10 Insights from the US Embargo on China's Technology Sector Simulation

Since the outbreak of COVID-19 in late December 2019, relations between the United States and China have increasingly deteriorated. Adding to that are the recent events in Hong Kong, increased tensions over the sale of weapons to Taiwan, and the growing bipartisan consensus in Washington that the United States must protect domestic industries to retain a technological edge.


In June 2020, Wikistrat ran an economic wargame in which some of the world’s leading experts on China explored the impact of an extreme-case scenario on the relations between the US and China and examined how the relations will evolve as a result.


40 Top experts on China and the US, were divided in accordance with their expertise to their corresponding team. Each participant role played a certain political influential character in those countries. Wikistrat collaborative platform uses wargames and role-playing, in particular, to facilitate thinking as the target actor, to increase creativity and to encourage out of the box thinking. This gamification technique was established so participants will feel more open in their suggestions and discussions.


Scroll down to view the top insights from the simulation, or download the report and learn more about our methodology and experts:

The US Embargo on China's Technology Sec
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1. US POLICY IS UNLIKELY TO CHANGE AFTER THE ELECTIONS

Regardless of who wins the US Presidential elections in November 2020, we are not likely to see a drastic change in US policy toward China. During the simulation, experts on both teams set their policies with the understanding that there is a consensus in Washington about the challenges China poses to American interests, resulting in bipartisan support for tougher policies against China.


“There is no real domestic political incentive to have a dovish view on China today, while there are numerous political incentives to have a hawkish view on China” - Expert who participated in the simulation

2. BEIJING WILL CIRCUMVENT US SANCTIONS

During the simulation, Team China experts were confident that Beijing will circumvent US sanctions on sensitive technology by reaching out to its network of alliances and trade partnerships with various companies and individuals (in countries such as Japan, Korea, and Taiwan). The simulation participants made it clear that China already has pre-existing contingency plans, relying on strategic stockpile to maintain short-term supplies of the advanced technology that is critical for its manufacturing, such as semiconductor equipment and EDA tools. According to the experts, at best, a technological ban might achieve the following two goals:

  • A ban will deny China the ability to work with US companies

  • It will slow China from acquiring the required quantities of advanced technological equipment that are required for massive commercial use (but it will not deny it from access to it).

“Longer-term, it will be harder for the US because we are talking about emerging technologies where the US lead (and the lead of its allies) is likely narrower and China will be able to develop 'good-enough' technologies. The battle will be decided as much in the fast-growing developing world as in the developed world. China will pursue a low-cost and 'good-enough' strategy to win market share and expand its tech standards. America's challenge is how to compete on costs.“ - Dr. Minxin Pei, Claremont McKenna College

3. THE INCREASING VALUE OF SEMICONDUCTORS

The relative high cost of building a semiconductor fabrication plant (estimated at billions of dollars), the high-level knowledge required to do so, and the fact that the market is primarily controlled by a very small group of companies make the manufacturing of semiconductors a strategic asset that was at the core of the policies discussed by the experts on both Team China and Team US.


The experts on Team China were aware that, currently, China lacks the capacity to produce the most-advanced 7-nanometer designed integrated circuits and smaller chips, important for 5G technology and other devices produced by Huawei. Yet, recent events have led China to increase investment in such capabilities (via SMIC) and move forward in promoting trading initiatives with companies such as Samsung and TSMC. When it comes to the manufacturing and trade of semiconductors, it was clear that the experts in Team China were not creating a new policy, only accelerating policies that are already applied by the Chinese government, aimed at the development of domestic industries and establishing new alliances.

"Semiconductors are the key technology in the USChina tech cold war. Since May 2020, the Commerce Department has stipulated that US companies supplying chips to Huawei will need a license if the design and production process uses US intellectual property, software, or equipment. Semiconductors are the brain of the digital economy, power grids, healthcare, smart devices, etc., and they are difficult to design, produce, and reverse engineer. In a growing sign of semiconductor nationalism, governments are considering ways to spur domestic production of this key technology.“ - Devin Stewart, Senior Fellow for Carnegie Council's Asia Dialogues Research and Exchange Program

4. CHINA WILL NOT WEAPONIZE ITS HOLDINGS OF US TREASURIES

One topic the experts on Team China debated was whether China should consider, threaten, and prepare for the possibility of large-scale selling of some of the $1.07 trillion worth of US Treasuries it currently holds. Most of the experts in Team China considered these types of actions to be counterproductive, leading to a potential destabilization of the US and global economies, which would not be in China’s interest.

As for the option of threatening to do so, most experts agreed that such a move would force China to carry it out or lose credibility. Yet, the experts agreed that the current Chinese policy of reducing its exposure to the US treasury, a policy China has been applying since 2013 (Chinese holdings have decreased by about 15% since 2013), should be continued and accelerated.

5. CHINA IS SEEKING CURRENCY SOVEREIGNTY

Experts on Team China argued that a continued worsening of relations with the US will only expedite the ongoing Chinese policy of creating a Chinese alternative to US currency and USD backed financial systems (such as the SWIFT). According to the experts, there are a few ways China can achieve this:

  1. It could expand the usage of the Chinese Central Bank Digital Currency, the DCEP, with its trade partners across the 150 Belt and Road countries.

  2. It could price oil in DCEP, doing so in collaboration with Central Banks of the Gulf region, Russia, and other oil-producing countries. This is a trend likely to grow along with falling oil prices.

  3. It could create an alternative to the IMF with China as its core founder, major liquidity provider, and lender of last resort.

“Currency sovereignty has been at the center of China's economic policy in the past decade or so. Current US policies gives it an opportunity to test waters and gain leverage using its trade partnerships with other countries” - Dr. Dhanasree Jayaram, Co-Coordinator at the Centre for Climate Studies (CCS), Manipal Academy of Higher Education

6. TAIWAN IS A RED LINE FOR BEIJING

In recent years, Beijing has been gradually embracing a “Wolf-Warrior” approach, which is more aggressive, confrontational, and keener on showing force. However, key policy responses from Team China were relatively moderate and reasonable when only economic and technological stakes were involved. Regarding Taiwan, the experts on Team China were clear that their policy would shift from containment to escalation in order to establish clear red lines, even at the risk of spiraling into direct military conflict. Yet, it’s important to note that, even in such an extreme scenario, the experts in team China tried to avoid a “security spiral” that would escalate the relations into a direct military confrontation with the US.

"Taiwan's relations with the US are the best they've been in decades, as lawmakers in Washington have sought to boost ties with the island by introducing and enacting several important pieces of legislation and approving arms sales in the past two years. The legislation and arms sales, however, are always mindful of a potential negative economic or military reaction from Beijing and are frequently watered down. Taipei is also sensitive to asking (or receiving) too much assistance from Washington and stoking the fire and prompting a face-saving exercise from the CCP. The extent to which Beijing chooses to escalate its efforts to annex the island will depend on what actions Washington undertakes to improve relations with Taiwan.” - Gary Sands, Managing Director at Highway West Capital Advisors, based in Taiwan

7. COUNTRIES AT A CROSSROAD

Countries such as Japan, Korea, and Taiwan will find themselves under increased pressure and scrutiny from the US to join the technological front against China. A move taken by the experts on Team US. China too, will reach out to these countries, and more specifically to the business elite in these countries, to apply both pressures on the local governments and to establish open trade channels to circumvent sanctions.


As a result, we are likely to see various companies from these countries forced to follow the footsteps of TSMC in establishing ways to walk between raindrops by building factories in the US or providing China with certain access to advance technological capabilities. All for the sake of preserving current and ongoing trade with both the US and China.

“TSMC is the largest single contributor to Taiwan's GDP (4.46% in 2019), it is the largest exporter and is the largest employer. Chinese companies like Huawei also make up a large portion of their orders. It would take an unusual amount of US pressure to fully cut this supply line off… TSMC has proven cooperative in helping Chinese companies find solutions to problems such as Huawei's inclusion on the entity list in 2018. It has even been speculated to be using its US$12bn Arizona plant as leverage in bargaining for an export license to China, in the context of the US's 2020 ban on Huawei's use of components made using US-supplied semiconductor equipment and EDA tools. “ - Gareth Tan, Research Analyst at TRPC, Singapore

8. CHINESE STUDENTS IN THE US

With more than 350,000 Chinese students residing in the US, accounting for about a third of all international students in the country, both teams debated policies related to them. Team US considered pressuring China's elites to influence the leadership by expelling the students. Yet, the experts in the team rejected the idea, as it could financially hurt academic institutions in the US and could lead to a PR disaster. Team China did consider the possibility of recalling the students to put economic pressure on US academic institutions and force them to pressure US policymakers. Yet, the experts in the team were concerned about the possibility of students staying in the US, a move that would reflect badly on Beijing.

9. RUSSIA'S ABSENCE

The Russian actor was completely absent from most experts’ discussions over desired policies, on both sides. According to experts on Team China, the Russian actor was not considered as a potentially valuable ally because of the US sanctions against it. In addition, experts in the US Team didn’t consider applying the same policies against China that are used against Russia; they made clear distinctions between the threats each country poses to the US.

“The absence of Russia was partly due to the nature of the topic—focusing primarily on high-technology, Taiwan, and other questions where Moscow is not a major player. Russia would have been more prominent if the simulation had focused on a potential SinoAmerican military clash regarding Korea, Iran, or Japan.” - Richard Weitz, Director of Political-Military Analysis, Hudson Institute

10. THE RACE FOR ALLIANCE WITH THE EU

While both China and the US will seek a stronger partnership with the EU, US isolationist policy will have a price when confronting China. Many of the policies from Team China were aimed at reacting to the US embargo by strengthening partnerships on trade, energy, and technology and creating a kind of coalition that would emphasize the increasing role of China in Europe while the US global status, led by Trump, is increasingly deteriorating. Team US was also looking for solutions, especially in the field of tech and communications, that could replace Chinese supply to the American market. Yet, many of the experts emphasized the fact that relations with Europe today, specifically with Germany, will make it both hard and costly for the US.

"Civil aviation is another area where the US has a huge edge, but its ability to pressure the Europeans to cut off tech flows will be limited because China will essentially give Airbus a huge advantage in competing with Boeing and leverage its market access for tech transfers.“ - Dr. Minxin Pei, Professor of government, Claremont McKenna College

If you wish to learn more about Wikistrat's unique methodology, use our services, or join our experts' community, email info@wikistrat.com. For press inquiries please contact lironne.alice.koret@wikistrat.com

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