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Techno-nationalism in US-China row: Q&A with Alex Capri, senior fellow at NUS

Judy Lin, DIGITIMES, Taipei 0

While many still believe the US-China tech war will be over along with the end of the US presidential election, most China experts at US think tanks believe it will be difficult for the two superpowers to return to their pre-trade war relationships.

Alex Capri, a senior fellow at the National University of Singapore, and a research fellow at the Hinrich Foundation, believes the US-China confrontation will extend from the technology sector - which he describes as ground zero - to other areas. During a recent interview by Digitimes, Capri - a former partner and regional leader at KPMG's Asia Pacific Trade and Customs Practice, and a former international trade specialist with the US Customs - explains what he calls "techno-nationalism" in the US-China disputes and analyzes post-pandemic and post US-election development for the global supply chain.

Q: The US-China technology cold war is intensifying. Do you think their confrontation is going to expand to other fronts?

A: Yes, I think so. There are strategic industries that will inevitably decouple. It doesn't mean all trade will cease. But there will be significant bifurcation of trade between the US and China around strategically sensitive issues.

The technology sector is of course, ground zero. When we talk about industries of the future, foundational and emerging technologies, we will see export controls and weaponization of supply chains on the US side, expand beyond hard technologies such as semiconductors, and focus increasingly on data.

How data is extracted, who has access to data, and so on, is exactly what we've seen now with WeChat and TikTok and the Trump administration's executive orders last week. I expect that these executive orders will expand to cover the parent company of WeChat, TenCent, and the BAT - Alibaba, Baidu and Tencent - companies, in general. Any major Chinese digital platform company is now fair game for different kinds of sanctions and controls.

There are multiple facets to what I referred to as "techno-nationalism." There is the "national security" element, which involves technology or data and whether it is harvested or used to endanger national security, in some way, or whether it is related to military, defense, or cyber intrusion and cyber security. Whether it is cyber espionage or corporate espionage, theft of IP - all of these things are now directly tied to national security and tethered to the use of technology. Then there is the economic side of techno-nationalism, where countries promote their national champions. From an economic standpoint, this is a mercantilist kind of view of the world. This view is accelerating fragmentation and decoupling in global value chains. The third element of techno-nationalism involves the use of technology to suppress, or promote ideological and political values using different kinds of technologies. For example, how is technology used to protect or infringe data privacy, or, to censor, to suppress information, to conduct surveillance of populations, or to produce fake news - essentially, propaganda. This clash of values is now central to the ideological systems involving China and the US and liberal democracies, in general. How technology is used or may not be used, is going to dictate which business relationships and transactions are acceptable and which ones are restricted. We are seeing this play out through the imposition of export controls, and, more and more, companies being put on restricted entity lists. That is all playing out.

Q: Yes, it's essentially the struggle between the different ideological values of China and the US. In Taiwan we are paying much attention to the semiconductor industry. There was a report from Wired, saying that there was a hacker attack on some of the high-tech companies in Taiwan. How valid or credible do you think it is?

A: I don't doubt that. Although I don't have specific proof for this. But it is such a strategic industry. It is absolutely vital for the CCP (Chinese Communist Party) to try to catch up, because semiconductors is an Achilles heel for China Inc. There are still no Chinese companies that can produce state-of-the-art microchips. The latest move of the US to close the loopholes regarding the "foreign produced direct product rule" now prevents third parties in overseas jurisdictions from selling semiconductors to Huawei and Hisilicon, if those semiconductors are made with US manufacturing equipment, and/or US software and IP. As you know, TSMC has announced they would no longer supply Huawei and Hisilicon. That scenario, in the future, can potentially hit Alibaba, Tencent and Baidu as well, because their hardware infrastructures also require US semiconductor technology and there are no viable substitutes.

Since the trade war began in 2018, there has been an exponential increase in corporate cyber-attacks in virtually all sectors. So, semiconductor industry would be a major target for cyber espionage at this point.

Q: Can Alibaba, Tencent and Baidu also be impacted by the export restriction of semiconductors?

A: They could be. So far there are still many companies that have not been put on the entity lists, such as SMIC. And certainly Alibaba, Baidu and Tencent are vulnerable. One might ask why the US administration would consider doing that, because these (TikTok and WeChat) are social media platforms, and they have a tiny market share in the US. The argument is: yes, that maybe true, but they are part of the China Inc ecosystem. From the techno-nationalist point of view, it's part of that economic footprint, ideological footprint, and security-risk footprint. Those companies are building cloud, digital infrastructure, and, not to mention that Tencent is building the blockchain infrastructure for the Chinese government for its cryptocurrency, or the e-renminbi. That is a very strategic geopolitical move on the part of Chinese government, as it tries to decouple from the US dollar. Again, in order to achieve much greater financial independence, they will continue to pursue their geopolitical objectives, including making the renminbi the primary currency of international trade with their regional trading partners. This is part of the much greater geopolitical rivalry that's going on, and so any of these companies, from a techno-nationalist standpoint, are vulnerable, and they are fair game for US sanctions and other export controls.

Q: You shed light on the Eastern Asian Currency Initiative in your previous paper. It seems lately China has been ramping up speed testing their cryptocurrency. It will soon expand the trial to other major cities in key areas and ready for launch. How soon do you think we will see the decoupling of the e-renminbi and the US dollar?

A: That's a difficult one to answer. It's not going to be that easy, because the US dollar is by far still the dominant currency, accounting for more than 60% in central bank reserves all over the world. But a certain group of countries are supportive to China's efforts to move to a digital currency, that would include the Iranians, the Russians and the North Koreans, and, to a lesser extent, EU companies that have become collateral damage to US sanctions against, for example, Russian entities. Essentially any country that would be subject to US sanctions would want an alternative currency. Since the dollar is the primary currency used in most trade, especially commodities, countries like Iran and Russia, which are rich in natural gas and oil, are stuck using the dollar. If they are using the dollar, that transaction can be traced all the way back to the US banking system. And the US government can impose sanctions on those banks, as well as those parties that are involved. So I would answer that Beijing would decouple from the US dollar as quickly as possible. If they are successful, this will further decouple and drive the world into more fragmented trading blocks. And you have to ask, if a trading block is held together with the renminbi, are the values of the Chinese companies going to be pre-dominant? Most likely that would be the case. That brings a very interesting counter measure from the US, that is: does the US government start to promote using Libra or other convertible currency, because it is directly and freely convertible to the US dollar?

The other thing that is interesting is that, if one looks at the business model of the BAT companies, they are innovative not because of unique technologies, but because the technologies they are using are ubiquitous and even built on western open-sourced platforms.

We are now seeing social media firms in the US starting to adopt models of their (BAT) payment platforms for all kinds of reasons. They kind of encircle their ecosystems, and have more access to their data, and again, this becomes an issue with the digital currency. When every transaction is becoming digital - everything is done with a QR code - that, again, provides power and control to a central government. It's enormous amount of control, and we run into data privacy issues again. Suppression and denial of people's access to a digital monetary system based on social credit scores, so to speak, in that regard we are going to see more fragmentation of the global financial landscape. The liberal democracies of the world will say, "Look, if adopting digital currency means that citizens essentially give up their rights of privacy, or if they choose not to participate in the monetary system they are marginalized to the point that they cannot participate in the economy," I don't see digital currency becoming the only alternative for democracies. I think you will still see a two-track process where you can do all kinds of things with digital cash, but you still have an option to pay in cash. In some ways that may not be a good thing because you can have black markets, criminal organization payment networks, tax evaders etc. But until a system based entirely on digital currency provides or allows for privacy and choice, we are going to see different emergent systems.

Q: Yes, essentially it is an ideological value system diversity issue.

A: Indeed, and the monetary system is a belief system based on trust and values. But what we are seeing as a game changer right now is the technology. That changes everything.

Q: But is it possible for the US government to develop its own digital currency?

A: We will see that. In the US, it will not be a government initiative. It will be through public-private partnership. The government will probably encourage Amazon, Google, or the other FAANG companies, to come up with some kind of universal digital currency. There have been talks about the COVID-19 making the US dollar lose some value. But I think in the long run, there is no alternative. For the digital renminbi, maybe you can see the countries along the Belt and Road, emerging countries in central Asia and parts of Africa, adopting it. We are in super early days of mercantilist competition. The US and the West has just woken up. It is like they got slapped a couple of times hard and woke up to this new reality. Now they are going to alter their behavior. We will see a re-orientation to a much more mercantilist system. That is going to lead to a more fragmented global economy - a fragmented Internet, fragmented markets, more localized production, and so forth.

Q: As the US is trying to catch up with semiconductor production, and China is of course doing the same for the purpose of meeting its Made-in-China 2025 goals, can there be over-supply in the future? Do you think they will achieve their goal?

A: Yes. US semiconductor companies, in terms of revenues and global share, are now a little more than half of the world revenues. So, they are still dominant in that regard. If you look at the value chain of semiconductors, which is broken into research and development, design, foundry, testing, and packaging, 80% of the value is in the design and the manufacturing portion. Most of the US semiconductor industry has outsourced that manufacturing portion, and the biggest percentage of that is with TSMC and UMC. The trade war and COVID, which further exacerbated the techno-nationalist issues we've been discussing, sort of brought that to light. The US government sees it cannot afford to be vulnerable to having such a big portion of semiconductor manufacturing off-shore to Taiwan.

We just discussed all kinds of cross-strait tension, cyber-infiltration, the possibility of sabotage, IP theft and so on. The US is committed to reshoring a significant portion of semiconductor manufacturing. That is now underway. We are in very early stages. It is well-known that TSMC has already pledged to build a US$12 billion in Arizona. But beyond that, there is US$30 billion funding in the first tranche in government spending to get production back to the US. That will happen. That happened before. Go back to the 1980s, Japan became the most advanced nation in terms of semiconductor design and manufacturing capabilities. The US responded with a public-private partnership called Sematech. Within 10 years, the US semiconductor industry had leapfrogged. Semiconductor for sure is an industry of strategic importance that is going to be re-shored and re-fenced to a certain degree. Other strategic industries such as pharmaceuticals, will also be re-shored.

As for whether the goals of MIC 2025 can be achieved, I think they have miscalculated, and that is a serious example of overreach. China absolutely over-stepped what they were able to. They pronounced this MIC 2025 plan, in which all core industries require semiconductors, and they are a long way from having the capability to produce these semiconductors. And the CCP doubled down and came out with a China Standards 2035, saying that Chinese companies are going to dominate global standards such as 5G. Doing all of these subsequently at the time when militarizing islands in the South China Sea, and imposing national security law at Hong Kong, you couldn't have drawn this up any worse in terms of a foreign policy bungle, given the backlash and the blowbacks we are seeing. So, no. No, I don't think they are going to meet their goals by 2025, not even close, when it comes to semiconductors.

But you could look at it another way. This is a 21st century "Sputnik moment" for the United States. And Western Europe is basically saying, "OK, game on!" I would argue, when the US is so paralyzed by its divisive national politics, I can't think of a better way to unite a country, and to come up with a new wave of public-private partnerships, than to name China a new technology and economic rival. This is a new Moon-shot Moment for the West.

Q: The Beijing government seems to have done a good job controlling the pandemic and have its economy rebounded from the low, while the US is still in deep water. What can we expect from the future development?

A: That is a testimony to the Chinese juggernaut. China has always been good at doing things at scale. They have decades of successful experience in building infrastructure at scale. To see them building those hospitals from ground up in Wuhan, that was an awesome display of autocratic efficiency. No question about that. When the Chinese Communist Party set their eyes on something, they can accomplish a lot. You contrast that to Western liberal democracies, which are, of course, by nature, prone to political paralysis and partisanship. There is, to a large degree, political paralysis like that in the United States. There is no question that liberal democracies have not handled the pandemic anywhere near as efficiently as some technocratic governments in Asia. COVID will provide an interesting lesson going forward, but it would be a huge mistake interpreting it as the validation for the ultimate decline of the United States or the West.

There is no question that there will be people in China who look at the United States and say, "These guys can't even manage themselves out of a wet paper bag! Why are we worrying about these guys?" But the real strength of the US will emerge. The US economy and political system is resilient and will survive Donald Trump. It is going to make a comeback and if it needs to reinvent itself, it will. The institutional systems are still sound, and the checks and balances are still working. And you have a wide range of public-private partnerships, which I think will be the key to the 21st century. This is not a top-down, centralized system of government. It's a public-private partnership government, where government plays a supporting and promoting role. But when you throw in the vast US entrepreneurial sector, the open and free market, and the universities, think-tanks and knowledge economy ecosystems, the synergies can be huge.

Q: So, no matter who wins in the presidential election, there is no going back for the US-China relations?

A: The US-China trajectory would not change with Democrat or Republican winning the election. What will change, of course, if Mr Biden is elected, is a much more organized and articulated policy when it comes to China. That would mean mending fences with allies, and probably building a new coalition to build a new rule-frameworks. We are still at the early, early days with the digital landscape. It requires a new e-WTO, for example. And we also need clearer guidelines around privacy, and all the things we talked about. From a multilateral perspective, we can again see the world fracturing into different blocs, where liberal-democratic countries are members of the multilateral frameworks that promote their own values and non-democratic countries are not going to be a part of that. You cannot separate the application of technologies from those values.

Q: But would that mean the production costs for manufactures will go up?

A: Yes, invariably there will be instances that represent the Galapagos Syndrome. We probably won't have the same efficiency of markets that we had with fully rationalized, open global value chains. But again, the full global trading system is not sustainable, unless everybody is playing by the rules. And when the world's second largest economy is not playing by the rules, it's not a sustainable system.

You have fenced-off ecosystems that are not particularly efficient and could not compete on an international basis if they are left on their own. We saw this happen in Japan in the telecommunications space in the 1990s. Can that happen again? Yes of course. But in a neo-mercantilist world, where it's about the nation state and its interests, or its aligned interests with other nation states around specific values, that's the way it is.