News recently broke that Huawei, a leading Chinese manufacturer of cell phones and telecom equipment, launched a new phone with a 7-nm chip. Huawei has been the subject of severe U.S. sanctions since the Trump administration, which substantially damaged its consumer business by limiting access to advanced chips and chip-making technologies. The Biden administration has doubled down on the chip war with China through the CHIPS and Science Act, which put in very broad import and export controls on advanced semiconductor equipment. Huawei’s recent phone, unveiled during an official U.S. visit to China, is the first major win for China’s efforts to develop domestic chip-making capability. While there’s still a lot of unknowns (including how many of these phones they’re actually making) and there are still substantial gaps between China and the rest of the world in terms of chip-making technology, it’s an important case study for tech policy going forward.
This is an important case study for future import and export restrictions on advanced sustainability technologies like batteries, electrolyzers, and other energy infrastructure. These are already scrutinized under an increasingly diverse set of international laws (see our Industrial Policy Compass for more). It’s unclear how tech protectionism could play out in the future, but the Huawei case gives us a few insights.
- U.S. tech protectionism works: Despite this breakthrough, Huawei and Chinese phone manufacturers generally are still two generations behind leading Western companies like Apple. These sanctions have substantially delayed Chinese adoption of cutting-edge technology; while they probably can’t delay that forever, they have served their purpose so far. Moreover, the CHIPS sanctions demonstrate the U.S. has the ability to control global companies: All of the advanced chip-making equipment for extreme UV photolithography is produced by the Dutch company ASML (Advanced Semiconductor Materials Lithography), which is technically not subject to the full force of U.S. law. However, because of the U.S.’ centrality in geopolitics and the dollarization of the financial ecosystem, U.S. economic and geopolitical policy has effectively applied to the entire global community. Dutch and Japanese authorities initially protested the CHIPS Act but have since joined the U.S., which is still very much a superpower and can enforce its economic and political goals on non-U.S. actors quite easily. It’s probably worth noting this really only works for the U.S.
- Sanctions lead to waste: The response from the Chinese government has been very straightforward: It is planning to develop its own chip ecosystem. This effort has come under a lot of scrutiny in and out of China because of its seeming lack of major successes up to this point. It’s possible this narrative will change, especially if Huawei is able to scale production of these chips. Either way though, it has been very costly; the result of these sanctions has been a lot of duplicated effort on the part of Chinese companies. This is clearly not efficient in a macroeconomic sense. In the context of sustainability, it’s not a major issue right now, as China is leading the U.S. in many areas like batteries, but it’s very possible that sometime in the future a technology developed in the U.S. could become a political football with China. This would be bad! Accelerating the sustainable transition is much more important than transitory geopolitical tensions. There’s a real risk of sanctions slowing the transition or causing a bunch of resources to be wasted on duplicate R&D efforts instead advancing or deploying new technologies.
- Geopolitics is a clear business risk: I’ve been hammering this point for a while, and I don’t think it should really be news, but being on the wrong side of a geopolitical fray could have major consequences for business. Huawei’s consumer sales are down 50% from what they used to be, primarily due to these sanctions. This isn’t just an issue for CEOs: Innovation professionals within corporations need to understand and manage these risks by both proactively developing technologies that can help increase the flexibility of supply chains and aligning investment in new technologies toward geographies that are lower risk.
Chips and sustainability are quite different, however. It’s less clear that the economic redundancies created by protectionism are a bad thing in this case. Sustainable technology and sustainable technology development carry with them positive externalities (i.e., carbon emissions reductions and other reduced environmental impacts). While it may not be economically efficient to have redundant supply chains or R&D, such redundancies could actually help accelerate the development of the sustainable transition and bring down the costs of important technologies. In addition, having domestic supply chains will improve resilience and might help bring together political interests in the U.S. to support sustainability.
It’s also possible the politics of the situation might play out better: For one thing, much of the important technology expertise is currently owned by China. In some areas like rare earth metals, they have little incentive to share that technology, whereas in others like batteries, they have been open to licensing. There’s also less of the global monopoly we see in chips. This creates a dynamic in which tech protectionism might not be as effective. In addition, there’s much less of a defense angle to sustainable technologies and much more of a clear win-win scenario (and decarbonization) for sharing, which should theoretically reduce the chances of protectionism. Still, during the COVID pandemic, the U.S. failed to open source its vaccine technologies, although it’s not clear that China would have accepted them even if they were open source. It’s a pretty grim case study for politics interfering with tech transfer, and it ultimately cost an unknown number of lives. Hopefully, the same issue does not repeat itself with sustainable tech, but with the Biden administration largely upholding the Trump administration’s foreign policy on China, it’s tough to see a clear path here.