Video Transcript:
“I value our conversation because I think it’s paramount that you and I understand each other clearly, leader to leader, with no misconceptions or miscommunication. We have to ensure that competition does not veer into conflict.” (video from Biden meeting with Xi)
Joe Biden told Xi Jinping in San Francisco this week that he wants competition but not conflict.
What did Biden mean by that?
Where does competition end and where does conflict begin?
Are the US and China competitors or has their rivalry already gone beyond competition?
What is the difference between Biden’s approach to dealing with China versus Trump’s?
-------
There are three major differences between competition and conflict.
One, competition has no regard for the players involved whereas conflict is directed at a specific player or players.
Two, competition is predicated on all players playing by the same rules. In contrast, conflict arises when the players no longer agree on the rules of the game or have decided they are no longer bound by them.
Three, while competition makes everyone better and increases the size of the pie, conflict is expensive and reduces the size of the pie.
This means it is very likely that in a conflict everyone is worse off.
Are the US and China in competition or in conflict?
----------
When Donald Trump launched a trade war against China in 2018, he was motivated by what he saw as unfair competition between the two countries.
For example, Chinese tariff on US cars was 25% whereas US tariff on imported cars was just 2.5%.
Another example of unfair competition is market access. US financial institutions like banks, mutual funds, and insurance companies faced high hurdles doing business in China.
Finally, there were serious concerns about violation of US intellectual property rights by Chinese firms.
Contrary to the received wisdom at the time, Trump didn’t want to change the rules the game.
He just wanted China to play by the same rules so that the US and China could compete on a level playing field.
Trump’s trade war was not directed only at China. Indeed, he launched trade wars at the same time against the European Union and Canada, America’s closest allies.
Since the Chinese were not singled out, it made it easier for them to negotiate and to swallow their national pride.
It took nearly two years of negotiation but in the end the US and China reached a historic Phase 1 trade agreement in January 2020.
Unsurprisingly, Trump didn’t get much credit for the deal from the hostile media and soon after the agreement was signed the pandemic broke out which quickly overrode everything else. And then came the US election later that year.
One day we might look back at this deal of nearly 100 pages and ask ourselves, what if it had the chance to be implemented?
In the deal, China agreed to remove a long list of non-tariff barriers to U.S. agriculture products.
Beijing also agreed to dismantle trade and investment barriers for US financial services firms, barriers that included foreign equity limitations and discriminatory regulatory requirements.
Most importantly, the deal addressed longstanding US concerns regarding trade secrets, intellectual property, trademarks, pirated and counterfeit goods.
It was a good deal because it had teeth.
The deal included detailed agreements on implementation, enforcement and a dispute resolution arrangement with strong procedures for addressing potential disputes that allowed each party to take proportionate responsive actions.
Trump was right to call the agreement a historic deal towards a ‘future of fair and reciprocal trade’
Importantly, the deal was a win for China too, since
it helped strengthen the position of Chinese reformers who shared Trump’s view that more competition would make China stronger.
Had it been given time to be implemented fully, the US-China trade deal might have unleashed serious liberalization of the Chinese economy.
------------
Then along came the Biden administration.
Biden’s approach to dealing with China could not be any more different than Trump’s:
Whereas Trump tried to get China to play by the rules, Biden decided to change the rules of the game.
Under Biden, the US has decided to embrace industrial policy to counter growing Chinese influence.
In August 2022, Biden signed into law the Chips and Science Act that provided $106 billion worth of subsidies, tax credit and research grants to boost semiconductor manufacturing on US soil.
Three months later, the Department of Commerce implemented new export controls on advanced computing and semiconductors to China that “restrict the China’s ability to both purchase and manufacture high-end chips.”
In October 2023, the US ordered an immediate halt of export of advanced AI chips to China that would set back China’s ambition in supercomputing.
On Taiwan, Biden also changed the rules of the game.
In May 2022, Biden said he was willing to use force to defend Taiwan, a notable departure from past US policies
3 months later, Nany Pelosi, the speaker of the house visited Taiwan, the first speaker to do so in 25 years.
This August, the US approved its first-ever military aid to Taiwan
If Trump used both carrot and stick in his dealing with China, Biden uses only stick.
If Trump’s aim was to safeguard fair competition between the two superpowers, Biden’s policies are designed to weaken China’s ability to compete against the US.
Competition versus conflict.
Two different presidents, two different approaches to dealing with China.
Forget about what it means for China, which approach benefits the US more?
-------------
There is nothing wrong with any country acting in its rational self-interest in its dealing with other countries.
The US hegemony has served the US well and it makes sense that the US wants to keep it that way.
Any other in the same position of the US will do the same.
But what is the best way to achieve this goal?
By promoting fair competition or by holding back competitors.
Trump’s way or Biden’s way?
Since Trump’s way never got to full implementation, we can’t know for sure.
But it is clear that Biden’s approach is both more expensive and riskier.
To take advantage of the taxpayer funded subsidies and tax credit under the CHIPS act, semiconductor companies have committed to spend $230 billion on building chip manufacturing plants on American soil.
Intel is building plants in Ohio, TSMC in Arizona, and Samsung in Texas.
The long-term payoff of the new US industrial policy depends on the competitiveness and commercial viability of these plants after the tax credits have expired.
This is not a given. One issue is talent.
Another is competition.
The European Union, following the US lead, passed its own CHIPS act earlier this year to encourage semiconductor manufacturing in Europe.
In June this year, Intel announced that it would start building a $33 billion plant in Germany after the German government agreed to cover 1/3 of the investment required.
Japan, which saw its market share of global semiconductor manufacturing fall from 50% in the 1980s to 10%, is determined not to be left behind.
Both TSMC and Micron are now building plants in Japan with heavy subsidies from the Japanese government.
All this will lead to a big jump in chip production capacity in the years to come.
Chip prices will likely collapse, some chip plants will close, and tax payers in the US, Europe, and Japan may never recoup their investments.
The beneficiaries of the industrial policies of the rich countries will be developing countries that will pay less for the chips they buy.
What about China?
US sanctions that restrict the ability of China to purchase advanced chips and manufacturing equipment to produce them is a major setback for China in the global race for artificial intelligence and quantum computing.
However, the Chinese government has decided not to let the sanctions thwart its ambition and has decided to redouble its effort to attain chip independence.
Will it succeed?
Ironically, US sanctions could help China in the long-term.
This is because with the sanctions all gloves have now come off.
Remember, under Trump, the US goal was to get China to agree to respect US intellectual property.
Biden’s sanctions will have the opposite result by encouraging China to copy and steal technology that it lacks in order to stay in the tech race.
Sanctions might work on smaller countries, but China, with its 1.4 billion people, accounts for 25% of the world’s consumption of semiconductor enable electronics.
The size of China’s internal market means there is a huge economy of scale for China when it comes to technology development.
This means sanctions not only will not stop China from developing its semiconductor industry but will actually accelerate it.
Biden’s industrial policy and tech war on China will be successful if an only if they manage to stop China from developing its own semiconductor technology.
The jury is still out.
But the odds are not good, given China’s track record in technology development, the economy of scale that it has, and the fact that it is no longer bound by intellectual property protection considerations.
A new tear-down analysis of the Huawei’s new Mate 60 Pro phone shows Chinese parts constitute 47% on a value basis, up 18% from just 3 years ago.
Trump versus Biden: Competition versus conflict.
Which approach when it comes to dealing with China do you think will be more beneficial to the US in the end?
For me the answer is pretty obvious.
For investors, one of the most important implications of the 2024 US elections is how the US will deal with China in the future.