
Biden has forced all Americans working in China to pick between quitting their jobs and losing
American citizenship. Every American executive and engineer working in China’s semiconductor
manufacturing industry resigned yesterday, paralyzing Chinese manufacturing overnight.”
According to the Financial Times, several US companies in China have already started
complying with the rules. That Dutch company we just mentioned, ASML, just said in a letter:
“ASML US employees – including US citizens, green card holders,
and foreign nationals who live in the US – are prohibited from providing certain services to
advanced [fabrication plants] in China. Effective at midnight tonight, ASML US employees must
refrain – either directly or indirectly – from servicing, shipping or providing support to any
customers in China until further notice.” For sure, many people are looking at this
and saying, hmm, USA, you’ve just messed up the world’s chip industry. You’ve not
just made life hard for China, but as we speak, non-Chinese companies
are wondering what the hell they will do. The US might say no one ever said a trade
war was pleasant. It doesn’t seem to mind China smarting about this. Chinese Foreign Affairs
Ministry spokeswoman Mao Ning said the US was “abusing export control measures to wantonly
block and hobble Chinese enterprises.” No poop! She added, “Such practice runs counter to the
principle of fair competition and international trade rules. It will not only harm Chinese
companies’ legitimate rights and interests, but also hurt the interests of US companies.”
Still, despite many people saying the Chinese have been “decapitated” in terms of chips,
some say that it will use its power – and probably a lot of hard cash – to recruit Taiwanese and
Korean semiconductor engineers. There can be little doubt that as you watch this, the US is
busy putting a heavy arm on those countries and telling them it has an offer they can’t refuse.
This will go something like: Don’t send your engineers to China. If you do,
expect there to be consequences you won’t like. China will need this expertise just as much as
it will need equipment, and how hard it is to get those two things remains to be seen.
One thing that is certain is that the US has dropped one great big bombshell. Then again,
one of the reasons the Schlieffen Plan failed was that Germany underestimated its enemies.
If it does fail, the US may come out of it looking like a villain. After all,
as one writer said, “The goal is not to benefit American companies,
but to hurt Chinese ones.” There will be a lot of losers in this technological Cold War, and in the
future some might blame the US for acting like a bully on the world stage. It wouldn’t be the first
time. This might not happen, though. We still don’t know what the full ramifications will be.
But as the old saying goes, you have to break some eggs to make an omelet. Obviously, the folks
at the White House that came up with these rules did so because through analyses, they believe the
outcome will be good for the US, perhaps only big business US, or perhaps much of the public, too.
We wish we could tell you how it will work out, but the Infographics Show’s Crystal
Ball has run out of batteries. We just got our intern to order some more. She
says she found a great deal on Alibaba. It’s apparently much cheaper than Amazon. Go intern!
Now you need to learn more about Mao in “Meet the Man Responsible for the Most Deaths in History.”
Or, look at another big story right now, “How War in Ukraine Will Cause Russia To Collapse.”