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US-China sanctions create parallel tech universes

William Yang Taipei
August 2, 2021

Recent tit-for-tat sanctions from Beijing and Washington have accelerated a trend of economic decoupling, with China looking for more ways to achieve self-sufficiency in critical tech sectors.

A Huawei microchip
China is ramping up domestic development of critical technologies like microchips as US sanctions cut off supplyImage: picture-alliance/dpa/Imaginechina

As the US continues to blacklist dozens of Chinese companies, Beijing is increasingly imposing its own sanctions on US organizations and individuals it accuses of meddling in China's internal affairs.  

Last month, the US government added 23 Chinese companies to an economic blacklist, including 14 companies that have allegedly enabled Beijing's oppression of the Uyghur Muslim minority in Xinjiang province.

China responded by imposing sanctions on several US individuals and organizations, including former Commerce Secretary Wilbur Ross and Human Rights Watch's China director, Sophie Richardson.

China has also passed a law designed to counter foreign sanctions, allowing Beijing to seize assets and deny visas to individuals who are involved in sanctions against Chinese interests.

US sanctions not changing China's policy

Alex Capri, a Singapore-based research fellow at the Hinrich Foundation, an economics think tank, told DW that US sanctions on Chinese companies are focused on strategic sectors, meaning any technology that could be considered to have a dual strategic use could be targeted.

"The US is looking for any means by which it can put pressure on Beijing," he said, adding that US sanctions on Chinese companies are accelerating the process of economic decoupling, which also speeds up Beijing's push to become more self-sufficient.

Chinese companies forced to look inward

Other experts agree that the US sanctions have forced Chinese tech companies to stop relying on the US as a supplier of key component parts.

"Most of them are trying to source domestic alternatives or design the necessary technologies themselves," wrote Dan Wang, a technology analyst at Gavekal Dragonomics in China, in Foreign Affairs.

"[Former US President Donald] Trump's gambit accomplished what the Chinese government never could: aligning private companies' incentives with the state's goal of economic self-sufficiency," he added.  

China responds to semiconductor sector threat

Rui Zhong, a program associate at the Wilson Center, a think tank, said Chinese companies are realizing that if US sanctions on Chinese information technology companies like ZTE happen again, it could have an effect on companies' long-term strategy.

"The mindset of 'we need to rely more on ourselves' makes sense for Chinese firms to have," she told DW.  

Does Biden's strategy differ from Trump's?

Analyst Capri said that the administration of US President Joe Biden has continued the Trump administration's policies toward China, but with several important differences.

"We see a much more concerted and clinical approach to extend the policies toward China, as the Biden administration looks to do it with allies," he said.  

Rui Zhong said that the Biden administration's stance on penalizing a Chinese company's connection to the People's Liberation Army (PLA) and the issue of forced labor in Xinjiang hasn't changed much from the Trump administration.

"This is effectively the status quo that Joe Biden has inherited, and we haven't seen too much of a change" from the US State Department, she added.  

Analysts also say that the US is trying to prevent China from expanding its model of "techno-authoritarianism," with which, for example, technology is used to increase surveillance.  

"China's techno-authoritarian model is a combination of the hard technologies that are used to build the infrastructure and the application of the AI and algorithms in ways that would promote surveillance, censorship and population control," Capri said.

Parallel tech universes   

As many predict that the US will continue to impose sanctions and export controls on Chinese companies, some experts think the result could be a world with parallel systems, with players trying to operate in both systems, if they can.

"Global value chains will become fragmented, and companies or state actors will find themselves trying to figure out how to go from one day to the next due to sanctions," Capri said.  

Additionally, export bans will force the Chinese government and companies to accelerate the process of localization and self-reliance.

"It is likely that in a decade, China will have made greater technological advancements under the US export-control regime than it would have had the United States not forced China's leading companies to buy from weak domestic firms," wrote analyst Dan Wang in Foreign Affairs.  

Wang added that the US should not expect China's leading technology companies to stay behind for long.

"Companies are rushing to fill the demand that US firms can no longer supply, and Chinese firms have to reinvent only certain wheels, with many simply working to recreate technologies that already exist," he wrote.  

The burden to localize supply chains isn't just on Chinese companies. Capri said that if the US government implements a full-on ban on imports from Xinjiang, or requires American companies sourcing from Xinjiang to provide proof that their products are not made by forced labor, they will also have to consider restructuring supply chains.  

"They have to start looking at localization and producing closer to their markets," he said. "There are a lot of companies in denial, thinking this is going to blow over. However, we are in the beginning of a completely new era."

Xinjiang - sanctions on China