America first vs China first

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While the media is still talking of a “USA-China trade war”, it might be better to call it a “geopolitical technology war”

8/26/2019_In the USA a consensus is emerging in various political and industrial circles that China’s high-tech and ICT developments and ambitions pose a serious threat to America’s leading position in science and technology and to US national security. China is accused of developing its high-tech industry in an unfair way with the ultimate goal of technological dominance and the establishment of a new world order by Chinese standards.

America together with Europe does also accuse China of unfair trade practices and protection of its own markets. The militant Chinese attitude in the South China Sea further taints China’s reputation. In the West people suddenly no longer talk about the unprecedented “market opportunities” in China, but about the People’s Republic as possibly the biggest enemy and about the dangers of a clash between the US and China in the near future.

The China Initiative

Copyright Jeff Parker © Florida News

Jeff Sessions of the Department of Justice (DOJ) announces the “China Initiative” in November 2018, by which the USA will investigate and aggressively prosecute Chinese companies in the event of economic espionage, theft of Intellectual Property (IP), and criminal, corrupt foreign activity. The DOJ frees up additional resources and manpower for these efforts. The China initiative is led by the national security department of the DOJ including senior FBI officials and several prosecutors. At the same time the Trump government is starting to implement all sorts of trade and investment restrictions to curb China’s technological and geopolitical ambitions. The transfer of leading edge American technology and equipment to China is restricted.

China First

The growing American fears of China are particularly fueled by 3 fairly recent Chinese plans:

  1. “Made in China” MIC plan 2025
  2. “Internet Plus Plan (IPP) 2020
  3. Next generation Artificial Intelligence (AI) plan/AIP2030

ad 1) With the MIC plan, launched in 2015, the CCP aims to drastically reduce Chinese dependence on western technology, components and know-how in the high-tech such as in the semiconductor, IT, automotive & aerospace industry. By 2025, 70% of the core materials in this high-tech sector should be Chinese-made. To illustrate, in 2019 just ~15% of China’s total semiconductor consumption is made in China, of which foreign chip manufacturers with a branch in China contribute half.

Of the $155 bln of Chinese IC consumption in 2018, 15.5% is locally manufactured. General expectation among western industry observers is this could grow to >20% by 2023. copyright: © Tabel IC Insights, USA 2019

Despite fervent Chinese attempts over the past 20 years, China’s contribution (= from Chinese IC companies with headquarters in China) to the global IC market is <5% of the total, while the US has held >50% for many years.

Tabel IC Insights 2019 IDM = Integrated Device Manufacturer such as Infineon, Intel, Texas Instruments & NXP who have their own fabs. Fabless are chip companies like Qualcomm who design and sell chips, yet outsource production to pure-play foundries such as TSMC & UMC copyright tabel © IC Insights, USA@2019

The Chinese government has been investing massively in the MIC over the past 5 years to transform the country from a low-cost manufacturer into a world leader in products and services with high added value. In addition the Chinese have attempted to acquire leading foreign high-tech companies, taking advantage of the open Western market.

ad 2) The IPP, also introduced around 2015, is the Chinese equivalent of the “Information Super Highway” or “Industry 4.0”: the CCP has established guidelines to modernize traditional industries and drive future economic growth in China via the “internet, connectivity & the cloud”. Those guidelines are supposed to stimulate the introduction of business automation and robots and the development of so-called smart cities.

ad 3) The CCP launches the AIP2030 in 2017 to ensure that by 2030 China will be the world leader in AI. Through a sophisticated policy with several, clearly identified milestones China wants to build an AI industry that must at least be able to compete with the West, but whose ultimate goal is dominance. To accomplish this goal the PRC hopes -among other things- to attract the world’s “best and brightest”.

Whether the CCP’s objectives are entirely realistic and achievable is very debatable, but the unambiguous ambitions in this “China first policy” have induced American distrust of China as well as stirred up American techno-nationalism, whose traces have been visible during the Obama administration. In American political circles China’s current technological skills are often exaggerated and America’s own technological hegemony watered down to force Trump into a hard-line position against China.

To a large extent the Chinese government has brought these troubles onto herself: contrary to Western expectations China’s growing economic prosperity and international importance has not led to more domestic political freedoms or a reform of the CCP. On the contrary, the social control and repression by the Chinese Communist Party has increased considerably in the last 15 years. How can the West trust large Chinese companies, led by Chinese managers, if the country itself has no political transparency whatsoever? And if the CCP, which is deeply involved in the overseas expansion of China’s companies, issues a National Intelligence Law in 2017, under which citizens and organizations are expected at all times to cooperate with the Chinese security and government agencies in collecting information for “defensive security purposes”?

American Campaign

The campaign against unfair Chinese practices in the technology sector is specifically reflected in 3 consecutive actions by the US government:

  1. the ban on ZTE products from May 2018
  2. the charges against Fujian Jinhua & United Microelectronics (UMC) in November 2018 for stealing American know-how
  3. the arrest of Huawei’s CFO Meng Wanzhou in Canada on December 6, 2018 and the subsequent indictment in January 2019 against Huawei for bank fraud, IP theft and the evasion of economic sanctions against Iran


ad 1) ZTE is a leading Chinese telecom (state) company and producer of mobile phones and communication equipment. ZTE is added to the US blacklist in the spring of 2018 after it has become clear the company is ignoring international sanctions against North Korea and Iran by selling ZTE products, which do include American chip technology, to both countries. The US government decides to ban ZTE products in America and forbids US chip suppliers from supplying chips to ZTE.

This is the first escalation in what initially is considered to be a pure trade war, whose focus is primarily on gaining more and better access to the Chinese market for American (agricultural) products. Trump is obviously keen to deliver his electoral promise to the American farmer. What are the consequences of US action against ZTE?

a) the USA only agrees to ease its measures against ZTE in July 2018 (= ZTE is partially banned, i.e. by US governmental services and contractor) after the payment of a $1 billion fine by the Chinese company b) the market value of ZTE plunges by ~$3 billion c) under American pressure ZTE replaces its complete senior management d) ZTE’s mobile phone division is barely able to survive: ZTE’s deliveries and production of new mobile phones are seriously impacted by the temporarily American chip supply ban.

Incidentally Trump himself initially leaves the impression that he primarily wants to use the ZTE case to get trade benefits for the Americans. The President seems to have less warm feelings for his own high-tech industry and the national security aspect in the discussion, he is not known for his sympathy for the billionaires in Silicon Valley. Trump is personally willing to fully lift the ZTE ban in exchange for a new trade agreement. But he is blocked by Congress and members of his own cabinet, who demand at least a partial ban against ZTE. Whether or not it’s Trump’s intention, the trade war is nevertheless gradually turning into much more than just a fight over tariffs and market access. The American focus in the trade discussion is shifting to national security, technology transfer restrictions and IP protection. With the action against ZTE, the US is sending for the first time a very strong signal, demonstrating who is (still) worldwide in charge in the technology sector. In Chinese government circles there is meanwhile a growing feeling America’s only intention is to thwart China’s international rise.


ad 2) the charges against Fujian Jinhua (JHICC) and UMC draw less media attention in the Netherlands. They are actually very extraordinary and indicate a further escalation in the “trade conflict”. JHICC is a Joint Venture ($5.6 billion investment) founded in February 2016 in Jinjiang, Fujian, China, between the local Chinese government and UMC from Taiwan. UMC has been a so-called “pure-play foundry” for many years: a company with an annual turnover of ~ $4 billion running a dozen fabs in Asia (Taiwan, Singapore, China & Japan) with a wide variety of technical processes where ICs for large, international electronics companies are manufactured on silicon wafers. The foundry customer fully owns the design of his chips and is responsible for the final sale of his ICs, UMC is the subcontractor.

The JV, a subsidiary activity of UMC to strengthen its position and reputation in the Chinese market, aims to develop memory chips (DRAMs), indispensable for almost any product application. The Chinese provide the money, UMC the R&D and people for the development of the DRAM technology and product(s). China does not have its own memory chip manufacturers or technology and is entirely dependent on foreign suppliers, such as Micron from the US. Micron holds around 20% of the total $100 billion DRAM market. An investment group (Tsinghua Unigroup) supported by the Chinese government tries in vain to buy Micron in 2015. After that failure the Chinese government intends to use UMC from Taiwan to initiate its DRAM program in China.

Fujian Jinhua/JHICC in Jinjiang, Fujian province, PRC. photo company brochure. The operations in this mega-fab are aborted after the American indictment in November 2018

In 2017 Micron accuses UMC and JHICC of stealing Micron’s know-how and IP. The former president of Micron Taiwan, Mr. Chen, and some other former Micron employees have allegedly transferred confidential Micron information via UMC to the JV, where meanwhile Chen has been appointed as President with the approval of the UMC’ senior management and board of directors. JHICC, the involved former Micron employees and UMC are formally indicted by the DOJ in November 2018. On top of the civil proceedings started a year before by Micron, the Taiwanese company and the JV are now facing criminal charges by the US government!!

An American government suing a leading Taiwanese company for espionage/theft in favor of China, a remarkable situation! In addition, the DOJ identifies JHICC as a threat to US national security: all US deliveries of crucial equipment to the Chinese plant are to be stopped immediately, the Trump government instructs. What are the consequences of these American actions against JHICC /UMC?

a) Succumbing to American pressure, UMC announces in January 2019 it ceases all its R&D activities with JHICC. The JHICC project is thereupon aborted by China, because the essential equipment can no longer be purchased due the American boycott. Not much later China declares it will develop its own DRAM player fully by itself… b) the scheduled IPO at the Shanghai stock exchange of UMC’s own fabs in China is cancelled by the Taiwanese company c) the indictment is a huge blow to UMC’ reputation, particularly in the USA and Japan, threatening to affect its core foundry business. A planned takeover of Fujitsu’s chip factory in Japan is blocked by the Japanese government for fear that UMC will await more American penalties after the courts will have passed their verdicts d) as far as I know, both the civil and criminal lawsuits against UMC are still ongoing in the California / San Franciso court. If found guilty, UMC could face a maximum fine up to $20 billion or -even worse- foreclosure.

No doubt there are/have been a lot of consultations between the Taiwanese and American authorities behind the scenes. The island is dependent on the US for its safety, large American arms’ deliveries have just been promised to Taiwan by Trump. No Taiwanese government likes Taiwan and its companies to act or be viewed as agents of China. Nor is it in Taiwan’s interest that UMC, with around 20,000 employees worldwide, will crumble. A shake-up of UMC’ senior management can’t be ruled out, although so far nothing of the sorts has happened. The US actions seem a clear warning not only to China, but also to Taiwanese and other international companies who try to quickly expand into China without respecting international and American IP protection: they eventually might find the USA government & DOJ at their doorsteps…


Meng Wanzou, CFO Huawei copyright ©www.

ad 3) With the arrest of the CFO of Huawei, China’s flagship and rapidly growing telecom giant, in Canada at the request of America, it finally dawns upon the rest of the world more is at stake than just a “simple trade war”. While the moon landing is being commemorated, the world has entered into a new competition in 2019: the race for 5G & AI leadership between the US and China and the battle for technological dominance! Beijing is furious about the latest American action and the “trade conflict” is coming to its boil.

I have already devoted several articles to Huawei has been blacklisted by America. Europe is now facing a dilemma. A choice for Huawei could be interpreted as a betrayal by the Americans and jeopardize the close cooperation between American and European intelligence services…..

cartoon: Heng © CAI/NYTS

Although Trump does insinuate via Twitter he could personally work out a deal with Xi Jinping including the release of Meng and the lifting of the embargo on Huawei in exchange for a comprehensive trade agreement, the fact is US Congress and a number of Western countries have meanwhile completely banned Huawei from building their future 5G infrastructure for national security reasons.

What are the consequences of the American steps against Huawei?

a) Huawei’s overseas mobile telephone business is suffering heavily from the American embargo. In the short term, the damage (an estimated $10-30 billion decrease in sales in 2019) can be compensated by the increase in sales of 5G equipment in, for example, Africa. Moreover, in China sales of Huawei mobile phones have risen driven by nationalistic sentiments. However, should the American boycott last for a long time, Huawei (despite all its bluff) will face difficulties in launching new, competitive mobile phones in time in 1 – 2 years due to dependency on American chip and software suppliers. The production of new 5G equipment is also at risk. In addition chances have risen many EU states will (largely) exclude Huawei from the construction of their 5G networks ‘cos they are under severe pressure by the US.

b) for Chinese leader Xi Jinping it will be difficult to end this “trade war” without serious loss of face. Furthermore, he is likely to cling even stronger to his belief taking the path to self-sufficiency in high-tech is the only right one in view of the impact of the current American embargo

c) American chip suppliers are seriously impacted by the Huawei embargo and tariff war too. Take Micron: Huawei contributes >10% of its turnover. In coordination with other chip makers Micron has asked the Trump government to relax the embargo, fearing it otherwise won’t be able to meet the profit expectations of its shareholders. Micron claims its exemption request would only concern legacy products, not leading edge technology. The fact that American companies on the one hand do not hesitate to agressively challenge potential Chinese competitors (see Micron vs JHICC) in court, but on the other hand want to continue their business with Huawei, already denounced by the American political establishment as being a national security threat, naturally raises suspicion and skepsis in Chinese goverment circles about the sincerity and real motives of Americans business leaders and politicians.

d) the “trade conflict” with China has gotten completely out of hand following the arrest of Huawei’s CFO: Trump’s intention to quickly present a trade agreement to his supporters to ensure his re-election lies in tatters. Trump and Xi have become entangled in a meaningless, desperate tariffs battle in the absence of better ideas to resolve this complex, geopolitical technology dispute.

What next?

What is going to happen now? The escalating rounds of tariffs prove the self-destructive nature of both the China first and America first policies. The rest of the world is suffering too from the hopeless approach of the 2 great powers. Worst case the rest of the world will be forced to choose for or against China and the 5G digital world could be divided into one with a Western and one with a Chinese technical standard, eventually followed by a complete withdrawal of Western companies from China.

The latter isn’t likely to happen any time soon, though. Supply chains in the high-tech sector are closely linked to China and alternatives are not readily available. Many Western companies have major interests in China and no plans to leave the country. Isolation of China by the West will not increase international security: it will motivate China even more to innovate autonomously without any help of the West based on its own set of rules and (illegal) practices. The chances China in the future would still want to conform to an international legal order and trade system built on Western rules and principles would be nihil in such a scenario.

America ‘d better join the EU, Japan, Canada and Australia in existing multilateral fora to pressurize China to work out new international agreements on trade, technology transfer and IP protection, cyber security, national security and privacy. The aim should not be to kill successful Chinese companies, but to make them act and operate more responsible internationally. China must continue to feel involved and see the benefits of belonging to the international legal order and community. America (and the EU as well) should invest its energy in setting up a coherent innovation strategy in order to maintain a healthy competitive edge over China without falling into stiffling protectionism. Chinese economic and technological competition stimulates Western innovation and is not by definition just a threat.

The Chinese government and CCP ‘d better face reality and accept the fact a Chinese pursuit of self-sufficiency in the high-tech sector is neither desirable nor quickly achievable: if China wants to speed up its modernization American know-how will be indispensable. Xi Jinping must temper his rather megalomaniac dreams and plans for technological and economic world domination and swallow his national pride. China should not only profess it’s for peace, international cooperation, multilateralism and free trade, but should start to open up its markets and relax the many restrictions for foreign companies. It should also show more willingness to resolve complex international political issues such as control over the islands in the South China Sea through multilaterism.

In addition the Chinese government will have to proactively teach Chinese companies the value and significance of IP and intervene vigorously in the event of intellectual property violations. At the same time privatization of state-owned companies should be accelerated: or at least the role of the CCP in daily business operations should be greatly reduced. All of this will have to happen rather soon, thoroughly, broadly and transparently to avoid American (and Western) politicians lose faith in China’s willingness to adhere to the international legal order, free trade and peace. But these kind of steps presume the CCP would be ready and willing to allow major political reform, for which there has been almost no support in the party since the events of June 4 1989 (

US pushes Europe to shun Huawei

Unfortunately, the leaders of both superpowers are neither blessed with much sense of reality nor much wisdom: currently banal, silly nationalist sentiments and rhetoric dominate the mutual communication. In the short term we cannot expect much from any negotiations to end the conflict. The Chinese might even prefer to swallow their economic pain and wait for the next US presidential election, though a democratic president might even be tougher on them. But ahead of those elections Europe will have to make up its mind about the tenders for the construction of the European 5G networks and the participation of Huawei: it has already being sucked into the geopolitical “technology war”.