In many critical technology industries, the United States and China are locked in an intense competition for economic and innovative primacy. At the same time, the supply chains, talent pools, and financial capital of individuals, corporations, and governments in both countries are deeply entangled in one larger tech ecosystem.
Using the semiconductor industry as a case study, we asked NCUSCR Director Anja Manuel to shine a light on this complex web of collaboration and competition, and discuss what it could mean for humanity’s shared technological future.
This episode is part of the National Committee’s U.S.-China HORIZONS series.
Anja Manuel is co-founder and partner along with former Secretary of State Condoleezza Rice, former National Security Advisor Stephen Hadley and former Secretary of Defense Robert Gates, in Rice, Hadley, Gates & Manuel LLC, a strategic consulting firm that helps U.S. companies navigate international markets. She is a former diplomat, author, and advisor on emerging markets. She is the author of the critically acclaimed This Brave New World: India, China and the United States, published by Simon and Schuster in 2016. From 2005-2007, she served as an official at the U.S. Department of State, responsible for South Asia Policy.
Earlier in her career, Ms. Manuel was an attorney at WilmerHale working on corporate governance, international and Supreme Court cases, and represented special committees of major corporate boards before the U.S. Congress, Department of Justice and the SEC. She was also an investment banker at Salomon Brothers in London. She currently serves as a director on the board of the National Committee on U.S.-China Relations. She is the director of the Aspen Strategy Group and Aspen Security Forum – the premier bi-partisan forum on foreign policy in the U.S. – and is a member of the Council on Foreign Relations.
A graduate of Harvard Law School and Stanford University, Ms. Manuel now also lectures at Stanford University. Ms. Manuel lives in San Francisco with her husband and two children.
What are China’s goals for developing its domestic critical technology industries and how is it achieving these ambitions?
Anja Manuel: China is really ramping up its technology development. And there are four key areas where I would say the competition between China and the U.S. is joined. One, of course, is semiconductors, the chips that are in your computers, phones, tablets, everything. It’s the basic technology that underlies everything else we do in computing. The Chinese have spent hundreds of billions of dollars trying to catch up with where the West is and they’re beginning to do so. They’re not quite there. So that’s one, semiconductors.
Two is artificial intelligence. This is really a baseline technology that’s gonna underlie so much of everything else that’s happening. And while the best academics in that space are still in the U.S., Canada, U.K., Europe, Israel, Japan, the application of AI, and certain specific parts of AI, such as drone technology and visual recognition AI, are really, really, very advanced in China. So I would say, in some of those, they’re really neck and neck with us. That’s number two.
Number three, of course, has gotten the most attention and that’s 5G and 6G technology. So this is how you’re going to be able to use your devices very quickly. It’s gonna run everything from your mobile phones to the Internet of Things. So the backbone infrastructure of that is critical. Huawei, of course, is neck and neck with Ericsson and Nokia, the other big competitors and the Chinese are doing quite well.
And finally, and this is one that people don’t talk about very much, fintech. The Chinese fintech giants, especially Alipay, Ant Financial, WeChat Pay, are incredibly impressive, and especially in the international payment space, are much better than anything you see out there in the West. And if we don’t watch it carefully, I think this is an area we’re gonna wake up in a couple of years and it’ll be a 5G moment, where we’ll say, “Oh, my gosh. All of a sudden we’re behind.”
Those are the four big ones I would mention. Of course, there are others, certain aspects of biotechnology if they bleed into bioweapons, in particular, quantum computing, which is further out there. But the Chinese are catching up in all sorts of technical areas. In some cases that’s appropriate. In others, we’ll certainly want to stay on our toes.
How is the CCP trying to promote the development of these industries? What strategies are they using?
Manuel: Absolutely. China has a whole of society approach to all of these technologies. So, it’s from specific subsidies for companies working in the technologies I mentioned, to promoting education. The number of AI programs in China is proliferating far faster than it is in the West, on the military side, a concept they call civ-mil fusion, where you have the private sector and the public sector really working hand-in-hand to promote and develop those technologies. And then finally to spread them internationally, and this you saw, particularly with Huawei. There are subsidies and zero-interest loans to help disseminate Chinese technology internationally.
How has the U.S. government and its private sector in the U.S. responded to China’s technological rise so far? What has the reaction been in terms of policy and also rhetoric, too?
Manuel: I think the Trump administration deserves some credit here for raising the alarm at how quickly China is catching up in these key technologies. However, what the Trump Administration did was almost entirely defensive. So we tightened our investment screening, making it harder for Chinese companies to invest in our most advanced technology. We put in place very, very tough new export controls, making it harder for American technology to go to China. All of those were necessary, but in some cases it was overreach. It wasn’t multilateral. For example, in semiconductors which we talked about in the previous question. We put these tough new export controls in place, but we didn’t ask our allies to do the same thing, so the Chinese just buy them from Korea, Japan, the Netherlands, elsewhere. They don’t need to get them from us, so that’s one example. I think now what we should be doing is, instead of trying to tear China down, we should be doing more to build ourselves up, to build up the U.S. innovation ecosystem.
Could you speak more specifically to how the U.S. could build ourselves up and improve our own industries, in particular, the semiconductor industry, to better compete with China?
Manuel: There’s a lot we could be doing to build ourselves up and we’re starting to. And the nice thing is, this is one of the few issues in Washington that seem to be fairly bipartisan, so there are a couple of big initiatives out there. The Biden Administration really believe in this. They have a new Deputy National Security advisor for tech, Jason Matheny. They’re putting in place a lot of the people who would help us do this. There are two big bills right now going through the Congress that I think will help a lot. One is the Endless Frontier Act, pushed by Chuck Schumer, which is going to pump as much as 100 billion dollars over about 10 years, into advanced research and development for some of these key technologies that I talked about. That will be important. Of course, it will then be important to spend that money well and to use it to leverage more private sector investment, so it isn’t just wasted. That’s one.
Two, the new infrastructure bill, part of the American Jobs Plan, there is a promise for 50 billion to push advanced semiconductor manufacturing. This is really critical. However, semiconductors have so much capital spend, that 50 billion, even if the U.S. spends it and that’s a huge amount of money, that is only about four months or so of capital investment by that industry. Once again, just like the Endless Frontier Act, we need to make sure that we can spend that money effectively on the most advanced chip design and manufacturing, and that we use it to leverage appropriately private-sector incentives so we’re not just giving that money away and it flows down the drain.
The semiconductor industry is a really good example of an industry where the U.S. and China are competing, but at the same time are highly interconnected in terms of markets, supply chains, and rare metals required to produce chips. How can the U.S. protect its competitive advantage with China without breaking down the supply chain, or cutting itself off from the huge market in China?
Manuel: Intertwined is exactly the right word. So, while many of the most advanced chips are designed in the United States and much of the equipment, the machines that produce semiconductors come from the United States, our company’s biggest customer by far is China. Chinese chips, a lot of those are actually assembled in China into all of the phones and tablets that are currently in all of our pockets. So chips are designed in the United States, often manufactured in Taiwan, Japan, South Korea, then shipped to China, and assembled into all the products that then get shipped all over the world through Foxconn, for Apple, for Samsung, for everyone else. So you are absolutely right to say that this is one international ecosystem. Just breaking it up entirely doesn’t make a whole lot of sense. What I do think makes sense and people are beginning to talk about it in a bipartisan way, is to have very narrowly tailored export controls on the most advanced equipment that would allow the Chinese to make the most advanced chips, especially that goes into military applications. That’s one. And to do that, as I said in answer to a previous question, multilaterally, it can’t just be the U.S. It has to be the same controls on, especially in this space, Japanese, Korean, Dutch, and American technology, because those four countries are currently ahead on that. And then finally, on a lot of other second and third-generation stuff to keep cooperating, because it is a good market for all of us and we shouldn’t be 100% decoupled.
There are some calls in Congress to try to on-shore the production of these chips, so let’s not just design these chips but let’s build them too. Could you take us through some of the pros and cons of decoupling and on-shoring production? Because I feel like this is something that someone who is pro-decoupling might say: “Let’s just re-onshore the production and close the loop so we’re insulated.” Can you talk a little about this concept, and the pros and cons of that come with it?
Manuel: On-shoring the production of semiconductor chips, meaning installing the fabs, these huge factories that cost 5, 10, sometimes more than that, billion dollars apiece to build, I think is appropriate in small, select areas, the most advanced new chips and those that are going into our national security, defense, and intelligence supply chain. I think anything more than that it’s going to be folly, because let’s start with we don’t even have a workforce right now that is specially trained to work in those in those giant fabs. Most of those experts are in Taiwan, Korea, and Japan. So there would be a huge shortage of something like 200,000 people if you start onshoring fabs. You can grow that workforce and that would be a positive thing, but you don’t need it. What you want is, by and large, to keep the international trade system in these products going. The most advanced important things in those that go in national security, yes, some of those we should be manufacturing here.
Switching gears: China is not oblivious to what’s going on in Congress, and besides the debates currently raging, some reforms have already been made such as those relating to CFIUS. How has China responded or reacted to the United States, or at least parts of the United States, “waking up” to their technological rise, and what is the strategy China is putting together?
Manuel: You’re seeing a lot of tit for tat here. From an American perspective, the Chinese started it, if you will, by pushing so hard into some of these technologies, as opposed to letting it be an equal playing field and may the best technology win, really pushing in a way that we discussed earlier, to make sure they’re in the lead on 5G semiconductors, etc. We’ve talked a lot about the U.S. response. What’s China doing now? Doubling down on their strategy. They’re talking about dual circulation, where there was going to be one internal market for things. They’re moving very rapidly to cut, for example, non-Chinese software out of any systems in China, especially those that touch the government or state-owned enterprises, which is a big chunk of the Chinese economy. It’s called the 2-5-3 Program. That’s almost done and implemented. And there’s a lot of push to be more nationalistic, so I’m always surprised when I go to China, how strenuously patriotic and nationalistic the young generation is. Those guys who have just come out of college or going in, who have no memory of Tiananmen Square. They really are very pro-Xi Jinping and pro the Chinese regime. They’re going into Chinese tech companies, and they see it as their patriotic duty, in some cases, to make sure that China remains the tech leader in this thing. This is important. I just want to emphasize one more thing: competition is healthy, and we should welcome it. Total decoupling is in no one’s interest. So I think it behooves both countries to narrowly bound what you were going to compete in and also define some areas where we can continue to cooperate. And I think that is still lacking a little bit.
On that note of cooperation (or competition, either one), what is one aspect of the U.S.-China tech relationship today that makes you hopeful or excited about the future?
Manuel: I’m hopeful in two ways. One, if we can narrowly bound our competition, and say, “Okay, it’s really just in these few technologies where both sides think they need to be in the lead,” that’s a positive thing. There are so many other areas where we can cooperate. For example, clean technologies, solar, carbon capture and storage, many, many parts of artificial intelligence, many parts of biology and biotech. There are so many areas where we should be cooperating and we shouldn’t underestimate how much basic science research happens and the best basic science research really happens when you have international teams, often involving American and Chinese researchers. We should be celebrating that rather than undermining it, while being careful about the things that impact our national security. Hopefully, one, we can find areas where we can still continue to cooperate. Even if we can’t do that, and it’s looking pretty dark, pretty bleak these days in the U.S.- China relationship on both sides, I think, if we can do that, this can really spur a new era of vast advances in science and technology. Kind of like the Space Age in the sixties and seventies and that’s a positive thing. Healthy competition that spurs both of us and all of our friends and allies to be better in what we’re doing can only help the progress of humanity.